24th May 2012 07:00
FULL YEAR RESULTS FOR THE YEAR ENDED 31 MARCH 2012 £m Year ended (Continuing operations) 31 March 2012 31 March 2011 Underlying operating profit* 594.1 596.4 Underlying profit before 327.0 329.2 taxation* Underlying profit after 240.9 239.2 taxation*
Underlying earnings per share*, 35.3 35.1
** (pence) Revenue 1,564.9 1,513.3 Operating profit 591.5 580.2 Profit before taxation 280.4 327.1 Profit after taxation 311.4 354.5 Basic earnings per share** 45.7 52.0 (pence) Total dividends per ordinary 32.01 30.0 share (pence) *Underlying profit measures have been provided to give a more representativeview of business performance and are defined in the underlying profit measuretables
**Earnings per share and underlying earnings per share are explained in the earnings per share section
* Further customer service improvements delivered: significantly improved Ofwat
SIM scores
* Met regulatory leakage target for sixth consecutive year
* On track to meet regulatory outperformance targets
* Continued progress on capex programme: invested £680m, an increase of 12% on
prior year
* Underlying operating profit of £594m down £2m reflecting higher
infrastructure renewals expenditure
* Robust financial position: substantially repaid all term debt due in 2010-15
period
* Final dividend of 21.34 pence per share, an increase of 6.7% in line with
policy
Steve Mogford, Chief Executive Officer, said:
"Our focus on operational performance is delivering further serviceimprovements for customers. Our revised customer handling arrangements have ledto a marked improvement in customer satisfaction, resulting in significantprogress on Ofwat's service incentive mechanism. We have met our regulatoryleakage target for the sixth consecutive year and our water supply and demandbalance remains robust, with reservoirs in line with typical levels for thistime of year.
"Our business improvement initiatives are progressing well and we remain on course to meet our regulatory outperformance targets. Alongside this, we increased capital investment in our assets to £680 million for the year, providing benefits for our customers, the regional economy and the wider environment. This investment included £154 million of infrastructure renewals expenditure, an increase of £24 million on the previous year, which helps maintain and improve the resilience of our network.
"We are pleased with the recent progress we have made and believe there is plenty of opportunity to deliver further improvements.
"We have delivered another good set of results, despite the tough economicclimate. In line with our dividend policy of targeting annual growth of two percent above RPI inflation, we have proposed a final dividend of 21.34 pence pershare, an increase of 6.7 per cent. This takes the total dividend for the 2011/12 financial year to 32.01 pence per share."
For further information on the day, please contact:
Gaynor Kenyon - Corporate Affairs Director +44 (0) 7753 622282 Darren Jameson - Head of Investor Relations +44 (0) 7733 127707 Peter Hewer/Michelle Clarke - Tulchan Communications +44 (0) 20 7353 4200 A presentation to investors and analysts starts at 9.00 am on Thursday 24 May2012, at the Auditorium, Deutsche Bank, Winchester House, 1 Great WinchesterStreet, London, EC2N 2DB. The presentation can be accessed via a live listen inconference call facility by dialling: +44 (0) 20 7162 0025, access code 916639.A recording of the call will be available for seven days following Thursday 24May 2012 on +44 (0) 20 7031 4064, access code 916639.
This results announcement and the associated presentation will be available on the day at: http://corporate.unitedutilities.com/investors.aspx
BUSINESS REVIEW
KEY OPERATIONAL ACHIEVEMENTS
United Utilities (UU) 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 and customer service are top priorities for UU and thecompany aims to deliver significant improvements in these areas and outperformits regulatory contract. The business has a range of key performance indicators(KPIs) to enhance the visibility of its performance and help driveimprovements.
This increasing focus on operational performance since the start of the 2010-15 regulatory period is delivering a number of improvements, as outlined below:
* Significant improvements in customer service - UU has broadly halved its points score on Ofwat's quantitative service incentive mechanism (SIM) assessment in each of the last two years. UU has achieved the joint best improvement on Ofwat's qualitative SIM score in 2011/12, moving up five places to 16th position out of the 21 water companies.
* Capital delivery - more effective and efficient delivery of capitalprogramme, reflected in an improvement in our Time: Cost: Quality index (TCQi)score from around 50% last year to over 80% for 2011/12. Approximately £1.3billion invested in the 2010-12 period, which is broadly in line with theregulatory allowance and UU is on track to deliver its outputs.* Regulatory outperformance - clear targets set for 2010-15 period with UU ontrack to deliver these targets: £300 million of financing outperformance, atleast £50 million of operating expenditure outperformance and expect to meetOfwat's capital expenditure allowance. UU has now delivered cumulativeoperating expenditure outperformance of over £20 million in the first two yearsof the regulatory period and has already secured over £300 million of financingoutperformance across its debt portfolio.
* Leakage - met or outperformed regulatory leakage target for the sixth consecutive year.
* Corporate responsibility - attained Dow Jones Sustainability Index `World Class' rating and the highest platinum plus ranking in Business in the Community's (BITC) CR index. UU is one of only six FTSE 100 companies to hold both awards.
Financial overviewThe group has delivered a good set of financial results for the year ended 31March 2012. Revenue was up by £52 million to £1,565 million, principally as aresult of the impact of the regulated price increase for 2011/12 of 4.5%nominal (0.2% real price decrease plus 4.7% RPI inflation) partially offset bythe ongoing impact of customers switching to meters and lower commercialvolumes. Reflecting continued progress on the capital investment programme,infrastructure renewals expenditure was up £24 million. This expenditure,alongside increases in depreciation and property rates, in addition to theimpact of the transfer of private sewers and the new carbon reductioncommitment charge, resulted in underlying operating profit decreasingmarginally by £2 million to £594 million.
Regulatory capital investment in the year, including £154 million of infrastructure renewals expenditure, was £680 million, an increase of 12% compared with last year. This represents good progress in the early part of the 2010-15 period, as management has sought to deliver a smoother investment profile to support efficient delivery of outputs and reduce risk.
Underlying profit before taxation was down, by less than 1%, at £327 million. This reflected a lower underlying operating profit, with the underlying net finance expense broadly flat year on year.
Underlying profit after taxation was slightly higher than last year, reflectingthe 2% reduction in the mainstream UK corporation taxation rate. Reportedprofit after taxation benefited from a £105 million deferred taxation credit,which follows the UK government's changes to reduce the mainstream corporationtaxation rate. A similar credit of £99 million was recognised in the previousfinancial year.UU has a robust capital structure and gearing (measured as group net debt toregulatory capital value) as at 31 March 2012 was 59%, comfortably withinOfwat's assumed range of 55% to 65%, supporting a solid investment grade creditrating. United Utilities Water PLC (UUW) has a long-term credit rating of A3from Moody's Investors Service with a stable outlook.The group has now raised a total of £400 million of debt finance from theEuropean Investment Bank (EIB) thus far in the 2010-15 regulatory period.Following agreement of the latest £200 million index-linked loan facility withthe EIB, the group now benefits from headroom to cover its projected financingneeds into 2014. This provides good flexibility in terms of when and howfurther debt finance is raised to help fund the regulated capital expenditureprogramme. This £200 million loan facility was drawn down in a number oftranches between November 2011 and March 2012 at an average interest rate of0.9% real, the best rate UU has secured, and the average interest rate on thegroup's £2.7 billion index-linked debt portfolio has now reduced to 1.7% real.Reflecting this robust financing position, UU made an early repayment, in March2012, of a £150 million loan from the EIB, which was due for redemption in June2012. This transaction provided a small net interest saving and the group hasnow substantially repaid all of its term debt due in the current 2010-15regulatory period. In addition, in September 2011, UU accelerated approximately£100 million of previously agreed pension deficit repair payments, providing ahigher return for the group than could have been achieved through short-termdeposits.
In line with its policy, the board has proposed a final dividend of 21.34 pence per ordinary share, an increase of 6.7%. This produces a total dividend of 32.01 pence per ordinary share relating to the 2011/12 financial year. The intention is to continue with this policy of targeting dividend growth of RPI+2% per annum through to at least 2015.
Outlook
We are encouraged by our recent progress and will continue with our strongoperational and customer focus, with the aim of delivering further serviceimprovements for customers combined with greater efficiency. Our businessimprovement initiatives are progressing well and we remain on track to meet ourregulatory outperformance targets, with substantial financing outperformancealready secured. The group has a sustainable dividend policy, targeting 2% perannum growth above the rate of RPI inflation through to at least 2015,supported by a robust capital structure. We are actively engaged in the ongoingregulatory and political developments and will continue to work with all keyparties to help achieve the optimal outcome for all our stakeholders.
OPERATIONAL PERFORMANCE
Supporting our drive to improve operational performance, a revised managementstructure was put in place earlier in the year with a strong focus onaccountability and delivery. The company has moved, from its previousfunctional structure, to an organisational structure and managers are nowresponsible for end to end delivery of capital projects and operationalperformance within their respective regions, providing a more integratedapproach. This revised management structure is now well embedded in thebusiness and is helping to deliver performance improvements. A `whole company'scorecard has also been introduced and short-term incentives are now moredirectly aligned with operational performance. Long-term incentives are alignedwith shareholders' and customers' interests, being linked to total shareholderreturn and regulatory outperformance.
