21st May 2010 07:00
United Utilities Group PLC
21 May 2010 Final results for the year ended 31 March 2010 £m Year ended (continuing operations) 31 March 2010 31 March 2009 (restated)* Operating profit 817.9 729.5
Underlying operating profit** 756.3 736.1
Profit before tax 474.2 529.3
Underlying profit before tax** 500.4 531.3
Basic earnings per share*** 59.2 26.5 (pence) Total dividends per ordinary 34.30 32.67 share (pence)
* In accordance with International Financial Reporting Standards, IFRIC 12 `Service Concession Arrangements' is applied retrospectively hence the prior year has been restated
**Underlying operating profit and underlying profit before tax are defined in the underlying profit measure tables
***One-off factors affecting earnings per share are explained in the earnings per share section
* Sound results in a challenging economic environment: underlying operating
profit of £756 million * Final dividend increased by 5.0% to 23.13 pence per share, in line with policy * Customer satisfaction at highest recorded levels; leakage target met despite extreme winter weather * Programme of actions to deliver outperformance over 2010-15 period
* Significant reduction in pensions deficit since Sept 2009: more sustainable
and lower risk approach
* As outlined previously 2010/11 dividend of 30 pence per share and 2% p.a.
real growth target to 2015
* Total value of agreed non-regulated disposals approximately £267 million
* Continuing to assess expressions of interest for remaining non-regulated
businesses
Philip Green, Chief Executive, said:
"We are well positioned for the 2010-15 regulatory period. With the detailed efficiency plans we are implementing and the low cost of the group's debt portfolio, we believe we can deliver outperformance over the five years.
"This is a sound set of results in a tough economic climate, reflecting ourstrong focus on cost management and efficiency improvement. In line with ourpolicy the board has proposed a final dividend for 2009/10 of 23.13 pence pershare, an increase of five per cent."Improving operational performance is an important part of our strategy and weare pleased to have met our regulatory leakage target for the fourthconsecutive year, despite the exceptional winter weather conditions. Customersatisfaction has continued to increase and is now at its highest recordedlevels."In light of the recent water price review, we have had to balance the need toretain a robust and sustainable financial profile for the group with theimportance of income to our shareholders. As outlined in January, the boardintends to pay a dividend of 30 pence per share for the 2010/11 financial yearand thereafter continue with our policy of targeting real dividend growth of 2%per annum through to 2015."We recently agreed the sale of our Australian business, increasing the totalvalue from non-regulated disposals from £132 million to approximately £267million. We will continue to review the expressions of interest we havereceived for our remaining non-regulated businesses."
For further information on the day, please contact:
Gaynor Kenyon - Communications Director +44 (0) 7753 622282 Darren Jameson - Head of Investor Relations +44 (0) 7733 127707 James Bradley / Tom Murray - Tulchan Communications +44 (0) 20 7353 4200 A presentation to investors and analysts starts at 9.00 am on Friday 21 May2010, 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. A recording of thecall will be available for seven days following 21 May 2010 on +44 (0) 20 70314064, access code 864850.
This final results announcement and the associated presentation will be available on the day at: http://www.unitedutilities.com
CHIEF EXECUTIVE'S REVIEW
Financial performance
United Utilities has delivered a sound set of financial results for the yearended 31 March 2010. Revenue from continuing operations rose by £12 million to£2,439 million. Underlying operating profit increased by 3% to £756 million.Underlying profit before tax decreased by 6% to £500 million, principally dueto an increase in the underlying cost of net borrowings.The regulated business has delivered a modest increase in underlying operatingprofit, which is up 3% at £701 million. This result primarily reflects theprice increase allowed by our regulator coupled with tight cost control, offsetas expected by reduced water demand and ongoing cost pressures in areas such aspower and bad debts, alongside an expected increase in depreciation. The priceincrease supports the high levels of essential investment in our assets, whichhelps the business meet strict environmental standards and deliver an improvedservice for our customers.Capital expenditure in our regulated water and wastewater business amounted to£620 million during the year, including infrastructure renewals expenditure.This level of spend is consistent with our planned investment profile for thefinal year of the 2005-10 capital expenditure programme.Our non-regulated activities delivered an underlying operating profit of £59million, compared with £62 million in the prior year. In the second half of theyear, we completed the disposals of our holdings in Northern Gas Networks andManila Water Company for a combined price of £132 million. The dividends fromthese investments amounted to £2 million in 2009/10 and £12 million in 2008/09.Adjusting for these dividends would show a year on year increase in underlyingnon-regulated operating profit of £7 million. Earlier this month, the groupalso agreed to sell its Australian business for a total of approximately £135million. We intend to retain the proceeds from these disposals within thegroup. The group is continuing to evaluate the expressions of interest it hasreceived for its remaining non-regulated businesses.The group has sought to adopt a more sustainable approach to the delivery ofpension provision and has amended the terms of its defined benefit pensionschemes. This reduces future funding and deficit risk as well as future servicecost, thereby enabling the company to retain defined benefit pension schemesfor existing members. Following consultation, the changes to the rules of thepension scheme were supported by the company's trade unions. The reduction inservice cost for 2010/11 is expected to be approximately £7 million, althoughthe lower risk investment strategy is likely to reduce investment income andresult in a lower net benefit at the profit before tax level. The amendmentshave also resulted in a reduction of £92 million to the group's pensiondeficit, which is required to be accounted for as a credit to operating profitin the group's income statement. Overall, the group's net pension deficit atthe year end has decreased by £87 million, compared with the position at 30September 2009, reflecting the aforementioned changes to the pension schemesand the routine actuarial assessment of movements in assets and liabilities.The group benefits from headroom to cover its projected financing needs throughto the spring of 2012. During the year we enhanced our liquidity through theissuance of £220 million of new bonds and £150 million of term extensions toexisting committed bank facilities. This provides us with good flexibility interms of when and how we raise further debt finance.
Operational performance
Improving operational performance is a key area of focus for the group and weare pleased to report further progress. The business met its regulatory leakagetarget for the fourth consecutive year, despite extreme winter weatherconditions. Customer satisfaction continues to increase and is now at itshighest recorded levels. We have also halved the number of serious pollutionincidents over the last few years.Since 2005, we have narrowed the operational efficiency gaps to the mostefficient water and wastewater companies and sustained these improvements. Wehave continued to remove properties from our sewer flooding register and haveplans in place to offer mitigation measures for all properties on the register.Although we are encouraged by the tangible progress we have made, we dorecognise that there is more to do and the business is continuing to take stepsto improve overall service performance. We expect improvement in our overallperformance assessment (OPA) score for 2009/10 and the management actions weare taking will have a positive impact on our performance as measured byOfwat's new service incentive mechanism, which is scheduled to be introduced in2010/11.
Price review, capital structure and dividend policy
In November 2009 Ofwat published its final determination of price limits forthe 2010-15 period, which sees customers benefit from lower prices and higherlevels of capital investment. After careful consideration, United UtilitiesWater PLC (UUW) accepted these proposals and the new price limits took effectfrom 1 April 2010.Over the last year, we have undertaken a comprehensive review of the business,challenging working practices across the group. As a result, we areimplementing detailed plans to improve performance and reduce our cost base. Weare streamlining our processes as we aim to become a leaner, more efficientcompany and have signed new supplier contracts for the 2010-15 period, whichwill deliver significant savings and help improve operational and capitalefficiency. We have substantially reduced our workforce and have placed ourpension provision on a much more sustainable footing.Earlier in the year, Moody's re-affirmed its A3 credit rating for UUW and weintend to continue to target this credit rating, which we believe best mirrorsthe regulatory assumptions underpinning the final determination and remainsappropriate to maintain efficient access to debt capital markets.We are well prepared for the 2010-15 price review period, with a robust andsustainable capital structure in place. United Utilities has approximately £2billion of index-linked debt at an average cost of 1.8% real, compared withOfwat's cost of debt assumption of 3.6% real. The group has also fixed the costof the majority of its remaining debt at an average nominal rate in the range5.0% to 5.5%. Together with the group's index-linked debt, this equates toapproximately £300 million of financing outperformance over the 2010-15 period,based on an RPI inflation rate of 2.5% per annum.In line with the group's policy, we are proposing to increase the finaldividend for 2009/10 by 5% to 23.13 pence per share. This takes the totaldividend per share for the year to 34.30 pence. In order to meet therequirements of the 2009 water price review, we need to balance the retentionof a sound financial profile with the importance of income to our investors. Inview of this, the board intends to pay a dividend of 30 pence per share for the2010/11 financial year and thereafter continue with our policy of targetingdividend growth of RPI+2% per annum through to 2015.