Best service to customers
Actions:
Customer initiatives - We established a customer experience programme last yearto help understand better the needs and issues of our customers and this isalready delivering improvements in the levels of customer service we areproviding. We offer additional contact options for customers, such as an onlineaccount management facility, to provide more choices as to when and how theycan contact us. Staff availability has been extended, coupled with an onlinecall back facility. A priority is to improve customer data management to ensurethis provides a single view of the customer to help improve the efficiency andquality of service. We have focused on root cause analysis to help usunderstand better the reasons for customers contacting us. Supporting thiscustomer experience programme, we increased staff training, better alignedstaff incentive mechanisms, put new service level arrangements in place and weproactively contact customers to keep them informed of progress in respect oftheir enquiries. We have extended our focus to identifying potential customerqueries in advance, through, for example, more proactive exception billingreporting and contacting the customer before the bill is sent to discuss thematter. Operationally, we are aiming for prompt completion of jobs and, wherepracticable, via a single visit, to improve the customer experience and reducethe need for unnecessary calls. We are also making ongoing improvements to ourprocesses based on customer feedback.We have made a significant improvement in our performance on Ofwat's serviceincentive mechanism (SIM), reflecting our increased focus on dealing withcustomer enquiries. The number of customer complaints made to the ConsumerCouncil for Water (CCW) has reduced by 27% in 2011/12, compared with last year,following a similar improvement in the previous year. This represents areduction of close to a half in the number of complaints to the CCW over thelast two years. We have also substantially reduced the number of escalatedcomplaints assessed by the CCW in 2011/12, with zero assessments in severalmonths of the year. This has helped UU improve its quantitative SIM performanceby 49% in 2011/12, compared with 2010/11. This follows a similar significantimprovement of more than 40% in 2010/11, versus the indicative score for 2009/10. UU has also moved up five places into the third quartile on qualitative SIMfor 2011/12, representing the joint best improvement of the 21 water companiesin the year. Encouragingly, we delivered continued improvement in the secondhalf of the year on both SIM measures providing a strong platform from which tobuild in the forthcoming year. Improving customer service remains a significantarea of continued management focus and we see plenty of opportunity to deliverfurther improvements.Safe, clean drinking water - We have an action plan to maintain safe, cleandrinking water through improving the robustness of our water treatmentprocesses, refurbishing service reservoir assets, ongoing mains cleaning andoptimising water treatment to reduce discoloured water events. UU continues tosupply a high quality of drinking water, with a mean zonal compliance waterquality performance of 99.95%.Water supply and demand balance - To help ensure a continuous water supply toour customers, our action plan includes innovation and investment in remotemonitoring to better manage and control the company's water supply system. Wealso have investment projects to optimise water pressures and improve networkresilience. In addition, we are improving our response to burst mains to helpkeep the water flowing, supported by `wet' repairs to water mains where thesupply remains on through the repair process. UU completed the West East Linkin 2011/12, a significant capital project designed to improve further the watersupply and demand balance in its region and enhance network resilience toclimate change. In addition, our reservoir levels are robust and in line withtypical levels for this time of year.Wastewater - UU has a range of actions to help support the serviceability ofits wastewater assets. To help reduce sewer flooding, these actions includeincident based targeting to focus on areas more likely to experience flooding,effective intervention in cleaning and rehabilitation or refurbishment ofsewers and advising customers about items not suitable for sewer disposal. Theplan also includes an improved approach to risk assessment to identify andreduce the risk profile of the company's wastewater treatment works.
Key performance indicators:
* Serviceability - Long-term stewardship of assets is critical and Ofwatmeasures this through its serviceability assessment (Ofwat definesserviceability as the capability of a system of assets to deliver a referencelevel of service to customers and to the environment now and in the future).Ofwat currently assesses one asset class (wastewater non-infrastructure) as"improving" and two asset classes (water infrastructure and waternon-infrastructure) continue to be rated "stable". UU is currently assessed bythe regulator as "marginal" in respect of wastewater infrastructure and thecompany is implementing an action plan to return this asset class back to a"stable" rating. The aim is to hold at least a "stable" rating for all fourasset classes, which is aligned with Ofwat's target.* Service incentive mechanism (SIM) - UU improved its quantitative score for2011/12 by 49%, compared with 2010/11, to 273 points. This follows animprovement of over 40% in the previous year. On the qualitative measure, UUhas improved its 2011/12 score by 0.39 points to 4.18 points and has moved upfive places into 16th position (out of 21 water companies). This represents 6thposition when compared with the ten water and sewerage companies. This earlyprogress is encouraging and the aim is to move to the first quartile in the
medium-term.Lowest sustainable costActions:
Asset optimisation - Our asset optimisation programme continues to progresswell, providing the benefits of increased and more effective use of operationalsite management to optimise power and chemical use and the development of morecombined heat and power (CHP) assets to improve energy efficiency. Theimplementation phase is well underway at over half of the 30 sites covered bythe programme and a large number of schemes came on line in 2011, with furtherprojects being scoped. The optimisation programme is targeting approximately £9million of annual savings by 2013/14.Proactive asset management - We are continuing to introduce a more proactiveapproach to asset and network management, with the aim of improving ourmodelling and forecasting to enable us to address more asset and networkproblems before they affect customers, thereby reducing the level of reactivework and improving efficiency and customer service.Power costs - UU has substantially locked in the cost of its power requirementsthrough to 2014/15, via hedging, securing outperformance. Power unit costs for2011/12 were similar to the prior year and approximately 20% lower comparedwith 2009/10. Although power unit costs beyond 2011/12 have been secured athigher levels than those for 2011/12, this still delivers additionaloutperformance versus the regulatory contract.Debt collection - We are adopting a more proactive approach to debt collectionand have delivered another good performance in the year. We are implementing adetailed action plan, which includes enhancing systems to improve customersegmentation analysis and to obtain better data on customers who have changedaddress, coupled with a more proactive debt follow up strategy. To supportthis, a proportion of our debt collection function which was previouslyoff-shored has been brought back in-house and this has helped improve our debtcollection performance. Bad debts as a proportion of regulated revenue improvedfrom 2.5% in 2009/10 to 2.1% in 2010/11. The North West faces a particularlytough economic environment with unemployment having increased at a faster ratethan any other UK region in 2011/12, particularly in the second half of theyear. Despite this, we have again delivered a good performance with bad debtsstanding at 2.2% of regulated revenue for 2011/12. Debt collection will remaina significant area of focus for the business.
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.
Pensions - The group placed its pension provision on a more sustainable footingin 2010 and has subsequently taken additional steps to de-risk the pensionscheme further. An inflation funding mechanism has been introduced, which hasfacilitated a move to a lower risk investment strategy with the proportion ofpension assets invested in equities or other high risk assets now reduced toaround 25%. More prudent longevity assumptions have also been recentlyintroduced. Further details on the group's pension provision are provided inthe pensions section.Capital delivery - The business is strongly focused on delivering itscommitments efficiently and on time. We utilised previous experience to improvethe terms and conditions of our supplier contracts and have a robust commercialcapital delivery framework in place for the 2010-15 period. Contractorperformance is aligned with the company's business plan through appropriateincentive arrangements. In addition, the business has introduced a moredisciplined approach to spend and outputs through a Time: Cost: Quality index(TCQi). This enhances the capital investment governance process and provides asharper focus on the delivery of commitments, with a direct link to theexecutive remuneration scheme. The TCQi performance score has improved fromaround 50% last year to over 80% for 2011/12 and the company's long-term goalis to achieve over 90%. Regulatory capital investment in 2011/12, including £154 million of infrastructure renewals expenditure, was £680 million, anincrease of 12% compared with last year. UU has now delivered approximately £1.3 billion of capital investment in the first two years of the 2010-15 period.This spend is broadly in line with the regulatory allowance, after adjustingfor the construction output price index (COPI) which is consistent with Ofwat'smethodology. Good progress in the delivery of outputs has also been achieved inthe early part of the new regulatory period, reflecting a smoother and moreefficient investment profile than that experienced in the 2005-10 period. Weexpect regulatory capital expenditure to be around £700 million in the 2012/13financial year, consistent with our five-year programme.Sludge processing - A new £100 million sludge processing centre is beingdeveloped at the company's Davyhulme wastewater treatment works in Manchester.Sludge will arrive from seven feeder treatment works and will be processedusing advanced thermal hydrolysis technology. The new facility will provide arange of benefits including energy self-sufficiency for the whole site, greatersludge disposal flexibility, with a wider choice of land disposal due to theadvanced stage of the treated product, and improved sludge condition to enhancethe efficiency of incineration. There will also be the option to pump thetreated sludge to UU's Shell Green sludge processing centre in Widnes.Private sewers - The ownership of and responsibility for private sewers wastransferred to the wastewater companies in England and Wales from 1 October2011. We have been preparing for this for some time resulting in a smoothtransition. The number of customer contacts, the increase in work volumes andthe level of expenditure, thus far, has been a little below initialexpectations. In addition, the mix of work has been slightly different to thatinitially anticipated, with a greater proportion of expenditure relating toenhancement capex, as we undertake investigations and remedial work on thesenewly acquired assets. As we have evolved our operating model, we have seen anincreasing proportion of work relating to enhancement expenditure as we haveprogressed through the period since 1 October. We are attaining better assetinformation and, in addition to jetting and cleaning activity, we areundertaking remedial work to improve and, where appropriate, enhance thequality of the infrastructure, to bring it more in line with UU's assetstandards and to reduce the risk of future problems for our customers. This isall consistent with our drive to deliver good customer service, where we aim tocomplete the job efficiently and effectively and in a single visit wherepracticable. We have also experienced lower levels of operating expenditure andinfrastructure renewals expenditure (IRE) than anticipated. In the second halfof 2011/12, operating expenditure was £6 million and capital expenditure was £15 million, of which £9 million was IRE. This has also resulted in a positiveimpact on operating profit in the second half of 2011/12. In light of this, wehave outlined a revision to the level and mix of our cost estimates for theperiod October 2011 to March 2015. This reduces our total estimate foroperating expenditure by £15 million to around £40 million, with a £5 millionreduction in total capital expenditure to around £120 million. Importantly, themix is now expected to be more evenly split between IRE and enhancement capex,reflecting experience over the last few months, with a revised estimate of £60million for each of these expenditure categories. This lower rate of spend ispositive for customers as it should be beneficial to bills at the next pricereview and, alongside this, we are raising asset standards. It is alsobeneficial for our investors, as costs are lower, a greater proportion of spendshould be recoverable and we have the opportunity for additional growth in theregulatory capital value. We are still early into the transfer and willcontinue to review these cost estimates based on the levels and type ofworkload and activity experienced and will provide updated forecasts asappropriate.
Key performance indicators:
* Financing outperformance - UU has secured over £300 million of financingoutperformance across the 2010-15 period, when compared with Ofwat's allowedcost of debt of 3.6% real, based on an average RPI inflation rate of 2.5% perannum. Should average RPI inflation outturn at 3.5% per annum across thefive-year period, this would increase financing outperformance to around £400million, net of the impact of the pensions inflation funding mechanism. UUagreed a £200 million index-linked loan with the European Investment Bank(EIB), drawn down between March and May 2011, at an average real interest rateof 1.2%, which secures financing outperformance of around £20 million throughto 2015. Subsequently, a further £200 million index-linked loan facility wasagreed with the EIB and was drawn down in a number of tranches between November2011 and March 2012 at an average interest rate of 0.9% real. This is the bestrate UU has secured and generates further outperformance of over £15 millionthrough to 2015.* Operating expenditure outperformance - The business is targeting totaloperating expenditure outperformance over the 2010-15 period of at least £50million, or approximately 2%, compared with the regulatory allowance. This isin addition to the base operating expenditure efficiency targets set by Ofwat,which equate to a total of approximately £150 million over the five years. UUis on track to meet its five year target and has now delivered cumulativeoperating expenditure outperformance of over £20 million in the first two yearsof the regulatory period.* Capital expenditure outperformance - UU is delivering significantefficiencies in the area of capital expenditure and expects to meet Ofwat'sallowance after adjusting, through the regulatory methodology, for the impactof lower construction output prices. Capital expenditure and the delivery ofoutputs remain on track.Responsible mannerActions:Sustainability is fundamental to the manner in which we undertake our businessand the group has for many years included corporate responsibility (CR) factorsas a strategic consideration in its decision making. This has contributed to UUretaining the highest platinum plus ranking in Business in the Community's(BITC) CR index, as well as again being rated `World Class' in the Dow JonesSustainability Index. UU is one of only six FTSE 100 companies to hold bothawards. UU's Business Principles set out its commitment to environmental,social and economic improvements and this is communicated in a way that enablesall employees to recognise how their roles and responsibilities contribute tomaintaining and improving sustainability performance.
Environment
Leakage management - The performance of the business in meeting its regulatoryleakage target for 2010/11 was excellent, given the extreme winter weather, andUU was one of only four water and sewerage companies to meet its regulatoryleakage target in that year. This reflected strong year round operational focuson leakage, an approach which we continued through 2011/12 and UU has now metits leakage target for the sixth consecutive year. To help customers protecttheir homes in winter and prevent leakage from their own pipes, we undertook acustomer awareness campaign and distributed over 100,000 advice packs.Environmental performance - This is a high priority for the company and UU hasmore than halved the number of major pollution incidents over the last fewyears. Wastewater treatment works compliance remains high at over 98%, aslight improvement compared with the previous year. UU is working more closelywith the Environment Agency (EA), through its agreed protocol, to help minimisethe occurrence and environmental impact of pollution incidents. This includesthe sharing of resources, knowledge and expertise. The company is alsoenhancing its telemetry and flow monitoring equipment to provide earlyidentification of incidents to enable prompt action to be taken to minimise thepotential impact. Recognising that environmental performance is wide-ranging,the company is measuring itself against an EA composite measure as detailed inthe key performance indicators below.Sustainable catchment management programme - UU owns over 56,000 hectares ofland in the North West which it holds to protect the quality of water enteringits reservoirs. The company has developed a sustainable catchment managementprogramme which will help to protect and improve water quality and enhancebiodiversity.Renewable energy - UU has a detailed carbon and renewable energy plan, whichboth contributes to sustainability and reduces costs. We are on track to meetour target of a 21% reduction in carbon emissions by 2015 (measured from a 2005/06 baseline). Emissions in 2011/12 were 522,003 tonnes of carbon dioxideequivalent, a reduction of 9% on last year. We are now 13% below our baselineposition. UU has consistently generated over 100 GWh of renewable electricityannually for the past three years, principally from sludge processing, withrenewable energy equating to approximately 14% of the group's total electricityconsumption. UU also reduced its energy purchases by over 20 GWh in 2011/12.The group has plans in place to increase renewable energy generation to 125 GWhper annum by 2015.Liverpool wastewater treatment works enhancement - UU has received planningpermission for a £200 million plant expansion to its existing wastewatertreatment works in Liverpool, which serves over half a million customers. Thiswill enhance the capacity of the treatment works to handle up to 11,000 litresof wastewater per second and the treated water leaving the plant will be of ahigher standard. The project will create up to 350 jobs during the constructionperiod. The project will deliver both environmental benefits and growth in thecompany's regulatory capital value.
Employees
We continue to be successful in attracting and retaining people and inachieving UK high performing levels of employee engagement. We have, over aperiod of 12 months, delivered much more training of a higher standard and atthe same time reduced the associated cost. This year we delivered 24,000 daysof training to employees, of which more than 6,700 days were health and safetyrelated. In addition, over 300 employees have been supported through a widerange of further education courses. We currently have 80 apprentices and planto recruit up to a further 40 apprentices each year through to 2015. We havealso re-energised our graduate recruitment programme and in 2012 expect torecruit up to 20 graduates. The past year has seen us strengthen our focus onimproving health and safety, with a programme led by UU's executive team. Thishas helped reduce our accident frequency rate for employees from 0.386accidents per 100,000 hours worked in 2010/11, to 0.215 accidents per 100,000hours worked in 2011/12. More detail is provided in our annual CR report.Health and safety performance will continue to be a significant area of focusfor the company, as we strive to improve our performance further.
Communities
We actively support our local communities and we have a number of communitypartnerships to help us engage with the people in our region. This year we haveincreased the number of partnerships that address social issues in our region,such as education, water efficiency and employability skills. We understand theimpact we can have on the communities where we operate and undertake capitalprojects so we seek to work with those communities to leave a positive legacyafter our projects have been delivered. We have continued our award winning`United Futures' programme with our partner, Groundwork, to help regenerateneighbourhoods after we have finished our work there. In addition, we haveexpanded our innovative `Community Fund' where local community groups areinvited to apply for small scale grants to support their work. During the year,we have contributed approximately £2 million supporting our local communities,providing debt advisory services and over 19,000 hours volunteered by ouremployees.
Key performance indicators:
* Leakage - UU met its economic level of leakage rolling target for the sixthconsecutive year in 2011/12, with a performance of 453 megalitres per dayversus the regulatory target of 464 megalitres per day. The aim is to meet ourregulatory leakage target each year.* Environmental performance - The EA computes a composite measure whichincorporates a broad range of areas including pollution. UU improved to amid-ranking position for 2009/10 improving from its position in 2008/09, whenit was ranked tenth out of ten water and sewerage companies. The company hasreduced further the number of major pollution incidents and this hascontributed to an improved performance score for 2010/11 (the latest assessmentavailable) and UU retains a mid-ranking position. UU aims to move from thisaverage relative position to the first quartile in the medium-term.* Corporate responsibility - UU has a strong focus on corporate responsibilityand is the only UK water company to have a `World Class' rating as measured bythe Dow Jones Sustainability Index. The group aims to retain this `World Class'rating each year.
Political and regulatory developments
UU is actively involved in political and regulatory developments that relate tothe UK water sector and has a proactive programme to regularly engage with thekey parties. The UK Government published a Water White Paper `Water for Life'in December 2011, which reaffirmed the success of the privatisation of thewater industry, with companies having invested over £90 billion to maintain andimprove assets, customer service and the environment. The paper highlights thatthe water industry needs to evolve in order to meet the challenges arising fromfactors such as climate change and a growing population to help ensure thathigh quality water is supplied reliably while remaining affordable. In linewith expectations, a draft Water Bill was announced in the Queen's Speech on 9May 2012 and is due to be published before Parliament Summer Recess whichcommences on 18 July 2012. In addition, Ofwat published its statement ofprinciples for the 2014 price review on 15 May 2012.We are pleased that the government recognised the need for evolutionary, ratherthan revolutionary, changes to the successful existing water model. We are inagreement with many of the aims set out in this paper, such as tackling waterpollution, over abstraction, affordability and water efficiency, as well asprotecting water and the natural environment. Indeed, much of what we alreadydo supports many of the Government's aspirations.Our sustainable catchment management programme (SCAMP) is perhaps the most highprofile example of how we address sustainable abstraction. This model has beenadopted as best practice in the sector. We do benefit from having robust waterresources in our region and continue to enhance our regional network to provideresilience to local water stress.We have been undertaking water trading for many years, albeit on a fairly smallscale, but certainly have the potential to do more within the right industryframework. In addition to our existing water trading arrangements, we arelooking at further options to help other parts of the country deal with droughtconditions and we have a number of connections which can be used for shortperiods when required. Looking ahead, there is potential to develop morecross-border export options and we are in a strong position to contribute insuch a future market scenario, although we envisage the financial quantum ofthis to be fairly small relative to the size of the industry. However, watertrading is not the sole answer to addressing drought conditions. Thelonger-term answer must be comprehensive and include more large capacitypipelines, enhanced storage capacity, flexible abstraction and water efficiencymeasures.UU believes that water companies are in a unique position to help facilitatethe use of scarce water resources by customers. In the area of waterefficiency, this is something we continue to focus on and UU has one of thelowest per capita consumption levels in the industry. Recent measures adoptedby the company include distributing shower regulators and devices to reduceflush volumes in toilets and rolling out education programmes. UU believes thatmore can be done to promote water efficiency and the company supports therefinement of the regulatory framework to provide companies with incentives toencourage the wise use of water.Underpinning all of this, and the plans to increase competition fornon-domestic customers, is the need to retain investor confidence in thesector. This is of paramount importance and we are pleased that the strengthsof the current industry structure will be retained and that the historicalregulatory capital value will be protected. Key issues that are currentlyundergoing industry consultation include possible modifications to watercompanies' licences and the replacement of the `costs principle', which governsaccess pricing, along with Ofwat's proposed average cost to serve methodologyfor the retail price control. On the matter of licence modifications, we aresupportive of the simple changes necessary to implement the government'sdecision for expanded non-domestic competition and those necessary tofacilitate the 2014 price review. With regard to the `costs principle', it isimportant that, in order to ensure fair network access, that any parliamentarybill or act encourages only efficient entry and protects customers not eligiblefor competition from cross-subsidy. In respect of retail price controls, webelieve it is essential that the regulator continues to take account ofregional socio-economic conditions, addresses reporting inconsistencies betweencompanies, retains the RPI inflation link and makes adjustments to reflect thenumber of customers that receive only water or wastewater service. We willcontinue with our active involvement on these issues.
FINANCIAL PERFORMANCE
Revenue
UU has delivered a good set of financial results for the year ended 31 March2012. Revenue increased by £52 million to £1,565 million, principallyreflecting a 4.5% nominal (0.2% real price decrease plus 4.7% RPI inflation)regulated price increase, partially offset by the ongoing impact of customersswitching to meters and lower commercial volumes. The impact of meter switchingwas in line with our expectations, although commercial volumes were lower thanexpected, particularly in the second half of the year when the North Westexperienced an increase in unemployment. We would expect to recover themajority of this revenue shortfall through the regulatory methodology at thenext price review.Operating profitUnderlying operating profit decreased slightly by £2 million to £594 million,primarily as a result of increases in infrastructure renewals expenditure,depreciation and property rates, the impact of the transfer of private sewersand the new carbon reduction commitment charge, largely offset by the increasein revenue. Reported operating profit rose by 2% to £592 million, as last yearwas impacted by one-off restructuring costs of £16 million which reducedoperating profit in the prior period.