Board change
On behalf of the board, I would like to thank our Chief Financial Officer, TimWeller, for the significant contribution he has made to United Utilities overthe past four years and wish him well in his new role at Cable&WirelessWorldwide. We would also like to welcome Russ Houlden, who will join the groupas Chief Financial Officer from Telecom New Zealand later in the year.
Outlook
Based on Ofwat's final determination, prices to UUW's customers across the2010-15 regulatory period will decrease in real terms by an annual average of0.4%, with a 4.3% real decrease in 2010/11. We are implementing a range ofdetailed efficiency and performance improvement initiatives and believe we candeliver outperformance in respect of the new regulatory contract. Our earlycapital investment planning should facilitate a smooth transition into the2010-15 period and we expect capital expenditure to continue at high levels in2010/11. Overall, we are well positioned for the next five years.SEGMENTAL PERFORMANCEREGULATED ACTIVITIESFinancial highlights
* Regulated revenue increased by 3% to £1,541 million
* Regulated underlying operating profit increased by 3% to £701 million Revenue from regulated activities increased by 3% to £1,541 million,principally as a result of an allowed price increase of 6.0% (includinginflation of 3.0%), partially offset, as expected and indicated previously, byreduced water demand reflecting the challenging economic climate. The regulatedprice increase supports significant investment in UUW's infrastructure whichprovides vital water and wastewater services to customers.Underlying operating profit for the year increased by 3%, primarily reflectingthe revenue increase coupled with the impact of tight cost control measures,offset by higher depreciation, bad debts and power costs. The increase indepreciation reflects the recent high levels of capital spend, in line with theplanned profile of the investment programme. Reported operating profit wassignificantly higher than the prior year, reflecting a one-off credit of £77million in respect of the group's revised pension provision and partly offsetby restructuring costs of approximately £16 million.As outlined previously, the business had entered into forward contracts for themajority of its power requirements for 2009/10. As a result, unit power costsin 2009/10 were approximately 10% higher than in 2008/09 and the power expensehas increased by around £6 million. The business has also entered into forwardcontracts for the majority of its power requirements for 2010/11 and 2011/12and unit power costs are expected to be in the order of 20% lower than in 2009/10. Bad debt expense is broadly in line with the prior year at approximately3.5% of regulated revenue. This reflects the impact of the continuing tougheconomic environment on cash collection rates.
Capital investment in the year, including £114 million of infrastructure renewals expenditure, was £620 million. This level of spend was in line with the planned capital investment profile for the final year of UUW's 2005-10 regulatory programme.
Operational performance
Operational performance is a key area of focus and UUW is targeting an upperquartile position among UK water companies on key operational measures in themedium-term. The regulated business continues to upgrade its infrastructure,replacing 134 kilometres of water mains during the year. UUW continues tosupply high quality drinking water with a mean zonal compliance water qualityperformance for the year of 99.94%, which compares with 99.92% for the previousyear. UUW is making good progress against its key performance indicators:
* Relative efficiency - UUW has narrowed the operational efficiency gaps to
the most efficient water and wastewater companies since 2005. This is
reflected in Ofwat's most recent (2008/09) assessment of United Utilities
as band B for the water service and band C for the wastewater service and
represents a one band improvement for both services over this period. UUW
expects at least to sustain these bandings in Ofwat's 2009/10 assessment.
* Security of water supply - UUW met its economic level of leakage rolling
target for the fourth consecutive year in 2009/10, despite extreme winter
weather conditions, reflecting strong management focus and the commitment
of the workforce.
* Pollution - The business has now met or outperformed its medium-term target
of a 50% reduction in major pollution incidents in each of the last four
years. One water and seven wastewater Category 1&2 incidents were recorded
in 2009, compared with the base position of two water and 21 wastewater
incidents in 2005.
* Sewer flooding - UUW continues to remove properties from the sewer flooding
register. In 2009, an independent review of UUW's sewer flooding recording
and reporting process was undertaken, which was submitted to Ofwat for
consideration. The independent reviewer concluded that the processes are
generally fit for purpose with some scope for streamlining and further
improvement. UUW agreed to implement changes required by Ofwat as a result
of this review and has reassessed its sewer flooding registers. The number
of properties on the register in 2009/10 is expected to be 1,028 (for
properties at risk of experiencing at least one sewer flooding incident in
ten years), which compares with a reassessed number for 2005/06 of 1,091
properties, a net reduction of 63 properties over the four year period. The
company has plans in place to reduce the number of incidents due to sewer
flooding (other causes) and to offer mitigation measures for all properties
on the register.
* Overall customer satisfaction - Significant progress has been achieved and
overall customer satisfaction in response to enquiries is now at its
highest recorded levels, with a satisfaction rating of 82% for the 12
months to 31 March 2010. UUW achieved its target of 85% for March 2010, the
highest score attained for an individual month. These satisfaction levels
are based on a comprehensive independent survey conducted on behalf of UUW
each month. Customer satisfaction has improved from less than 50% in 2005
to consistently over 80% during the second half of 2009/10. The business
remains focused on achieving further improvements.
Although UUW has delivered real progress, the business recognises that there ismore to do. As indicated previously, sewer flooding incidents, together withenvironmental underperformance at Fleetwood wastewater treatment works,negatively impacted the 2008/09 OPA score.UUW has a capital investment programme designed to improve performance atFleetwood works, which is scheduled to be completed later this year on time andon budget. The business has introduced an enhanced monitoring system across thecompany's wastewater treatment works to help improve performance in respect ofmeeting consent standards at its works. With regard to sewer flooding, thebusiness has identified those areas of its sewer network which are high riskwith the potential to have a major flooding impact and has commenced aprogramme of work to help mitigate these risks.Improving the company's response to customer contacts is another key area offocus, in particular billing enquiries. The business has introduced new workingpractices to help improve performance and early progress is encouraging. Theprocess of monitoring performance against regulatory targets has been enhancedand managers now have better information and the flexibility to reallocateresources to help meet these targets. The more technical work has also beenbrought back in-house, giving the business greater control to resolve issuesand help meet its targets.The business expects an improved OPA score for 2009/10, with an increase inpoints in the areas of wastewater treatment works compliance, company contactscore and unplanned interruptions. The actions being taken will have a positiveimpact on UUW's performance as measured by Ofwat's new service incentivemechanism, which is replacing OPA and is due to be introduced in 2010/11.
2009 water price review
On 26 November 2009, Ofwat published its final determination of price limitsfor the 2010-15 period. After careful consideration, UUW accepted theseproposals and the new price limits took effect from 1 April 2010. Ofwat's finaldetermination of price limits for UUW was based on: * a £3.6 billion capital investment programme (2007/08 prices); * real growth of 12%, or approximately £900 million, in the regulatory capital value over the five year period; * an average annual underlying operating efficiency of 1.2% for the water service and 2.4% for the wastewater service; * a return on capital of 4.5% (post-tax, real); and
* an average annual real price decrease of 0.4% across the five-year period,
with a real price decrease of 4.3% in the first year.
United Utilities had indicated previously that there was potential for additional investment in respect of the North East Irish Sea, which was dependent on a European court case decision involving the UK government. A ruling by the European Court of Justice on 10 December 2009 concluded that United Utilities will not be required to undertake this additional investment.
Efficiency initiatives
UUW is well prepared for the 2010-15 price review period. Over the last year,United Utilities has undertaken a comprehensive review of the business,challenging working practices across the group, and is implementing detailedplans to improve performance and reduce its cost base.
Operating efficiency
During 2009/10, United Utilities reduced the number of people working in thegroup by the equivalent of around 500 full time employees (includes UnitedUtilities staff and agency staff). Approximately 350 of the 500 worked in orsupported the regulated business, equivalent to around 7% of that workforce.This provides an immediate contribution to the achievement of efficiencytargets set by Ofwat.Customer service is a key area of focus, as this forms part of Ofwat's relativeefficiency analysis and will also contribute to the regulator's new serviceincentive mechanism assessment. UUW aims to reduce its cost to servesignificantly, whilst continuing to improve the customer experience. Thebusiness has reduced its annual cost to serve from £23 per customer to £19 percustomer over the last two years and is implementing plans to deliver furtherreductions, all while customer satisfaction has improved markedly. The companyhas amended staff incentive mechanisms to help get things right first time,with the aim of reducing unnecessary customer calls. Performance measurement isnow based on first time resolution, rather than average call handling time.United Utilities' customer online self-serve system is being enhanced to makeit more comprehensive and user friendly, with the aim of reducing by a thirdthe need for customers to contact the company's call centre. UUW is focused onimproving its debt collection rates and is planning to utilise more localauthority collection agreements. The company is also enhancing systems toimprove its customer segmentation analysis and to obtain better data oncustomers who have moved address, coupled with a more proactive debt follow upstrategy.United Utilities is reviewing and streamlining its processes as it aims tobecome a leaner, more efficient company. The group is focused on operating withfewer, simpler and more consistent processes. For example, UUW is halving thenumber of steps from metering to cash collection. The group is rationalisingits IT infrastructure, providing greater automation and visibility of workflow.Managers now have ownership of all steps in a process to help enhanceperformance. Individuals also have greater visibility and understanding of howtheir performance influences the efficiency of the entire process.The group will continue to focus on delivering benefits from its existingefficiency initiatives, such as its workforce management system which is a keyelement in improving the efficiency of frontline staff, utilising remoteoperational site management and optimisation of chemical and power usage,improving efficiency of operational pumps, developing combined heat and powerassets, which recycle energy generated from wastewater treatment processes, andimproving supply chain management to deliver further procurement economies. Anumber of these schemes are also key elements of United Utilities' plan tomitigate its carbon emissions. In 2009, UUW was awarded funding from Defra toconvert biogas, a by-product of the sludge treatment process, into bio-methanefor vehicle fuel. There is potential in the future to export biogas into thenational gas distribution network.
Capital delivery
United Utilities has a robust commercial capital delivery framework in placefor the 2010-15 period. Contractor partners have been appointed and the companyhas signed new supplier contracts, which will deliver significant savings andhelp improve efficiency. Incentive mechanisms are closely linked to the UUWbusiness plan and pain/gain incentives are assessed on a project basis, ratherthan a cumulative basis, providing more clarity on performance. A partial feeretention mechanism is also in place to help drive on-time project delivery. Inaddition, UUW has flexibility in respect of the level of competitive tenderingit may use in the award of future work during the five year regulatory period.United Utilities undertook detailed advanced planning which ensured smoothtransition into the 2010-15 period and leveraged recent economic conditions todeliver procurement efficiency benefits. UUW expects capital investment,including infrastructure renewals expenditure, in 2010/11 to be substantial asthe company aims for a smoother capital delivery profile across the five yearperiod compared with 2005-10. UUW has a strong focus on asset serviceabilityand also expects to bring forward the delivery of certain outputs.
Financial
United Utilities has approximately £2 billion of long dated, index-linked debtat an average cost of 1.8% real. This compares with Ofwat's cost of debtassumption of 3.6% real and secures financing outperformance for the next fiveyears. In line with its policy, the group has also fixed the interest rates ona significant proportion of the remainder of its existing debt portfolio, forthe 2010-15 regulatory period, at an average nominal rate in the range 5.0% to5.5% (inclusive of credit spread). This provides more clarity on UUW's abilityto outperform the final determination. Taken together with the group'sindex-linked debt, this equates to approximately £300 million of financingoutperformance over the five years, based on an RPI inflation rate of 2.5% perannum. In addition, the group requires little re-financing during the 2010-15period.
The changes to the defined benefit pension schemes have significantly reduced the company's pension deficit, reduced the future service cost and reduced future funding and deficit risk, thereby placing the company's pension provision on a much more sustainable footing.
NON-REGULATEDACTIVITIES
Financial highlights
* Non-regulated revenue marginally down at £890 million
* Non-regulated underlying operating profit marginally lower at £59 million
Non-regulated revenue was marginally lower at £890 million, reflecting theimpact of difficult conditions in the UK property market on the group's utilityconnections business and, as expected, a reduction in contribution from thegroup's UK outsourcing contracts in the final year of the 2005-10 regulatoryperiod. Reported operating profit was £63 million, in line with the prior year.This reflects a one-off credit of £9 million in relation to the group's revisedpension provision, partly offset by restructuring costs of approximately £5million. The prior year profit numbers have been restated in accordance withIFRIC 12, as explained in note 1 of the financial statements.During the second half of the year, United Utilities disposed of its investmentin Northern Gas Networks Holdings Limited (NGN) for approximately £86 millionand sold its economic interest in Manila Water Company (MWC) for approximately£46 million. The intention is to retain these proceeds within the group. As aresult of the disposals, dividends from these investments, which are includedin operating profit, were materially lower in 2009/10, at £2 million, comparedwith £12 million received in 2008/09. Adjusting for the impact of thesedisposals and the aforementioned one-off items would show an increase innon-regulated underlying operating profit growth of £7 million, for the yearended 31 March 2010, reflecting tight cost control in the business.
Business update
United Utilities applies its utility skills from its regulated activitiesthrough outsourced utility contracts and investments. In June 2009, UnitedUtilities, via the 4D consortium, won a new capital delivery contract withSouthern Water to manage the design and build of a new wastewater treatmentworks in the Brighton and Hove area. The contract is underway and constructionis expected to take approximately three years, followed by the potential for atwo-year contract to operate and maintain the new plant. In addition, the 4Dconsortium has responsibility for managing part of Southern Water's regulatorycapital investment programme through to 2015.The contract with Scottish Water, via Scottish Water Solutions Limited in whichUnited Utilities is a major partner, came to a natural end in March 2010.Following the outcome of the recent water price review, Welsh Water announcedin February 2010 that it intended to take operations and maintenance servicesin-house and therefore the contract with United Utilities has not been renewedfor the 2010-15 regulatory period.Following the sales of its holdings in NGN and MWC, United Utilities receivedseveral expressions of interest for its non-regulated activities. In May 2010,the group agreed the disposal of its Australian business for approximately £135million, comprising £106 million in cash and £29 million in net debt assumed bythe purchaser. The transaction is subject to a number of consents andregulatory approvals and financial close is expected in the second half of2010. The group is continuing to evaluate the expressions of interest it hasreceived for its remaining non-regulated businesses.
ALL OTHER SEGMENTS
As expected, the group's other activities, which include central costs,delivered an underlying operating loss during the year of £4 million, comparedwith an underlying operating loss of £6 million in 2008/09. As indicatedpreviously, the difficult conditions in the UK property market have affectedthe performance of United Utilities Property Services, the group's propertysales and management business. The reported operating loss for other activitieswas £7 million. This reflects restructuring costs of approximately £10 million,partly offset by a one-off credit of £7 million in respect of the group'srevised pension provision.