Investment income and finance expense
Investment income and finance expense of £311 million was £58 million higherthan last year, principally reflecting £43 million of net fair value losses ondebt and derivative instruments, compared with £19 million of net fair valuegains in 2010/11. The £43 million net fair value loss in the period is largelydue to losses on the regulatory swap portfolio resulting from a significantdecrease in sterling interest rates during the period. The group uses theseswaps to effectively fix interest rates on a substantial proportion of its debtto better match the financing cash flows allowed by the regulator at each pricereview. The group has continued to benefit from fixing the majority of itsremaining debt for the 2010-15 financial period, providing a net effectivenominal interest rate of approximately 5%. Partially offsetting these losses,there has been a net fair value gain during the period due to widening creditspreads in the market, affecting the fair value of our fair value option debt. The indexation of the principal on index-linked debt amounted to a net chargein the income statement of £100 million, compared with a net charge of £103million last year. This reflected lower RPI inflation in respect of thegroup's index-linked debt with a three month lag. This reduction was primarilyoffset by additional finance expense relating to the £400 million index-linkedloan facilities provided by the European Investment Bank (EIB), which weredrawn down in various tranches between March 2011 and March 2012. The first £200 million of facilities were drawn down at an average real interest rate of1.2%, with the second £200 million at 0.9%, the lowest rate the company hasachieved to date. The indexation charge does not represent a cash flow and ismore than matched by an inflationary uplift to the regulatory capital value.The group had approximately £2.7 billion of index-linked debt as at 31 March2012.These offsetting factors resulted in the underlying net finance expense of £267million being flat compared with the prior year, despite a slightly higherlevel of average net debt. The lower RPI indexation charge contributed to thegroup's average underlying interest rate of 5.5% for 2011/12 being a littlelower than the rate in 2010/11 of 5.7%.
Profit before taxation
Underlying profit before taxation was £327 million, £2 million lower than lastyear in line with the reduction in underlying operating profit. This underlyingmeasure adjusts for the impact of one-off items, principally from restructuringand reorganisation within the business, and fair value movements in respect ofdebt and derivative instruments. Reported profit before taxation decreased by14% to £280 million, primarily as a result of net fair value losses on debt andderivative instruments.TaxationThe current taxation charge was £46 million in the year and the currenttaxation effective rate was 16%, compared with 11% in the previous year. Thecurrent year charge includes a £16 million credit following agreement with theUK tax authorities of prior years' taxation matters, without which theeffective rate would have been 22%.The group has recognised a net deferred taxation credit of £77 million for theyear. This includes a £105 million credit, of which £50 million had alreadybeen recognised in first half of 2011/12, relating to the changes substantivelyenacted by the UK government to reduce the mainstream rate of corporationtaxation from 26% to 24% from 1 April 2012. A net deferred taxation credit of£99 million was also recognised in 2010/11, to reflect a similar 2% stagedreduction in the rate of corporation taxation.An overall taxation credit of £31 million has been recognised for the yearended 31 March 2012. Excluding the impact of the reduction in the corporationtaxation rate and the impact of the prior year taxation adjustments, the totaltaxation charge would have been £74 million or 26% compared with an £89 millioncharge or 27% last year.The taxation benefit of £33 million relating to pension contributions fordeficit funding has been recorded in the statement of comprehensive income,rather than the income statement, as the actuarial movements giving rise to thedeficit were previously recorded there. Associated deferred taxation movementsof £29 million are also included in the statement of comprehensive income.
The group made a net cash taxation payment during the year of £5 million, primarily reflecting the £35 million cash taxation inflow relating to prior years' taxation matters, which largely offset the cash taxation paid in the year. In the previous year, the group's net taxation payment was £47 million.
Profit after taxation
Underlying profit after taxation was £241 million. This is based on theunderlying profit before taxation figure less an underlying taxation charge of£86 million, which includes an adjustment for the deferred taxation credit inrelation to the change in the mainstream rate of corporation taxation and thecredit relating to prior years' taxation matters. Reported profit aftertaxation was £311 million compared with £355 million last year.
Earnings per share
Underlying earnings per share increased slightly from 35.1 pence to 35.3 pence.This underlying measure is derived from underlying profit before taxation lessunderlying taxation. This includes the adjustments for the deferred taxationcredits in 2011/12 and 2010/11, associated with the reductions in thecorporation taxation rate, and the taxation credits in both years relating toprior years' taxation matters. Basic earnings per share decreased from 52.0pence to 45.7 pence, principally reflecting net fair value losses on debt andderivative instruments.Dividend per shareThe board has proposed a final dividend of 21.34 pence per ordinary share inrespect of the year ended 31 March 2012. Taken together with the interimdividend of 10.67 pence per ordinary share paid in February, this produces atotal dividend per ordinary share for 2011/12 of 32.01 pence. This is anincrease of 6.7%, compared with the dividend relating to the previous year, inline with group's dividend policy of targeting a real growth rate of RPI+2% perannum through to at least 2015. The inflationary increase of 4.7% is based onthe RPI element included within the allowed regulated price increase for the2011/12 financial year (i.e. the movement in RPI between November 2009 andNovember 2010).The final dividend is expected to be paid on 3 August 2012 to shareholders onthe register at the close of business on 22 June 2012. The ex-dividend date
is20 June 2012.Cash flow
Net cash generated from continuing operating activities for the year ended 31March 2012 was £560 million, compared with £563 million last year. This smallreduction reflected the accelerated pension deficit repair payment and anincrease in operating costs, partly offset by a rise in revenue and the minimalamount of cash taxation paid in 2011/12 as the group benefited from a taxationrebate relating to prior years. The group's net capital expenditure was £502million, principally in the regulated water and wastewater investmentprogrammes. This excludes infrastructure renewals expenditure which is treatedas an operating cost under International Financial Reporting Standards.
Net debt including derivatives at 31 March 2012 was £5,076 million, compared with £4,778 million at 31 March 2011. This expected increase reflects expenditure on the regulatory capital investment programmes and payments of dividends and interest, alongside the accelerated pension deficit repair payment, partly offset by operating cash flows.
Debt financing and interest rate management
Gearing (measured as group net debt divided by UUW's regulatory capital valueadjusted for actual capital expenditure) remained flat at 59% at 31 March 2012,compared with the position at 31 March 2011, and remains comfortably withinOfwat's 55% to 65% assumed gearing range. This is the net effect of three mainfactors: indexation of the principal of the group's index-linked debt, theaccelerated pension deficit repair payment and growth in the regulatory capitalvalue. The group's pensions deficit has reduced to £92 million, on anaccounting basis, compared with a deficit of £195 million at 31 March 2011.Taking account of this small deficit, and treating it as debt, gearingincreases slightly to 60%.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- fromMoody's Investors Service and Standard & Poor's Ratings Services respectively.The split rating reflects differing methodologies used by the credit ratingagencies.Cash and short-term deposits at 31 March 2012 amounted to £321 million. BetweenMarch and May 2011 UUW drew down a £200 million index-linked loan facility withthe EIB. The group also renewed £150 million of bank facilities during 2011/12.In addition, in November 2011, UUW agreed a further £200 million index-linkedloan facility with the EIB which was drawn down between then and March 2012. UUhas headroom to cover its projected financing needs into 2014.The group has access to the international debt capital markets through its €7billion euro medium-term note programme which provides for the periodicissuance by United Utilities PLC and United Utilities Water PLC of debtinstruments on terms and conditions determined at the time the instruments areissued. The programme does not represent a funding commitment, with fundingdependent 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's preferredform of funding as this provides a natural hedge to assets and earnings. At 31March 2012, approximately 53% of the group's net debt was in index-linked form,representing around 31% of UUW's regulatory capital value, with an average realinterest rate of 1.7%. The long-term nature of this funding also provides agood match to the company's long-life infrastructure assets and is a keycontributor to the group's average term debt maturity profile which isapproximately 25 years.Where nominal debt is raised in a currency other than sterling and/or with afixed interest rate, to manage exposure to long-term interest rates, the debtis generally swapped to create a floating rate sterling liability for the termof the liability. To manage exposure to medium-term interest rates, the groupfixed interest costs for a substantial proportion of the group's debt for theduration of the 2010-15 regulatory period at around the time of the pricereview.Following the 2009 price review, the group re-assessed its interest ratehedging policy with a view to further reducing regulatory risk. To help addressthe uncertainty as to how Ofwat may approach the setting of the cost of debtallowance at the next price review in 2014, UU has revised its interest ratemanagement strategy to extend its fixed interest rate hedge out to a ten yearmaturity on a reducing balance basis. The intention is to extend the interestrate hedge each year to eventually achieve a ten year rolling average interestrate on the group's nominal debt. UU believes that this revised interest ratehedging policy, which provides for a longer fixing of interest rates, will putthe company in a more flexible position to respond to whatever approach Ofwatadopts to the industry cost of debt in future.
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, UU aims to maintain a robust headroomposition. Available headroom at 31 March 2012 was £614 million based on cash,short-term deposits and medium-term committed bank facilities, net ofshort-term debt. This headroom is sufficient to cover the group's projectedfinancing needs into 2014.UU believes that it operates a prudent approach to managing bankingcounterparty risk. Counterparty risk, in relation to both cash deposits andderivatives, is controlled through the use of counterparty credit limits. UU'scash is held in the form of short-term (generally no longer than three months)money market deposits with prime commercial banks.UU operates a bilateral, rather than a syndicated, approach to its corerelationship banking facilities. This approach spreads maturities more evenlyover a longer time period, thereby reducing refinancing risk and providing thebenefit of several renewal points rather than a large single refinancingrequirement.
Pensions
As at 31 March 2012, the group had a net retirement benefit, or pension,deficit of £92 million, compared with a net pension deficit of £195 million at31 March 2011. This £103 million positive movement principally reflects paymentof the £100 million accelerated deficit repair contribution.The group has sought to adopt a more sustainable approach to the delivery ofpension provision and in advance of the start of the 2010-15 regulatory periodamended the terms of its defined benefit pension schemes, the details of whichwere included in the 2010 annual report and financial statements. UU alsoreduced its future pension obligations as a result of the sale of non-regulatedactivities.The group stated previously that it would continue to evaluate its pensionsinvestment strategy to de-risk further its pension provision and introduced aninflation funding mechanism (the details of which were included in the 2011annual report and financial statements), which facilitates a move to a lowerrisk investment strategy. This has allowed UU to reduce the allocation of itspension assets to 25% in equities and other high risk assets, from 34% at 31March 2011. In addition, UU has adopted the use of more prudent longevityassumptions. The group has also increased its interest rate hedge to around 65%of pension scheme liabilities. Although any additional payments under thismechanism would reduce financing outperformance, there would be a positivebenefit to the pensions surplus or deficit position.From an accounting perspective, IAS 19 treats the inflation funding mechanismas a schedule of contributions rather than a pension scheme asset. This meansthat the liabilities position can change to reflect a change in marketexpectations of long-term inflation, without a commensurate movement in assets.The change in inflation has decreased the present value of the liabilitiesduring the year to 31 March 2012. This accounting treatment means that there islikely to be a degree of volatility in future IAS 19 pension valuations.