FINANCIAL PERFORMANCE
Investment income and finance expense
Finance expense of £384 million was £113 million higher than the prior year.This expense included £136 million of net fair value losses on debt andderivative instruments, compared with £24 million of net fair value losses in2008/09. The impact of changes in credit spreads on debt accounted for at fairvalue through profit or loss can result in significant volatility and this isthe principal reason for the large net fair value movement in the year. Inaddition, the volatility in financing expense reflects the fact that, in orderto provide a hedge of the interest cost implicit in the regulatory period, thegroup fixes interest rates for the duration of each five-year review period fora substantial proportion of its debt using interest rate swaps. IAS 39 limitsthe use of hedge accounting for these commercial hedges, thereby increasing thepotential volatility of the income statement. However, this volatility in fairvalues has no cashflow impact. A reduction in returns on the group's pensionschemes' assets in 2009/10, compared with the prior year, has also contributedto the increase in finance expense in the year.Investment income was £14 million, compared with £71 million in the prior year,principally reflecting a reduction in cash, following the return ofapproximately £1.5 billion to shareholders in the previous financial year, andlower returns on cash deposits.The underlying cost of net borrowings for continuing operations of £236 millionwas £39 million higher than in 2008/09. This reflects higher average net debtin 2009/10 and an increase in the group's average net borrowing rate fromaround 4.7% to 4.9%. Average net debt was lower in 2008/09, primarily due tothe group holding approximately £1.1 billion of cash proceeds from the sale ofUnited Utilities Electricity (UUE) prior to the return of approximately £1.5billion to shareholders in August 2008.
Profit before taxation
Underlying profit before taxation was £500 million, 6% lower than 2008/09,principally reflecting an increase in interest expense as a result of higheraverage net debt, following the return of £1.5 billion to shareholders inAugust 2008, an increase in the underlying cost of net borrowings, a reductionin investment income and lower expected returns on pension assets. Thisunderlying measure adjusts for the impact of one-off items, fair valuemovements in respect of debt and derivative instruments and the short-terminterest benefit in the previous year associated with the cash proceeds fromthe sale of UUE, prior to the £1.5 billion return to shareholders. Reportedprofit before taxation decreased by 10% to £474 million principally as a resultof an increase in finance expense and lower investment income, partly offset bythe £92 million one-off credit associated with the changes to the group'spension schemes and a £37 million profit on disposal of investments.
Taxation
During the year the group received a cash tax inflow for the year of £51 million, following agreement with UK tax authorities of prior years' tax returns. After taking account of this repayment, the net position for 2009/10 was a small cash outflow of £1 million.
The current tax charge was £22 million and the current tax effective rate was5%, compared with 26% in the prior year. The current tax charge included a £48million credit in relation to the agreement with the tax authorities of prioryears' tax returns.In the prior year, the group recognised a one-off deferred tax charge of £206million relating to the abolition of industrial buildings allowances with acash impact expected to be spread over a period of approximately 20 years. Thisone-off item resulted in a significant increase in the effective tax rate forthe prior year.The group has recognised a net deferred tax charge of £49 million compared witha deferred tax charge in the prior year of £210 million. This included a £7million credit in relation to the agreement with the tax authorities of prioryears' tax returns.An overall tax charge of £71 million has been recognised for the year ended 31March 2010. Excluding the impact of prior years' adjustments and the abolitionof industrial buildings allowances, the total tax charge relating to continuingoperations would be £125 million or 26% compared with a £148 million charge or28% in the prior year. Earnings per shareBasic earnings per share relating to continuing operations increased from 26.5pence to 59.2 pence. In 2008/09, there was a one-off deferred tax charge of £206 million relating to the abolition of industrial buildings allowances(equivalent to 30.3 pence per share). In 2009/10, there was a one-off credit of£55 million relating to the agreement of prior years' tax returns (equivalentto 8.0 pence per share).Dividend per shareThe board has proposed a final dividend of 23.13 pence per ordinary share inrespect of the year ended 31 March 2010. This is an increase of 5.0%, in linewith the group's dividend policy of targeting a real growth rate of RPI+2.0%.The inflationary increase of 3.0% is based on the RPI element included withinthe allowed regulated price increase for UUW for the 2009/10 financial year(i.e. the movement in RPI between November 2007 and November 2008).The final dividend is expected to be paid on 2 August 2010 to shareholders onthe register at the close of business on 18 June 2010. The ex-dividend date is16 June 2010.As outlined on 21 January 2010, following detailed analysis and assessment ofthe final determination, the board intends to pay a dividend per share of 30.0pence for the 2010/11 financial year. Thereafter, the intention is to continueto target a dividend per share growth rate of RPI+2% per annum through to 2015.
Cashflow
Cash generated for the year ended 31 March 2010 was £1,016 million, comparedwith £911 million in the prior year. The group's net capital expenditure was £573 million (including the purchase of intangible assets and proceeds fromsales of property, plant and equipment), principally in the regulated water andwastewater investment programmes. This excludes infrastructure renewalsexpenditure which is treated as an operating cost under International FinancialReporting Standards.Net debt including derivatives at 31 March 2010 was £4,906 million, comparedwith £4,895 million at 31 March 2009. Expenditure on the regulatory capitalinvestment programmes and payments of dividends and interest, were broadlyoffset by the proceeds from the disposals of the group's holdings in NorthernGas Networks and Manila Water Company, operational cash flows and theaforementioned cash tax receipt.
Debt financing and interest rate management
Gearing (measured as group net debt divided by UUW's regulatory capital value) decreased to 64% at 31 March 2010, compared with 66% at 31 March 2009. Adjusting for the group's non-recourse joint venture debt of £234 million, gearing was 61%.
At the year end, United Utilities Water PLC had long-term credit ratings of A3/BBB+ and United Utilities PLC had long-term credit ratings of Baa1/BBB- fromMoody's Investors Services and Standard & Poor's Ratings Services respectively.Shortly after UUW accepted Ofwat's final determination on 21 January 2010,Moody's re-affirmed its credit ratings of A3 for United Utilities Water PLC andBaa1 for United Utilities PLC, both with stable outlook. However, as expected,Standard & Poor's downgraded United Utilities Water PLC to BBB+ from A- andUnited Utilities PLC to BBB- from BBB+, both with stable outlook, reflectingdiffering methodologies particularly with regard to the treatment ofinfrastructure renewals expenditure.Cash and short-term deposits at 31 March 2010 amounted to £302 million. Duringthe year, the group's financing headroom position was enhanced through theissuance of an additional £100 million, 5.75% bond maturing in March 2022; anadditional £50 million, 6.125% bond maturing in December 2015; and a new £70million, 2.40%+RPI index-linked bond maturing in July 2039. United Utilitieshas headroom to cover its projected financing needs through to the spring of2012.The group has access to the international debt capital markets through its €7billion medium-term note programme which provides for the periodic issuance byUnited Utilities PLC and United Utilities Water PLC of debt instruments onterms and conditions determined at the time the instruments are issued. Theprogramme does not represent a funding commitment, with funding dependent onthe 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 2010, approximately 42% of the group's net debt was in index-linked form,representing around 27% of UUW's regulatory capital value, with an average realinterest rate of 1.8%. The long-term nature of this funding also provides agood match to the group's long-life infrastructure assets and is a keycontributor to the group's average term debt maturity profile which is inexcess of 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 groupfixes interest costs for a substantial proportion of the group's debt for theduration of each price control period at around the time of that price controldetermination. The group does not undertake any speculative trading activity.The group enters into joint ventures with consortium partners. The financialand legal structure of joint ventures is designed to limit the group's exposureto the extent of the equity investment and loans provided by the group, with nofurther recourse should the joint venture default. All joint venturearrangements have been incorporated into the group's results on a proportionateconsolidation basis.Liquidity
Short-term liquidity requirements are met from the group's normal operating cashflow and its short-term bank deposits. Further liquidity is provided by committed but undrawn credit facilities. This liquidity supports the group's €2 billion euro-commercial paper programme.