Further detail is provided in note 9 ("Retirement benefit obligations") of these condensed consolidated financial statements.
Underlying profit
In considering the underlying results for the period, the directors haveexcluded fair value movements on debt and derivative instruments and one-offitems. Reported operating profit and profit before taxation from continuingoperations are reconciled to underlying operating profit, underlying profitbefore taxation and underlying profit after taxation (non-GAAP measures) asfollows:Continuing operations Year ended Year endedOperating profit 31 March 2012 31 March 2011 £m £m Operating profit per published results 591.5 580.2 One-off items* 2.6 16.2 ------ ------ Underlying operating profit 594.1 596.4 ------ ------ Net finance expense £m £m Finance expense (315.5) (255.9) Investment income 4.4 2.8 ------ ------ Net finance expense per published results (311.1)
(253.1)
Net fair value losses/(gains) on debt and 43.2 (19.2)derivative instruments Adjustment for interest on swaps and debt under 7.2 5.7fair value option Adjustment for net pension interest expense 3.3
3.8
Adjustment for capitalised borrowing costs (9.7) (4.4) ------ ------ Underlying net finance expense (267.1) (267.2) ------ ------ Profit before taxation £m £m Profit before taxation per published results 280.4 327.1 One-off items* 2.6 16.2 Net fair value losses/(gains) on debt and 43.2 (19.2)derivative instruments Adjustment for interest on swaps and debt under 7.2 5.7fair value option Adjustment for net pension interest expense 3.3
3.8
Adjustment for capitalised borrowing costs (9.7) (4.4) ------ ------ Underlying profit before taxation 327.0 329.2 ------ ------ Profit after taxation £m £m Underlying profit before taxation 327.0 329.2 Reported taxation 31.0 27.4 Deferred taxation credit - change in taxation (104.6) (99.0)rate Agreement of prior years' UK taxation matters (0.4)
(17.8)
Taxation relating to underlying profit before (12.1) (0.6)taxation adjustments ------ ------ Underlying profit after taxation 240.9 239.2 ------ ------
* Principally relates to restructuring and other reorganisation costs within the business
Underlying operating profit reconciliation
2011/12 is the first year in which the group has presented the consolidatedfinancial statements as a single segment and therefore the table below providesa reconciliation between group underlying operating profit and United UtilitiesWater PLC historical cost regulatory underlying operating profit (non-GAAP
measures) as follows:Continuing operations Year endedUnderlying operating profit 31 March 2012 £m Group underlying operating profit 594.1 Underlying operating profit not relating to United (10.9)Utilities Water Infrastructure renewals accounting 40.2 Other differences (3.9) ------ United Utilities Water statutory underlying operating 619.5profit Revenue recognition 2.6 Infrastructure renewals accounting (2.5) Non-appointed business (7.0) ------
United Utilities Water regulatory underlying operating 612.6 profit
------
PRINCIPAL RISKS AND UNCERTAINTIES
We manage risk through our corporate risk management framework. As part of thiswe maintain a process that regularly assesses the nature and magnitude ofinternal and external risks. Mitigation measures are used in a prioritisedmanner to reduce exposure and ensure resilience. The executive reviewssignificant risks so that the board can determine the nature and extent ofthose risks it is willing to take in achieving our strategic objectives. Theaudit and risk committee regularly reviews the framework's effectiveness andthe group's compliance with it.
Key developments during the year
The risk profile of our group is now largely confined to the regulated waterand wastewater business in the North West of England following the sale of thevast majority of our non-regulated businesses in 2010.The legislative reform proposed by the government's recently published WaterWhite Paper (Water for Life) is now one stage nearer. More information is setout in the `Government Market Reform Agenda' section below but the likelyimpact on the industry, positive or negative, will not be fully understooduntil the draft Water Bill is published and ultimately becomes legislation.Ofwat has also started the process of preparing the ground for the 2014 pricereview process. This includes a consultation with stakeholders about `FuturePrice Limits' which asks for consideration of a number of proposals for changethat may be required to facilitate the aims of the Water White Paper.
Government market reform agenda
The government's White Paper (Water for Life) highlights a number of areas which government will focus on to reform the water industry. These include:
* protecting water and the natural environment;
* tackling water pollution;
* tackling over abstraction;
* water and the green economy;
* reforming and extending competition;
* supporting growth and innovation;
* affordability and bad debt; and
* changing the way we use and value water.
A draft Water Bill is expected to be published before Parliament Summer Recess,which commences on 18 July 2012, and should deliver many of the aspects set outin the White Paper. Changes to the industry are expected to include extendingcompetition to all non-household customers for both water and wastewater, theremoval of barriers to the trading of abstraction licences and facilitatingbulk supplies of water, reform of the special merger regime to allow moremergers of water companies and reform of the inset appointment regime. There isalso a proposal (in the government's White Paper) to replace the `costsprinciple' which underpins network access.
Ofwat plans to consult on the methodology for the 2014 price review in the autumn of 2012.
The group has been fully engaged in all government and Ofwat consultations in relation to competition, industry reform and the price setting process.
In respect of competition, a relatively small proportion of the group's profitsderive from the retailing of water and wastewater services to non-householdcustomers. If competition is expanded, there would be opportunities for thegroup to participate in a wider market in England and potentially Scotland.However, we recognise 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.
We have raised our concerns with Ofwat and will be proposing an alternative to the `costs principle', seeking to ensure that key underlying principles (on both cost of entry and efficiency of provision) are reflected in any replacement.
Future price limits - average cost to serve
It is expected that market reform will result in two price limits, one forretail and one for wholesale. Ofwat proposes to set an average cost to servefor non-contestable customers in the retail price limit. This proposal couldresult in us having a significant cost recovery shortfall over the nextfive-year price control period. We have raised and explained our concerns withOfwat and made alternative proposals as part of the consultation process andcontinue to make strong representation to Ofwat on this issue, citing themarket evidence from investors and analysts to support our case.
Future price limits - licence modifications
Ofwat has made proposals to modify the licences of the water and wastewater industry to:
* allow it to remove reference to the use of the retail price index (RPI) in price setting; and
* allow flexibility in the number of price limits set and the duration of price controls.
All 21 water companies have rejected Ofwat's proposals and the regulator is nowconsulting with the wider water sector before making its decision on this laterin 2012.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 offactors including adverse legacy effects of earlier capital investments (suchas increased maintenance, repair, reinstatement or renewal costs) or amountsbudgeted in prior capital investment programmes proving insufficient to meetthe actual amount required. This may affect the group's ability to meetregulatory and other environmental performance standards.Capital investment programmes are regularly monitored to identify the risk oftime, cost and quality variances from plans and budgets and to identify, wherepossible, any appropriate opportunities for outperformance and any necessarycorrective actions.
Executive directors are incentivised, as part of their bonusable measures, on time, cost and quality of delivery of our capital investment programme.
Service incentive mechanism
For the 2010-15 period, Ofwat has introduced a new comparative incentivemechanism to reward or penalise water companies' service performance, replacingthe Overall Performance Assessment (OPA). The Service Incentive Mechanism (SIM)compares companies' performance in terms of the number of `unwanted' contactsreceived from customers and how well they deal with those contacts. Dependingon UUW's relative performance under SIM it could receive a revenue penalty (upto one per cent of turnover) or reward (up to 0.5 per cent of turnover) whenprice limits are next reset in 2014.The group has been monitoring and measuring customer satisfaction for a numberof years and results have been improving consistently. We have already improvedour SIM score, as detailed in our KPIs. To build on this success we have adedicated project team 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 and reducing associated operating costs. Where`unwanted' contacts do arise, then there is a clear focus on identifying theroot causes to improve the overall customer experience and the SIM score.Capital costs of enhanced systems to improve performance are dealt with throughthe Capital Incentive Scheme. These actions are intended to ensure that thecompany's performance under SIM is optimised thereby mitigating the risk of apenalty at the next price setting.
Serviceability assessment
The group is required to maintain the serviceability of its water andwastewater assets, ensuring they continue to deliver a level of service andperformance that is at least as good as in the past. Where serviceability fallsbelow required reference levels of performance, Ofwat deploys a staged approachto regulatory action to secure corrective actions and could make financialadjustments at the next price setting if these actions did not restore serviceperformance. If performance was to continue to decline, the group may incuradditional operating or capital expenditure to restore performance.The various indicators of performance are closely and routinely monitored bymanagement. The company's capital investment programme is targeted to seek tomaintain stable serviceability of the company's water and wastewater assets.Similarly, operational practice is intended to ensure stable serviceability.Where adverse trends develop and there is a risk of serviceability deviatingfrom stable, then corrective action can be identified and taken.
Pension scheme obligations
The group participates in a number of pension arrangements. The principal schemes are defined benefit schemes, although these have been closed to new employees since October 2006. The assets of these schemes are held in trust funds independent of group finances, with the funds being well diversified and professionally managed.
The group's current schemes had a combined IAS 19 deficit of £92 million as at 31 March 2012, compared with a deficit of £195 million as at 31 March 2011.
Increases to pension fund deficits may result in an increased liability for thegroup, the size of the liability depending on a number of factors, includinglevels of contributions and actuarial assumptions. In the 2009 water pricereview, Ofwat took account of broadly 50 per cent of the pension deficit shownin UUW's final business plan over a ten-year period (subject to reaffirmationat the next price review) for the regulated business and allowed for half ofthis deficit when setting its overall price controls for the 2010-15 period. Inresponse to the size of its ongoing pension risks and pension costs the groupintroduced a series of changes for employees in its defined benefit (DB)schemes. These changes, which came into force on 31 March 2010, should resultin reduced costs and risks, including deficit, associated with DB liabilitiesin future. In conjunction with the trustees, the group continues to monitor andto look to reduce the investment strategy risks for the pension schemes,including the group'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; health and safety andwater quality. Amongst others, these may include civil actions by third partiesfor infringement of rights or nuisance claims relating to odour or othermatters. Furthermore, the impact of future changes in laws or regulations orthe introduction of new laws or regulations that affect the business cannotalways be predicted and, from time to time, interpretation of existing laws orregulations may also change or the approach to their enforcement may becomemore rigorous. If the group fails to comply with applicable law or regulations,in particular in relation to its water and wastewater licences, or has notsuccessfully undertaken corrective action, regulatory action could be takenthat could include the imposition of a financial penalty (of up to 10 per centof relevant 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 in accordance withits business principles and robust processes are in place to seek to mitigateagainst non-compliance. The group continually monitors legislative andregulatory developments and, where appropriate, participates in consultationsto seek to influence their outcome, either directly or through industry tradeassociations for wider issues. The group seeks appropriate funding for anyadditional compliance costs in the regulated business as part of the pricedetermination process.
Events, service interruptions, systems failures, water shortages or contamination of water supplies
The group controls and operates water and wastewater networks and maintains theassociated assets with the objective of providing a continuous service. Thegroup is also dependent on the ability to access, utilise and communicateremotely via electronic software applications mounted on corporate informationtechnology hardware and communicating through internal and external networkswhich are not wholly under its control.
In exceptional circumstances, such as prolonged drought, system failure or catastrophic damage, a significant interruption of service provision could occur.
Such consequences may arise due to a number of circumstances either within oroutside the company's control. For example from water shortages, the failure ofan asset or an element of a network or supporting plant and equipment, humanerror, an individual's malicious intervention or unavoidable resourceshortfalls.
Such instances have a low probability, but if materialised could result in significant loss of life, environmental damage and/or economic and social disruption.
The group could be fined for breaches of statutory obligations or be held liable to third parties or be required to provide an alternative water supply of equivalent quality, which could increase costs.
The group operates long-standing, well tested and appropriately resourcedincident response and escalation procedures. The processes continue to berefined, alongside related risk management and business continuity procedureswhich complement the governance and inspection regimes for key infrastructureassets such as aqueducts, dams, reservoirs and treatment works. DisasterRecovery processes also exist for the recovery of applications, all recognisingthat possible events can have varying causes, impacts and likelihoods.Sustainability of our water supply is also managed through regional aqueductnetworks which will be enhanced by the West East Link pipeline. While the groupseeks to ensure that it has appropriate processes and preventative controls inplace, there can be no certainty that such measures will be effective inpreventing or, when necessary, managing large-scale incidents to thesatisfaction of customers, regulators, government and the wider stakeholdercommunity. The group also maintains insurance cover in relation to losses andliabilities likely to be associated with such significant risks, althoughpotential liabilities arising from a catastrophic event could exceed themaximum level of insurance cover that can be obtained cost-effectively. Thelicence of the regulated business also contains a `shipwreck' clause that, ifapplicable, may offer a degree of recourse to Ofwat/customers (by way ofinterim determination) in the event of a catastrophic incident.
Material litigation
In February 2009, United Utilities International Limited (UUIL) was served withnotice of a multiparty `class action' in Argentina related to the issuance andpayment default of a US$230 million bond by Inversora El©ctrica de Buenos AiresS.A. (IEBA), an Argentine project company set up to purchase one of theArgentine electricity distribution networks which was privatised in 1997. UUILhad a 45 per cent shareholding in IEBA which it sold in 2005. The claim is fora non-quantified amount of unspecified damages and purports to be pursued onbehalf of unidentified consumer bondholders in IEBA. UUIL has filed a defenceto the action and will vigorously resist the proceedings given the robustdefences that UUIL has been advised that it has on procedural and substantivegrounds.In March 2010, Manchester Ship Canal Company (MSCC) issued proceedings seeking,amongst other relief, damages alleging trespass against United Utilities WaterPLC (UUW) in respect of UUW's discharges of water and treated effluent into thecanal. UUW filed a Defence and Counterclaim in support of its believedentitlement to make discharges into the canal without charge and await MSCC'sresponse. Although UUW won a `summary judgment' application against MSCC inJanuary on a significant element of the claim, MSCC have served notice thatthey intend to appeal this decision.The group faces the general risk of litigation in connection with itsbusinesses. In most cases, liability for litigation is difficult to assess orquantify; recovery may be sought for very large and/or indeterminate amountsand the existence and magnitude of liability may remain unknown for substantialperiods of time. The group robustly defends litigation, where appropriate, andseeks to minimise its exposure to such claims by early identification of risksand compliance with its legal and other obligations. Based on the facts andmatters currently known and the provisions carried in the group's statement offinancial position, the directors are of the opinion that the possibility ofthe disputes referred to in this risk section having a material adverse effecton the group's financial position is remote.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This financial report contains certain forward-looking statements with respectto the operations, performance and financial condition of the group. By theirnature, these statements involve uncertainty since future events andcircumstances can cause results and developments to differ materially fromthose anticipated. The forward-looking statements reflect knowledge andinformation available at the date of preparation of this financial report andthe company undertakes no obligation to update these forward-lookingstatements. Nothing in this financial report should be construed as a profitforecast.
Certain regulatory performance data contained in this financial report is subject to regulatory audit.
Consolidated income statement
Re-presented* Year ended Year ended 31 March 31 March 2012 2011 £m £m Continuing operations ------ ------ Revenue 1,564.9 1,513.3 ------ ------ Employee benefits expense: - excluding restructuring costs (135.4) (142.8) - restructuring costs (2.6) (3.1) ------ ------ Total employee benefits expense (138.0) (145.9) ------ ------ Other reorganisation costs - (13.1) Other operating costs (388.0) (358.1) Other income 4.8 4.9 Depreciation and amortisation expense (297.8)
(290.5)
Infrastructure renewals expenditure (154.4) (130.4) ------ ------ Total operating expenses (973.4) (933.1) ------ ------ Operating profit 591.5 580.2 Investment income (note 3) 4.4 2.8 Finance expense (note 4) (315.5) (255.9) ------ ------ Investment income and finance expense (311.1) (253.1) ------ ------ Profit before taxation 280.4 327.1 Current taxation charge (45.5) (34.6) Deferred taxation charge (28.1) (37.0) Deferred taxation credit - change in taxation rate 104.6 99.0 ------ ------ Taxation (note 5) 31.0 27.4 ------ ------ Profit after taxation from continuing operations 311.4 354.5 Discontinued operations Profit after taxation from discontinued operations 5.1 103.7(note 6) ------ ------ Profit after taxation 316.5 458.2 ------ ------ Earnings per share from continuing and discontinued operations (note 7) Basic 46.4p 67.2p Diluted 46.4p 67.2p Earnings per share
from continuing operations (note 7)
Basic 45.7p 52.0p Diluted 45.6p 52.0p Dividend per ordinary share (note 8) 32.01p
30.00p
* The comparatives have been re-presented to include loss on disposal of property, plant and equipment of £2.7 million within other operating costs rather than other income, as previously presented, as this better reflects the nature of the expenditure.
Consolidated statement of comprehensive income
Year ended Year ended 31 March 31 March 2012 2011 £m £m Profit after taxation 316.5 458.2 Other comprehensive income Actuarial losses on defined benefit pension schemes (24.3) (44.7)(note 9) Net fair value losses on cash flow hedges -
(0.2)
Revaluation of investments -
1.1
Reclassification from other reserves arising on disposal of financial asset investment (note 6) -
(6.6)
Reclassification from other reserves arising on -
1.8
disposal of subsidiaries (note 6) Reclassification from cumulative exchange reserve arising on disposal of subsidiaries (note 6) - (26.1) Taxation on items taken directly to equity (note 5) 4.4 11.7 Foreign exchange adjustments (1.9) 0.7 ------ ------ Total comprehensive income 294.7 395.9 ------ ------
Consolidated statement of financial position
31 March 31 March 2012 2011 £m £m ASSETS Non-current assets Property, plant and equipment 8,644.5 8,274.9 Goodwill 5.0 5.0 Other intangible assets 89.5 93.9 Investments 3.3 2.3 Trade and other receivables 1.1 - Derivative financial instruments 567.5 363.3 ------ ------ 9,310.9 8,739.4 ------ ------ Current assets Inventories 47.4 47.6 Trade and other receivables 301.4 296.8 Cash and short-term deposits 321.2 255.2
Derivative financial instruments 49.9
2.0 ------ ------ 719.9 601.6 ------ ------ ------ ------ Total assets 10,030.8 9,341.0 ------ ------ LIABILITIES Non-current liabilities Trade and other payables (378.0) (249.8) Borrowings (5,728.1) (5,203.6) Retirement benefit obligations (note 9) (92.0)
(195.0)
Deferred taxation liabilities (1,245.2) (1,293.1) Provisions (4.0) (9.3) Derivative financial instruments (159.7) (84.6) ------ ------ (7,607.0) (7,035.4) ------ ------ Current liabilities Trade and other payables (447.6) (433.0) Borrowings (127.1) (109.7) Current income taxation liabilities (78.1) (70.5) Provisions (6.3) (14.5) Derivative financial instruments (0.1) (0.4) ------ ------ (659.2) (628.1) ------ ------ Total liabilities (8,266.2) (7,663.5) ------ ------ Total net assets 1,764.6 1,677.5 ------ ------ EQUITY Share capital 499.8 499.8 Share premium account 2.4 1.3 Revaluation reserve 158.8 158.8 Cumulative exchange reserve (5.0) (3.1) Merger reserve 329.7 329.7 Retained earnings 778.9 691.0 ------ ------ Shareholders' equity 1,764.6 1,677.5 ------ ------
Consolidated statement of changes in equity Year ended 31 March 2012 Share Share Revaluation Cumulative Merger Retained Total capital premium reserve exchange reserve earnings account reserve £m £m £m £m £m £m £m At 1 April 2011 499.8 1.3 158.8 (3.1) 329.7 691.0 1,677.5 Profit after taxation - - - - - 316.5 316.5 Other comprehensive income Actuarial losses on - - - - - (24.3) (24.3)defined benefit pension schemes (note 9) Taxation on items - - - - - 4.4 4.4taken directly to equity (note 5) Foreign exchange - - - (1.9) - - (1.9)adjustments ------ ------ ------ ------ ------ ------ ------ Total comprehensive - - - (1.9) - 296.6 294.7(expense)/income ------ ------ ------ ------ ------ ------ ------ Transactions with owners Dividends (note 8) - - - - - (209.0) (209.0) New share capital - 1.1 - - - - 1.1issued Equity-settled - - - - - 1.2 1.2share-based payments Exercise of share - - - - - (0.9) (0.9)options - purchase of shares ------ ------ ------ ------ ------ ------ ------ At 31 March 2012 499.8 2.4 158.8 (5.0) 329.7 778.9 1,764.6 ------ ------ ------ ------ ------ ------ ------Year ended 31 March 2011 Share Share Revaluation Treasury Cumulative Merger Other Retained Total capital premium reserve shares exchange reserve reserves earnings account reserve £m £m £m £m £m £m £m £m £m At 1 April 2010 499.8 0.9 158.8 (0.1) 22.3 329.7 3.8 492.7 1,507.9 Profit after - - - - - - - 458.2 458.2taxation Other comprehensive income Actuarial losses - - - - - - - (44.7) (44.7)on defined benefit pension schemes (note 9) Net fair value - - - - - - (0.2) - (0.2)losses on cash flow hedges Revaluation of - - - - - - 1.1 - 1.1investments Reclassification - - - - - - (6.6) - (6.6)from other reserves arising on disposal of financial asset investment (note 6) Reclassification - - - - - - 1.8 - 1.8from other reserves arising on disposal of subsidiaries (note 6) Reclassification - - - - (26.1) - - - (26.1)from cumulative exchange reserve arising on disposal of subsidiaries (note 6) Taxation on - - - - - - 0.1 11.6 11.7items taken directly to equity (note 5) Foreign exchange - - - - 0.7 - - - 0.7adjustments ------ ------ ------ ------ ------ ------ ------ ------ ------ Total - - - - (25.4) - (3.8) 425.1 395.9comprehensive (expense)/income ------ ------ ------ ------ ------ ------ ------ ------ ------ Transactions with owners Dividends (note - - - - - - - (225.8) (225.8)8) New share - 0.4 - - - - - - 0.4capital issued Shares disposed - - - 0.1 - - - (0.1) -of from employee share trust Equity-settled - - - - - - - (0.1) (0.1)share-based payments Exercise of - - - - - - - (0.8) (0.8)share options ------ ------ ------ ------ ------ ------ ------ ------ ------ At 31 March 2011 499.8 1.3 158.8 - (3.1) 329.7 - 691.0 1,677.5 ------ ------ ------ ------ ------ ------ ------ ------ ------Consolidated statement of cash flows Re-presented* Year ended Year ended 31 March 31 March 2012 2011 £m £m Operating activities Cash generated from continuing operations 727.4 771.9 Interest paid (167.2) (165.8)