In line with the board's treasury policy, United Utilities aims to maintain ahealthy headroom position. Available headroom at 31 March 2010 was £1,100million based on cash, short-term deposits and medium-term committed bankfacilities, net of short-term debt. This headroom is sufficient to cover thegroup's projected financing needs through to the spring of 2012.United Utilities believes that it operates a prudent approach to managingbanking counterparty risk. Counterparty risk, in relation to both cash depositsand derivatives, is controlled through the use of counterparty credit limits.United Utilities' cash is held in the form of short-term (generally no longerthan three months) money market deposits with either prime commercial banks orwith triple A rated money market funds. As at 31 March 2010, no cash depositswere held in money market funds.United Utilities operates a bilateral, rather than a syndicated, approach toits core relationship banking facilities. This approach spreads maturities moreevenly over a longer time period, thereby reducing refinancing risk andproviding the benefit of several renewal points rather than a large singlerefinancing requirement.
Pensions
The group has sought to adopt a more sustainable approach to the delivery ofpension provision and has amended the terms of its defined benefit pensionschemes. The measures taken include a cap on the increase in pensionableearnings, an increase in the normal retirement age, an increase in employeecontribution rates, an adjustment to the accrual rates and a re-balancing ofthe pensions investment strategy. This reduces both the future service cost andthe future funding risk to the company, thereby enabling the company to retaindefined benefit pension schemes for existing members. The changes to the schemerules were supported by the company's trade unions. The reduction in servicecost for 2010/11 is expected to be approximately £7 million, although the lowerrisk investment strategy is likely to reduce investment income and result in alower net benefit at the profit before tax level. These amendments have alsoresulted in a reduction of £92 million to the group's pension deficit, which isrequired to be accounted for as a credit to operating profit in the group'sincome statement.Overall, the group's net pension deficit at the year end has decreased by £87million, compared with the position at 30 September 2009, reflecting theaforementioned changes to the pension schemes and the routine actuarialassessment of movements in assets and liabilities. As a result of changes inmarket conditions over the 12 months, the group's net pension obligationsincreased during the year from £213 million at 31 March 2009 to £271 million at31 March 2010. Further detail is provided in note 8 ("Retirement benefitobligations") of these condensed consolidated financial statements. The groupwill continue to evaluate its pensions investment strategy to de-risk furtherits pension provision.Going concern
The directors have reviewed the financial resources available to the group andhave concluded that the group is a going concern. This conclusion is basedupon, amongst other matters, a review of the group's financial projectionstogether with a review of the cash and committed borrowing facilities availableto the group.Underlying profitIn considering the underlying results for the year, the directors have excludedfair value movements on debt and derivative instruments and those significantitems identified as non-recurring. Statutory operating profit and profit beforetaxation from continuing operations are reconciled to underlying operatingprofit from continuing operations and underlying profit before taxation fromcontinuing operations as follows:Continuing operations Regulated Non- All
Group
activities regulated other Operating profit/(loss) for the year activities segments
ended £m £m £m £m 31 March 2010 Operating profit/(loss) per published 761.7 63.1 (6.9) 817.9results Impact of changes to pension schemes (76.7) (8.9) (6.7) (92.3) Restructuring costs 15.8 4.9 10.0 30.7 ------ ------ ------ ------
Underlying operating profit/(loss) 700.8 59.1 (3.6)
756.3 ------ ------ ------ ------ Continuing operations Regulated Non- All Group activities regulated other
Operating profit/(loss) for the year activities segments
ended £m £m £m £m 31 March 2009 (restated) Operating profit/(loss) per published 678.4 63.4 (12.3) 729.5results Restructuring costs 1.0 (1.0) 1.2 1.2
Other reorganisation costs**** - - 5.4
5.4 ------ ------ ------ ------
Underlying operating profit/(loss) 679.4 62.4 (5.7)
736.1 ------ ------ ------ ------ Continuing operations Restated Year YearProfit before taxation ended ended 31 March 31 March 2010 2009 £m £m
Profit before taxation per published 474.2
529.3results
Impact of changes to pension schemes (92.3)
- Restructuring costs 30.7 1.2
Other reorganisation costs**** -
5.4
Profit on disposal of investments (36.6)
-
Evaluation and disposal costs relating 10.8
-to non-regulated businesses
Net fair value losses on debt and 135.8
24.3derivative instruments
Interest on swaps and debt under fair (22.2)
(8.3)value option Interest associated with cash proceeds - (20.6)from UUE sale***** ------ ------
Underlying profit before taxation 500.4
531.3 ------ ------ Continuing operations Restated Year Year
Underlying cost of net borrowings ended
ended 31 March 31 March 2010 2009 £m £m Finance expense (383.6) (270.9)
Net fair value losses on debt and 135.8
24.3derivative instruments
Interest on swaps and debt under fair (22.2)
(8.3)value option Investment income 14.1 70.7
Adjustment for net pension interest 23.2
(6.8)expense/(income)
Adjustment for IFRIC 12 financing income (2.9)
(5.2) ------ ------ Underlying cost of net borrowings (235.6) (196.2) ------ ------
Add back adjustment for net pension (23.2)
6.8interest (expense)/income
Add back adjustment for IFRIC 12 2.9
5.2financing income Interest associated with cash proceeds - (20.6)from UUE sale***** ------ ------ Underlying net interest payable (255.9) (204.8) ------ ------
****Relates to the capital restructuring associated with the £1.5 billion return to shareholders.
****\* The interest associated with the cash proceeds from the sale of UUE hasbeen deducted to provide a more representative view of underlying performance.As the cash proceeds from the sale of UUE were held by the group until the £1.5billion return to shareholders in August 2008, this resulted in a short-termnet debt and interest reduction.
PRINCIPAL RISKS AND UNCERTAINTIES
The group faces a variety of risks and uncertainties, both foreseeable and unforeseeable, which if they materialise, could adversely affect its reputation, profitability or financial position, its share price or the pricing and liquidity of its debt securities. The principal ones are summarised below.
The group maintains an internal control framework that assesses, throughout theyear, the nature and magnitude of internal and external risks to theachievement of business goals. The board assesses the group's appetite andtolerance to risk and clear risk tolerance boundaries are set. Managers arerequired to employ both proactive and reactive mitigation measures in aprioritised manner to reduce exposures and ensure ongoing resilience should arisk materialise. The executive management team regularly reviews significantrisks. The audit committee regularly reviews the framework's effectiveness andthe group's compliance with it.
Capital investment programmes
The regulated business requires significant capital expenditure, particularlyin relation to new and replacement plant and equipment for water and wastewaternetworks and treatment facilities. Historically, the group has financed thiscapital expenditure from operating cashflow and from external debt and equityfinancing. There can be no assurance that operating cashflows will not declineor that external debt financing and other sources of capital will be available,at similar cost to that assumed by Ofwat, in order to meet these capitalexpenditure requirements. Delivery of capital investment programmes could alsobe affected by a number of factors including adverse legacy effects of earliercapital investments (such as increased maintenance or enhancement costs) oramounts funded in regulatory capital investment programmes proving insufficientto meet the actual amount required. This may affect the group's ability to meetregulatory and other environmental performance standards, which may result infines imposed by UUW's regulators of an amount of up to 10 per cent ofregulated business turnover or other sanctions.In order to minimise the likelihood of funding shortfalls, capital investmentprogrammes are regularly monitored to identify the risk of time, cost andquality variances from plans and budgets and to identify, where possible, anyappropriate opportunities for outperformance.
Service incentive mechanism and serviceability assessment
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 the SIM it could receive a revenue penaltyor reward when price limits are next reset in 2014.In preparation for the change, systems and processes are being developed andenhanced, where necessary, to allow the company to report accurately on thevolume of `unwanted' contacts it receives. The company's focus is on ensuringright first time service delivery to its customers, thus avoiding the need for`unwanted' contacts. Where `unwanted' contacts do arise, there is a clear focuson identifying the root causes. These actions are intended to ensure that thecompany's performance under the SIM is optimised and thereby mitigating therisk of a penalty at the next price setting.The group is required to maintain the serviceability of its water andwastewater assets, ensuring they continue to deliver a level of service andperformance at least as good as in the past. Where serviceability falls belowrequired reference levels of performance Ofwat may impose a penalty in revenueat the next price-setting. Or, if performance were to decline, the group mayincur additional 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 taken.
The adoption of private sewers
In 2008, the government announced its intention to transfer sewers and pumpingstations currently owned by private individuals and businesses to sewerageundertakers. The precise date and nature of the transfer is yet to bedetermined but could occur as soon as 2011. No allowance has been made in pricelimits for the costs associated with the transfer. Therefore, any costsincurred will represent an unbudgeted increase in operating and capitalexpenditure.
Although there are costs associated with the transfer, as long as they are incurred efficiently they are expected to be largely recoverable when price limits are next reset, either at an interim determination or the next periodic review, but there can be no guarantee of full cost recovery at this stage.
Economic environment, inflation and capital market conditions
In recent years, the global banking crisis and economic downturn have impactedthe bank lending environment, as well as the debt and equity capital markets.This has resulted in the cost of capital increasing and has made the arrangingof finance and issuance of new equity and debt capital more expensive anddifficult to secure.A compounding challenge arises from the relationship between the regulatorycapital value (RCV) of the regulated business and the Retail Prices Index(RPI). The RCV is adjusted annually for inflation so, if RPI decreases, the RCVwould be adjusted downward to reflect this. This may lead to pressure ongearing (and other key financial ratios), credit ratings of the regulatedbusiness (and the group as a whole), and increase the cost or limit theavailability of credit. In the extreme, the group may be required to increaseits equity base by either reducing its dividend payments or raising new equitycapital. The global economic downturn continues to present difficult tradingand financing conditions for customers, contractors and suppliers of materialsand/or services to the group.The group monitors closely its liquidity headroom within the parametersapproved by the board, the impact of trends in inflation or deflation on itscapital position as well as the potential impact of wider changes in the creditmarkets. Where possible, the group has sought to issue debt linked to RPI tominimise the extent of its exposure to deflationary (or low inflationary)conditions. The group also monitors the financial position of its keycontractors and suppliers and seeks to use its procurement processes to ensurethat alternative suppliers can be sourced quickly and, where possible, onsimilar terms.
Pension scheme obligations
The group participates in a number of pension arrangements, predominantly inthe UK. The principal schemes are defined benefit schemes, although these havebeen closed to new employees since October 2006. The assets of these schemesare held in trust funds independent of group finances, with the funds beingwell diversified and professionally managed. The group's current schemes had acombined IAS 19 deficit of £271 million as at 31 March 2010, compared with adeficit of £213 million as at 31 March 2009 and a deficit of £359 million as at30 September 2009.Increases to pension fund deficits may result in an increased liability for thegroup, the size of the liability depending upon the extent to which additionaldeficits are recoverable through the regulatory price determination process. Inits final determination for the 2009 water price review, Ofwat took account ofbroadly 50 per cent of the pension deficit shown in UUW's final business planfor the regulated business when setting its overall price controls. In responseto the size of its ongoing pension risks and pension costs the group hasrecently been consulting on a series of changes for employees in its definedbenefit schemes. These changes, which came into force on 31 March 2010, willresult in reduced costs and risks, including deficit, associated with definedbenefit liabilities in future. In conjunction with the trustees, the groupcontinues to monitor the investment strategy for the pension schemes, includingthe 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 and water quality. Amongstothers, these may include civil actions by third parties for infringement ofrights or nuisance claims relating to odour or other matters. Furthermore, theimpact of future changes in laws or regulations or the introduction of new lawsor regulations that affect the business cannot always be predicted and, fromtime to time, interpretation of existing laws or regulations may also change orthe approach to their enforcement may become more rigorous. If the group failsto comply with applicable law or regulations, in particular in relation to itswater and wastewater licences, or has not successfully undertaken correctiveaction, regulatory action could be taken that could include the imposition of afinancial penalty (of up to 10 per cent of relevant regulated turnover) or theimposition of an enforcement order requiring the group to incur additionalcapital or operating expenditure to remedy its non-compliance. In the mostextreme cases, non-compliance may lead to revocation of a licence or theappointment 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.
Increased competition in the water and wastewater industry
The Cave review of competition and innovation in water markets was published inApril 2009 and in September 2009 the government consulted on legislation toimplement a number of the review's proposals. If its recommendations areimplemented, this could eventually expand the competitive market allowingretail competition to all non-household customers. Ofwat and the EnvironmentAgency are considering the introduction of reforms to the regulation of waterabstraction licences that would allow trading of licences. Ofwat is alsoexamining the scope for `upstream' competition in treated water supply.Ofwat has taken steps to introduce competition into the water supply marketthrough inset appointments and the water licensing supply regime. Prior to 2007(with one exception), inset appointees had all been granted to existingregulated companies. Since 2007, Ofwat has granted more inset appointments, oneof which is within UUW's region. Further inset appointments may be made in thefuture, resulting in increased competition.The group has been fully engaged in the government and Ofwat consultations onthe Cave review and other aspects of competition. A relatively small proportionof the group's profits derive from the retailing of water and wastewaterservices to non-household customers. However, United Utilities recognises thatreforms to the pricing rules that govern access to the group's water networkand greater upstream competition could put at risk a greater proportion of thegroup's profits. If competition is expanded, there would also be opportunitiesfor the group to participate in a wider market in England and Wales.
Events, service interruptions, systems failures, water shortages or contamination of water supplies
The group controls and operates utility networks and maintains the associatedassets with the objective of providing a continuous service. In exceptionalcircumstances, a significant interruption of service provision or catastrophicdamage could occur resulting in: significant loss of life; and/or environmentaldamage; and/or economic and social disruption. Such circumstances might arise,for example, from electricity, gas or water shortages; the failure of an assetor an element of a network or supporting plant and equipment; human error; anindividual's malicious intervention; or unavoidable resource shortfalls. Thegroup could be fined for breaches of statutory obligations or held liable tothird parties, or be required to provide an alternative water supply ofequivalent quality, which could increase costs. The group is also dependentupon the ability to access, utilise and communicate remotely via electronicsoftware applications mounted upon corporate information technology hardwareand communicating through internal and external networks. The ownership,maintenance and recovery of such applications, hardware and networks are notwholly under the group's control.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 procedures.These recognise that possible events can have varying causes, impacts andlikelihoods. While the group seeks to ensure that it has appropriate processesin place, 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. Theregulated business's licence also contains a `shipwreck' clause that, ifapplicable, may offer a degree of recourse to Ofwat in the event of acatastrophic incident.