Interest received and similar income 4.4
3.1 Tax paid (39.8) (46.5) Tax received 35.0 - ------ ------ Net cash generated from operating activities 559.8 562.7(continuing operations) ------ ------
Net cash generated from operating activities -
13.7(discontinued operations) ------ ------ Investing activities Proceeds from disposal of discontinued operations 3.5
268.4
Transaction costs, deferred consideration and cash 2.0 (97.9)disposed ------ ------
Proceeds from disposal of discontinued operations net of transaction costs, deferred consideration and 5.5 170.5cash disposed Purchase of property, plant and equipment (502.2)
(475.4)
Purchase of increased shareholding in joint venture -
(5.0)
Purchase of other intangible assets (17.3)
(20.2)
Proceeds from sale of property, plant and equipment 4.8
9.8
Grants and contributions received 13.0
12.7 Purchase of investments (2.2) - ------ ------ Net cash used in investing activities (continuing (498.4) (307.6)operations) ------ ------ Net cash used in investing activities (discontinued - (52.7)operations) ------ ------ Financing activities
Proceeds from issue of ordinary shares 1.1
0.4 Proceeds from borrowings 446.3 94.1 Repayment of borrowings (231.7) (88.0)
Exercise of share options - purchase of shares (0.9)
-
Dividends paid to equity holders of the company (209.0) (225.8) ------ ------ Net cash generated from/(used in) financing 5.8
(219.3)
activities (continuing operations)
------ ------ Net cash used in financing activities (discontinued - (4.8)operations) ------ ------
Effects of exchange rate changes (continuing 0.5
-operations) Effects of exchange rate changes (discontinued - (1.3)operations) ------ ------
Net increase in cash and cash equivalents 67.7
35.8(continuing operations) ------ ------ Net decrease in cash and cash equivalents - (45.1)(discontinued operations) ------ ------ Cash and cash equivalents at beginning of the year 244.4 253.7 ------ ------ Cash and cash equivalents at end of the year 312.1 244.4 ------ ------
* The comparatives have been re-presented to show grants and contributions received of £12.7 million separately within investing activities (2011: previously included within decrease in provisions and payables as part of cash generated from continuing operations).
Cash generated from continuing operations
Re-presented* Year ended Year ended 31 March 31 March 2012 2011 £m £m Operating profit 591.5 580.2 Adjustments for: Depreciation of property, plant and equipment 278.0
258.3
Amortisation of other intangible assets 19.8
32.2
Loss on disposal of property, plant and equipment 5.5
2.7
Loss on disposal of other intangible assets 2.6
2.8
Amortisation of deferred grants and contributions (6.9)
(6.9)
Equity-settled share-based payments charge/(credit) 1.2 (0.1) Other non-cash movements (0.1) - Changes in working capital:
(Increase)/decrease in inventories (0.1)
2.1
Increase in trade and other receivables (8.2)
(20.1)
Decrease in provisions and payables (155.9) (79.3) ------ ------ Cash generated from continuing operations 727.4 771.9 ------ ------
* The comparatives have been re-presented to show amortisation of deferredgrants and contributions separately (2011: previously included within decreasein provisions and payables) along with the reclassification of grants andcontributions received which were previously included in decrease in provisionsand payables, now shown separately on the consolidated statement of cashflows,within investing activities.NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the year ended 31 March 2012 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority.
The accounting policies, presentation and methods of computation have been prepared on a basis consistent with the United Utilities Group PLC full financial statements which are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) that are effective for the year ended 31 March 2012.
The adoption of the following standards and interpretations, at 1 April 2011, had no material impact on the group's financial statements:
`Improvements to IFRSs (2010)' - This is a collection of amendments to sevenstandards as part of the International Accounting Standards Board's (IASB)programme of annual improvements. The improvements were issued in May 2010, areeffective for periods commencing on or after 1 January 2011 and were endorsedby the EU on 18 February 2011.
IFRIC 14 `IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction'
The interpretation addresses the interaction between a minimum fundingrequirement and the limit placed by IAS 19 on the measurement of the definedbenefit asset or liability. The interpretation was issued in July 2007 andamended in November 2009. It is effective for periods commencing on or after 1January 2011 and was endorsed by the EU on 19 July 2010.The condensed consolidated financial statements do not include all of theinformation and disclosures required for full annual financial statements, donot comprise statutory accounts within the meaning of section 434 of theCompanies Act 2006 and should be read in conjunction with the group's annualreport and financial statements for the year ended 31 March 2012.The comparative figures for the year ended 31 March 2011 do not comprise thegroup's statutory accounts for that financial year. Those accounts have beenreported upon by the group's previous auditor and delivered to the registrar ofcompanies. The report of the auditor was unqualified and did not include areference to any matters to which the auditor drew attention by way of emphasiswithout qualifying their report and did not contain a statement under section498(2) or (3) of the Companies Act 2006.
Going concern
The directors have a reasonable expectation that the group has adequateresources available to it to continue in operational existence for theforeseeable future and have therefore continued to adopt the going concernpolicy in preparing the financial statements. This conclusion is based upon,amongst other matters, a review of the group's financial projections togetherwith a review of the cash and committed borrowing facilities available to thegroup.2. Segmental reportingAs previously reported, United Utilities has reshaped its portfolio over thelast few years, from a group with a wide-ranging set of activities andinterests, such as telecommunications, business process outsourcing, gas andelectricity distribution and metering and international utility operations,into a focused regulated UK water and wastewater business. The group completedits non-regulated disposal programme in November 2010 and the residualnon-regulated activities now represent less than two per cent of operatingprofit.The board of directors of United Utilities Group PLC (the board) are providedwith information on a single segment basis for the purposes of assessingperformance and allocating resources. The board reviews revenue, underlyingoperating profit, operating profit, assets and liabilities at a consolidatedlevel.
In light of this, the group has a single segment for financial reporting purposes and the segmental information presented in previous years is no longer required to be disclosed separately within this note.
Statutory operating profit is reconciled to underlying operating profit asfollows:Continuing operations Year ended Year ended 31 March 31 March 2012 2011 £m £m Operating profit 591.5 580.2 Restructuring and other reorganisation costs 2.6 16.2 ------ ------ Underlying operating profit 594.1 596.4 ------ ------3. Investment incomeContinuing operations Year ended Year ended 31 March 31 March 2012 2011 £m £m Interest receivable 4.4 2.8 ------ ------4. Finance expenseContinuing operations Year ended Year ended 31 March 31 March 2012 2011 £m £m Interest payable (269.0) (271.3) Net fair value (losses)/gains on debt and derivative (43.2) 19.2instruments ------ ------ (312.2) (252.1) Expected return on pension schemes' assets 100.5
102.2
Interest cost on pension schemes' obligations (103.8) (106.0) ------ ------ Net pension interest expense (note 9) (3.3) (3.8) ------ ------ (315.5) (255.9) ------ ------The group has fixed interest costs for a substantial proportion of the group'snet debt for the duration of the regulatory pricing period and following therevision to its interest rate management strategy, has extended its hedge outto a 10-year maturity on a reducing balance basis. In addition, the group 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 finance expense for the continuing group of £267.1 million (2011: £267.2 million) is derived as shown in the table below.
Year ended Year ended 31 March 31 March 2012 2011 £m £m Finance expense (315.5) (255.9) Investment income (note 3) 4.4 2.8 Net fair value losses/(gains) on debt and derivative 43.2 (19.2)instruments
Interest on swaps and debt under fair value option 7.2
5.7
Adjustment for net pension interest expense (note 9) 3.3 3.8
Adjustment for capitalised borrowing costs (9.7) (4.4) ------ ------ Underlying net finance expense (267.1) (267.2) ------ ------5. TaxationContinuing operations Year ended Year ended 31 March 31 March 2012 2011 £m £m Current taxation UK corporation tax 60.1 61.8 Foreign tax 1.3 1.9 Adjustments in respect of prior years (15.9) (29.1) ------ ------ 45.5 34.6 ------ ------ Deferred taxation Current year 12.6 25.7 Adjustments in respect of prior years 15.5 11.3 ------ ------ 28.1 37.0 Change in taxation rate (104.6) (99.0) ------ ------ Total deferred taxation credit for the year (76.5) (62.0) ------ ------ ------ ------ Total taxation credit for the year (31.0) (27.4) ------ ------The deferred taxation credit for the year ended 31 March 2012 includes a creditof £104.6 million to reflect the change enacted on 5 July 2011 to reduce themainstream rate of corporation tax from 26 per cent to 25 per cent and thesubsequent change enacted on 26 March 2012 to reduce the mainstream rate ofcorporation tax further to 24 per cent effective from 1 April 2012. A relateddeferred taxation charge of £3.9 million is included within items takendirectly to equity. The deferred taxation credit for the year ended 31 March 2011 includes £99.0million which reflects both the change enacted on 27 July 2010 to reduce themainstream rate of corporation tax from 28 per cent to 27 per cent and thesubsequent change enacted on 29 March 2011 to reduce the mainstream rate ofcorporation tax from 27 per cent to 26 per cent effective from 1 April 2011.There will be a further phased reduction in the mainstream rate of corporationtax to 22 per cent by 1 April 2014. The total deferred taxation credit inrespect of this further reduction is expected to be in the region of £100.0million.