Risks in the group's non-regulated business
Outside the regulated business, the group provides services relating to theoperation and management of assets for other utility clients in the UK andoverseas. These services include the maintenance and operation of utilitynetworks, the design and construction of new assets, the design andconstruction of new connections to the relevant network and the provision ofancillary services. The delivery of contracts, both existing and future, willbe achieved by exploiting the group's core infrastructure management skills andmay also require capital expenditure. The overstretching of such skills couldlead to a loss of customers or the inability to meet contractual commitments,or to the incurrence of penalties.The costs and risks associated with these new projects are subject to internalreviews before approval is given to commit to them. The group aims to complywith its contractual commitments or operating performance targets and anyrequirements to maintain service continuity or achieve specified operatingefficiencies in relation to those clients. Within the non-regulated business,the focus is on deploying the group's core skills on an asset-light basis,whilst continually monitoring contract performance, together with programme
andproject management.Material litigation
NOSS Consortium (NOSS) (of which North West Water International Limited, awholly owned subsidiary of United Utilities Group PLC, is a member and the soleremaining active participant) is party to arbitration proceedings in Thailandin relation to a design and construction contract dated 1 November 1993 betweenNOSS and the Bangkok Metropolitan Administration (BMA) to build a wastewatertreatment plant and network in central Bangkok. Following disagreements withthe engineer (Dorsch Consult) and disputes with the BMA, NOSS terminated thecontract with the BMA and served a notice of arbitration. NOSS has total claimsagainst the BMA of approximately six billion baht. The BMA has counterclaimedfor approximately three billion baht; however, based upon the facts and matterscurrently known, the counterclaim appears to lack substance. Although therehave been some delays in the arbitral process, the arbitration now appears setto proceed.In February 2009, the group was served with notice of a multiparty `classaction' in Argentina into which United Utilities International Limited (UUIL)was enjoined in 2007. The class action is related to the issuance and paymentdefault of a US$230 million bond by Inversora El©ctrica de Buenos Aires S.A.(IEBA), an Argentine project company set up to purchase one of the Argentineelectricity distribution networks, which was privatised in 1997. UUIL had a 45per cent shareholding in IEBA which it sold in 2005. The class action is beingpursued against various parties, including the original direct and indirectshareholders of IEBA, the banks which advised IEBA and the rating agencies ofthe bonds. The bonds, which were issued in 1997, were defaulted in March 2002and IEBA entered an insolvency process in 2003. The claim is for anon-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), owners of the ManchesterShip Canal (the "canal"), issued proceedings, seeking, amongst other relief,damages alleging trespass against UUW in respect of UUW's discharges of waterand treated effluent into the canal. The respective legal rights of MSCC andUUW relating to the discharges are unclear. Accordingly, the relevant legalprinciples need to be tested through court process. UUW will be filing adefence and counterclaim in support of its believed entitlement to makedischarges into the canal without charge and MSCC's claim will be vigorouslydefended thereafter.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 upon the facts andmatters currently known and the provisions carried in the group's consolidatedstatement of financial position, the directors are of the opinion that thepossibility of the disputes referred to in this risk section having a materialadverse effect on the group's financial position is remote.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This final results announcement contains certain forward-looking statementswith respect to the operations, performance and financial condition of thegroup. By their nature, these statements involve uncertainty since futureevents and circumstances can cause results and developments to differmaterially from those anticipated. The forward-looking statements reflectknowledge and information available at the date of preparation of this finalresults announcement and the company undertakes no obligation to update theseforward-looking statements. Nothing in this final results announcement shouldbe construed as a profit forecast.
Certain regulatory performance data contained in this final results announcement is subject to regulatory audit.
Consolidated income statement Restated* Year ended Year ended 31 March 31 March 2010 2009 £m £m Continuing operations Revenue 2,439.1 2,427.2 ------ ------ Employee benefits expense - excluding pension schemes curtailment gains (362.4) (347.2) arising on amendment of pension obligations and
restructuring costs
- pension schemes curtailment gains arising on 92.3 - amendment of pension obligations (note 8)
- restructuring costs (30.7) (1.2) ------ ------ Total employee benefits expense (300.8)
(348.4)
Depreciation and amortisation expense (304.7)
(261.9)
Infrastructure renewals expenditure (113.7) (117.8) Other operating costs (905.1) (982.7) Other reorganisation costs - (5.4) Other income 3.1 18.5 ------ ------ Total operating expenses (1,621.2) (1,697.7) ------ ------ Operating profit 817.9 729.5 Investment income (note 2) 14.1 70.7 Finance expense (note 3) (383.6) (270.9) ------ ------ Investment income and finance expense (369.5)
(200.2)
Profit on disposal of investments (note 5) 36.6
-
Evaluation and disposal costs relating to (10.8)
- non-regulated businesses ------ ------ Profit before taxation 474.2 529.3 Current taxation charge (22.0) (139.1) Deferred taxation charge (48.7) (3.5) Deferred taxation charge - abolition of industrial - (206.4) buildings allowances ------ ------ Taxation (note 4) (70.7) (349.0) ------ ------ Profit for the year from continuing operations 403.5 180.3 Discontinued operations Loss for the year from discontinued operations - (1.2) (note 5) ------ ------ Profit for the year 403.5 179.1 ------ ------ Earnings per share
from continuing and discontinued operations (note 6)**
Basic 59.2p 26.3p Diluted 59.2p 26.2p Earnings per share
from continuing operations (note 6)**
Basic 59.2p 26.5p Diluted 59.2p 26.4p Dividend per ordinary share (note 7) 34.30p 32.67p * See note 1
** The weighted average number of shares for the prior year has been based on the 681,381,233 new ordinary shares in United Utilities Group PLC issued on 28 July 2008 (note 6).
Consolidated statement of comprehensive income
Restated Year ended Year ended 31 March 31 March 2010 2009 £m £m Profit for the year 403.5 179.1 Other comprehensive income Actuarial losses on defined benefit pension (125.4) (124.3)schemes (note 8)
Tax on actuarial losses on defined benefit pension 35.1
34.8schemes Revaluation of investments 3.4 (20.3)
Reclassification from other reserves arising on (36.6)
-
sale of financial asset investment Net fair value gains/(losses) on cashflow hedges 0.9
(1.6)
Tax on net fair value (gains)/losses on cashflow (0.5)
0.4hedges Foreign exchange adjustments 6.4 8.3 ------ ------
Total comprehensive income for the year 286.8
76.4 ------ ------
There is no tax impact on the items of other comprehensive income except where stated in the table above.
Consolidated statement of financial
position Restated* Restated* 31 March 31 March 31 March 2010 2009 2008 £m £m £m ASSETS Non-current assets Property, plant and equipment 8,122.8 7,866.8 7,481.8 Goodwill 2.5 2.6 2.3 Other intangible assets 208.6 198.9 176.2 Investments 7.7 136.8 155.5 Trade and other receivables 56.5 44.2 53.1
Derivative financial instruments 378.5 445.7
70.0 ------ ------ ------ 8,776.6 8,695.0 7,938.9 ------ ------ ------ Current assets Inventories 74.8 73.0 63.3 Trade and other receivables 451.0 491.6 456.2 Cash and short-term deposits 301.5 298.6 1,810.5
Derivative financial instruments 18.3 193.3
73.3 ------ ------ ------ 845.6 1,056.5 2,403.3 ------ ------ ------ Total assets 9,622.2 9,751.5 10,342.2 ------ ------ ------ LIABILITIES Non-current liabilities Trade and other payables (146.5) (139.8) (125.5) Borrowings (5,307.9) (5,200.1) (3,788.9) Retirement benefit obligations (note 8) (271.3) (213.1) (101.2) Deferred tax liabilities (1,355.4) (1,341.3) (1,166.6) Provisions (8.3) (17.2) (18.7) Derivative financial instruments (102.3) (90.8) (42.3) ------ ------ ------ (7,191.7) (7,002.3) (5,243.2) ------ ------ ------ Current liabilities Trade and other payables (594.0) (672.4) (771.9) Borrowings (168.3) (479.6) (878.4) Current income tax liabilities (89.0) (67.6) (66.9) Provisions (45.5) (22.6) (21.0) Derivative financial instruments (25.8) (62.3) (147.6) ------ ------ ------ (922.6) (1,304.5) (1,885.8) ------ ------ ------ Total liabilities (8,114.3) (8,306.8) (7,129.0) ------ ------ ------ Total net assets 1,507.9 1,444.7 3,213.2 ------ ------ ------ EQUITY