The adjustments in respect of prior years of £0.4 million credit (2011: £17.8 million) relate to agreement of prior years' UK taxation matters.
Taxation on items taken directly to equity
The taxation credit relating to items taken directly to equity is as follows:Continuing operations Year ended Year ended 31 March 31 March 2012 2011 £m £m Current taxation
Relating to other pension movements (33.1)
- ------ ------ Deferred taxation On actuarial losses on defined benefit pension (5.8) (11.6)schemes
Relating to other pension movements 30.6
- Change in taxation rate 3.9 - On net fair value losses on cash flow hedges - (0.1) ------ ------ 28.7 (11.7) ------ ------ ------ ------ Total taxation credit on items taken directly to (4.4) (11.7)equity ------ ------6. Discontinued operationsDuring the prior year, the group completed its non-regulated disposalprogramme, which, including 2009/10 investment 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 groupswere therefore classified as discontinued operations in the consolidated incomestatement and consolidated statement of cash flows. Year ended Year ended 31 March 31 March 2012 2011 £m £m Revenue - 353.4 Total operating expenses - (317.6) ------ ------ Operating profit - 35.8 Investment income and finance expense -
(7.0)
Evaluation and disposal costs relating to - (5.0)discontinued operations ------ ------ Profit before taxation - 23.8 Taxation - (9.2) ------ ------ Profit after taxation - 14.6
Profit on disposal of discontinued operations after 5.1
89.1taxation ------ ------ Total profit after taxation from discontinued 5.1 103.7operations ------ ------The profit on disposal of discontinued operations after taxation is analysed asfollows: Year ended Year ended 31 March 31 March 2012 2011 £m £m Total proceeds 3.5 268.4* Net assets disposed of (0.4) (164.3) Transaction and other costs of disposal 2.0
(45.9)
Reclassification from other reserves arising on -
6.6
disposal of financial asset investment Reclassification from other reserves arising on - (1.8)disposal of subsidiaries Reclassification from cumulative exchange reserve -
26.1
arising on disposal of subsidiaries
------ ------ Profit on disposal of discontinued operations after 5.1 89.1taxation ------ ------* Total fair value of the 2010/11 proceeds comprised cash of £268.4 million.The enterprise value of £447.1 million incorporates cash consideration receivedadded to the market value of the net debt disposed of which, at the date ofdisposal, totalled £178.7 million. Combined with the cash considerationreceived from the disposal of investments in 2009/10 of £132.1 million, thenon-regulated disposal programme achieved a total enterprise value of £579.2million.
The profit on disposal of discontinued operations after taxation for the year ended 31 March 2012 relates primarily to the receipt of contingent consideration and the release of accrued costs of disposal in respect of certain elements of the group's prior year non-regulated disposal programme.
7. 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 million Year ended 31 March 2012 681.8 682.2 Year ended 31 March 2011 681.6 681.9The difference between the weighted average number of shares used in the basicand diluted earnings per share calculations arises due to the group's operationof share-based payment compensation arrangements. The difference representsthose ordinary shares deemed to have been issued for no consideration on theconversion of all potential dilutive ordinary shares in accordance with IAS 33`Earnings per Share'.The basic and diluted earnings per share for the current and prior years are asfollows: Year ended Year ended 31 March 31 March 2012 2011
From continuing and discontinued operations
Basic 46.4p 67.2p Diluted 46.4p 67.2p From continuing operations Basic 45.7p 52.0p Diluted 45.6p 52.0p Year ended Year ended 31 March 31 March 2012 2011 £m £m Profit after taxation - continuing and discontinued 316.5 458.2operations Adjustment for profit after taxation from (5.1) (103.7)discontinued operations ------ ------ Profit after taxation - continuing operations 311.4 354.5 ------ ------8. Dividends Year ended Year ended 31 March 31 March 2012 2011 £m £m
Dividends relating to the year comprise:
Interim dividend 72.7 68.2 Final dividend 145.5 136.3 ------ ------ 218.2 204.5 ------ ------ Year ended Year ended 31 March 31 March 2012 2011 £m £m
Dividends deducted from shareholders' equity
comprise: Interim dividend 72.7 68.2 Final dividend 136.3 157.6 ------ ------ 209.0 225.8 ------ ------
The proposed final dividends for the years ended 31 March 2012 and 31 March2011 were subject to approval by equity holders of United Utilities Group PLCand hence have not been included as liabilities in the consolidated financialstatements at 31 March 2012 and 31 March 2011 respectively.
The final dividend of 21.34 pence per ordinary share (2011: final dividend of 20.00 pence per ordinary share) is expected to be paid on 3 August 2012 to shareholders on the register at the close of business on 22 June 2012. The ex-dividend date for the final dividend is 20 June 2012.
The interim dividend of 10.67 pence per ordinary share (2011: interim dividendof 10.00 pence per ordinary share) was paid on 1 February 2012 to shareholderson the register at the close of business on 16 December 2011.
9. Retirement benefit obligations
The main financial assumptions used by the group's actuary to calculate thedefined benefit obligations of the United Utilities Pension Scheme (UUPS) andthe United Utilities Group PLC section of the Electricity Supply Pension Scheme(ESPS) were as follows: Year ended Year ended 31 March 31 March 2012 2011 %pa %pa Discount rate 5.00 5.50
Expected return on assets - UUPS 4.45
5.65
Expected return on assets - ESPS 5.00
6.10
Pensionable salary growth and pension increases 3.25
3.35 Price inflation 3.25 3.35
The current life expectancies at age 60 underlying the value of the accrued liabilities for the schemes are:
Year ended Year ended 31 March 31 March 2012 2011 years years Retired member - male 26.5 25.1 Non-retired member - male 28.3 26.6 Retired member - female 29.8 28.9 Non-retired member - female 31.7 30.4Current studies continue to show faster rates of life expectancy improvementthan had previously been forecast. Studies have also illustrated that mortalityrates vary significantly according to the demographics of the schemes' members.These factors have been considered in order to update the life expectanciesdisclosed above and the resulting calculation of the defined benefit pensionobligations of the group during the year.The net pension expense before taxation for continuing operations in the incomestatement in respect of the defined benefit schemes is summarised as follows: Year ended Year ended 31 March 31 March 2012 2011 £m £m Current service cost (13.3) (11.9) Curtailments/settlements arising on reorganisation (5.4) (3.4) ------ ------ Pension expense charged to operating profit (18.7) (15.3) ------ ------ Expected return on pension schemes' assets 100.5
102.2
Interest cost on pension schemes' obligations (103.8) (106.0) ------ ------ Net pension interest expense charged to finance (3.3) (3.8)expense (note 4) ------ ------ Net pension expense charged before taxation (22.0) (19.1) ------ ------
The net pension (expense)/income (charged)/credited 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 2012 2011 £m £m Current service cost - (3.5)
Curtailments/settlements arising on reorganisation -
3.0 ------ ------ Pension expense charged to operating profit - (0.5) ------ ------
Expected return on pension schemes' assets -
6.9
Interest cost on pension schemes' obligations - (6.6) ------ ------
Net pension interest income credited to investment -
0.3income and finance expense
Curtailment/settlement arising on disposal and (charged)/credited to profit on disposal of (0.4)
7.3discontinued operations ------ ------
Net pension (expense)/income (charged)/credited (0.4)
7.1before taxation ------ ------
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 2012 2011 £m £m At the start of the year (195.0) (271.3) Expense recognised in the income statement - (22.0) (19.1)continuing operations (Expense)/income recognised in the income statement (0.4) 7.1- discontinued operations Contributions paid 149.7 133.0 Actuarial losses gross of taxation (24.3) (44.7) ------ ------ At the end of the year (92.0) (195.0) ------ ------
The closing obligations at each reporting date are analysed as follows:
31 March 31 March 2012 2011 £m £m Present value of defined benefit obligations (2,205.0) (1,912.9) Fair value of schemes' assets 2,113.0 1,717.9 ------ ------ Net retirement benefit obligations (92.0) (195.0) ------ ------
10. 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 the group's jointventures: Year ended Year ended 31 March 31 March 2012 2011 £m £m Sales of services 1.1 44.2
Purchases of goods and services 0.3
9.5 ------ ------
Included within the comparatives in the table above are amounts relating to entities disposed of during the year ended 31 March 2011.
Amounts owed by the group's joint ventures are as follows:
31 March 31 March 2012 2011 £m £m
Amounts owed by related parties 1.0
2.7 ------ ------
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 withnormal credit terms. The group has issued guarantees of £5.4 million (2011: £5.9 million) to its joint ventures.No allowance has been made for doubtful receivables in respect of the amountsowed by related parties (2011: £0.3 million). No expense has been recognisedfor bad and doubtful receivables in respect of the amounts owed by relatedparties (2011: £nil).
11. Contingent liabilities
The group has entered into performance guarantees as at 31 March 2012 where a financial limit has been specified of £85.2 million (2011: £104.5 million).
12. Changes in circumstances significantly affecting the fair value of financial assets and financial liabilities
From 1 April 2011 to 31 March 2012 market interest rates have fallen significantly, which has been partially offset by an increase in credit spread in relation to the group's borrowings.
The group's borrowings have a carrying amount of £5,855.2 million (2011: £5,313.3 million). The fair value of these borrowings is £5,830.3 million (2011:£5,065.0 million). There has been a net increase in funds from new borrowingsduring the year of £214.6 million (2011: £6.1 million). The group's derivativesmeasured at fair value are a net asset of £457.6 million (2011: £280.3million).
13. Events after the reporting period
There were no events arising after the reporting date that required recognition or disclosure in the financial statements for the year ended 31 March 2012.
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 2012. 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 theEuropean Union, give a true and fair view of the assets, liabilities, financialposition and profit or loss of the company and the undertakings included in theconsolidation 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.The directors of United Utilities Group PLC at the date of this announcementare listed below:Dr John McAdamSteve MogfordRuss HouldenDr Catherine Bell CBPaul HeidenDavid Jones CBENick Salmon
Sara Weller (appointed 1 March 2012)
This responsibility statement was approved by the board and signed on its behalf by:
……………………….. ………………………. Steve Mogford Russ Houlden 23 May 2012 23 May 2012 Chief executive officer Chief financial officer
PINXRelated Shares:
United Utilities