Capital and reserves attributable to equity holders
of the company Share capital 499.8 499.8 881.6 Share premium account 0.9 0.7 1,429.3 Revaluation reserve 158.8 158.8 158.8 Treasury shares (0.1) (0.3) (0.3) Cumulative exchange reserve 22.3 15.9 7.6 Merger reserve 329.7 313.0 - Other reserves 3.8 36.6 58.1 Retained earnings 492.7 420.2 678.1 ------ ------ ------ Shareholders' equity (note 10) 1,507.9 1,444.7 3,213.2 * See note 1 ------ ------ ------
Consolidated statement of changes in equity
Year ended 31 March 2010 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 2009 499.8 0.7 158.8 (0.3) 15.9 313.0 36.6 420.2 1,444.7(restated) Profit for the - - - - - - - 403.5 403.5year Other comprehensive income Actuarial losses - - - - - - - (125.4) (125.4)on defined benefit pension schemes (note 8) Tax on actuarial - - - - - - - 35.1 35.1losses on defined benefit pension schemes Revaluation of - - - - - - 3.4 - 3.4investments Reclassification - - - - - - (36.6) - (36.6)from other reserves arising on sale of financial asset investment Net fair value - - - - - - 0.9 - 0.9gains on cashflow hedges Tax on net fair - - - - - - (0.5) - (0.5)value gains on cashflow hedges Foreign exchange - - - - 6.4 - - - 6.4adjustments ------ ------ ------ ------ ------ ------ ------ ------ ------ Total - - - - 6.4 - (32.8) 313.2 286.8comprehensive income/(expense) for the year ------ ------ ------ ------ ------ ------ ------ ------ ------ Transactions with owners Dividends (note - - - - - - - (226.2) (226.2)7) New share - 0.2 - - - - - - 0.2capital issued Shares disposed - - - 0.2 - - - (0.2) -of from employee share trust Capital - - - - - 16.7 - (16.7) -reorganisation (note 10) Equity-settled - - - - - - - 2.4 2.4share-based payments ------ ------ ------ ------ ------ ------ ------ ------ ------ At 31 March 2010 499.8 0.9 158.8 (0.1) 22.3 329.7 3.8 492.7 1,507.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ Year ended 31 March 2009 Share Share Revaluation Treasury Cumulative Merger Other Retained Total capital premium reserve shares exchange reserve reserves earnings account reserve Restated £m £m £m £m £m £m £m £m £m
At 1 April 2008 881.6 1,429.3 158.8 (0.3) 7.6 -
58.1 678.1 3,213.2 Profit for the - - - - - - - 179.1 179.1year Other comprehensive income Actuarial losses - - - - - - - (124.3) (124.3)on defined benefit pension schemes (note 8) Tax on actuarial - - - - - - - 34.8 34.8losses on defined benefit pension schemes Revaluation of - - - - - - (20.3) - (20.3)investments Net fair value - - - - - - (1.6) - (1.6)losses on cashflow hedges Tax on net fair - - - - - - 0.4 - 0.4value losses on cashflow hedges Foreign exchange - - - - 8.3 - - - 8.3adjustments ------ ------ ------ ------ ------ ------ ------ ------ ------ Total - - - - 8.3 - (21.5) 89.6 76.4comprehensive income/(expense) for the year ------ ------ ------ ------ ------ ------ ------ ------ ------ Transactions with owners Dividends (note - - - - - - - (349.9) (349.9)7) New share 499.8 0.7 - - - - - - 500.5capital issued Capital (881.6) (1,429.3) - - - 313.0 - - (1,997.9)reorganisation (note 10) Equity-settled - - - - - - - 2.4 2.4share-based payments ------ ------ ------ ------ ------ ------ ------ ------ ------ At 31 March 2009 499.8 0.7 158.8 (0.3) 15.9 313.0 36.6 420.2 1,444.7 ------ ------ ------ ------ ------ ------ ------ ------ ------
Consolidated statement of cashflows
Restated Year ended Year ended 31 March 31 March 2010 2009 £m £m Continuing operations Operating activities Cash generated from operations 1,015.7 911.4 Interest paid (225.5) (232.3) Interest received and similar income 12.4 90.4 Tax paid (51.2) (32.8) Tax received 50.6 - ------ ------ Net cash generated from operating activities 802.0 736.7 ------ ------ Investing activities Purchase of property, plant and equipment (543.2)
(668.2)
Purchase of other intangible assets (34.4)
(45.9)
Proceeds from sale of property, plant and 4.4
3.8equipment Purchase of investments (0.8) -
Proceeds from disposal of investments 132.1
-
Evaluation and disposal costs relating to (10.8)
-non-regulated businesses ------ ------ Net cash used in investing activities (452.7) (710.3) ------ ------ Financing activities
Proceeds from issue of ordinary shares 0.2
1.6
Cash used in structured financing - (163.9) Proceeds from borrowings 272.9 3,784.7 Repayment of borrowings (348.4) (3,310.9) Dividends paid to equity holders of the company (226.2)
(349.9)
Return to shareholders on capital (16.7) (1,482.3)reorganisation ------ ------ Net cash used in financing activities (318.2) (1,520.7) ------ ------ Effects of exchange rate changes 13.5 (1.8) ------ ------ Net increase/(decrease) in cash and cash 44.6 (1,496.1)equivalents ------ ------ Cash and cash equivalents at beginning of the 209.1 1,705.2year ------ ------ Cash and cash equivalents at end of the year 253.7 209.1 ------ ------
Cash generated from operations
Restated Year ended Year ended 31 March 31 March 2010 2009 £m £m Continuing operations Profit before taxation 474.2 529.3 Adjustment for investment income and finance 369.5 200.2expense
Adjustment for profit on disposal of investments (36.6)
-
Adjustment for evaluation and disposal costs 10.8
-
relating to non-regulated businesses
------ ------ Operating profit 817.9 729.5 Adjustments for: Depreciation of property, plant and equipment 275.2
238.0
Amortisation of other intangible assets 29.5
23.9
Loss on disposal of property, plant and equipment 7.3
0.8
Equity-settled share-based payments charge 2.4
1.9
Other non-cash movements - pension schemes (92.3)
-
curtailment gains arising on amendment of pension
obligations Changes in working capital: Increase in inventories (1.8) (9.7) Decrease/(increase) in trade and other receivables 27.1
(22.9)
Decrease in provisions and payables (49.6) (50.1) ------ ------ Cash generated from continuing operations 1,015.7 911.4 ------ ------Segment reportingThe group is organised into two principal operating divisions for managementpurposes, being regulated and non-regulated activities. These divisions formthe basis on which the operating segment information, presented in accordancewith IFRS 8 `Operating Segments' (see note 1), is reported. The comparativefigures for the year ended 31 March 2009 have been restated in accordance withIFRS 8.
The regulated activities segment is as previously reported and includes the regulated results of United Utilities Water PLC.
The non-regulated activities segment is as previously reported and includes the group's utility outsourcing contracts in the United Kingdom and overseas.
The `all other segments' category was previously reported as the group's other activities segment. This category includes the results of United Utilities Property Services Limited (formerly United Utilities Property Solutions Limited), United Utilities Group PLC and other group holding companies.
The disclosure correlates with the information provided to the United UtilitiesGroup PLC board of directors (the `board') for the purposes of assessingperformance and allocating resources. The board reviews revenue, underlyingoperating profit and operating profit by segment, but assets and liabilitiesare reviewed at a consolidated level. Investment income and finance expense,and taxation are managed on a group basis and are not allocated to operatingsegments. Regulated Non-regulated All other activities activities segments Group £m £m £m £m Year ended 31 March 2010 Continuing operations Total revenue 1,540.7 890.2 14.1 2,445.0 Inter-segment revenue (0.8) - (5.1) (5.9) ------ ------ ------ ------ External revenue 1,539.9 890.2 9.0 2,439.1 ------ ------ ------ ------ Underlying segmental 700.8 59.1 (3.6) 756.3operating profit/(loss) Restructuring costs (15.8) (4.9) (10.0) (30.7)
Pension schemes curtailment 76.7 8.9 6.7
92.3
gains arising on amendment of
pension obligations ------ ------ ------ ------ Segmental operating profit/ 761.7 63.1 (6.9) 817.9(loss) ------ ------ ------ Investment income 14.1 Finance expense (383.6) Profit on disposal of 36.6investments Evaluation and disposal costs
(10.8)
relating to non-regulated
businesses ------ Profit before taxation 474.2 ------ Regulated Non-regulated All other Group activities activities segments Restated £m £m £m £m
Year ended 31 March 2009
Continuing operations Total revenue 1,499.5 911.8 22.4 2,433.7 Inter-segment revenue (0.9) (0.1) (5.5) (6.5) ------ ------ ------ ------ External revenue 1,498.6 911.7 16.9 2,427.2 ------ ------ ------ ------ Underlying segmental 679.4 62.4 (5.7) 736.1
operating profit/(loss)
Restructuring costs (1.0) 1.0 (1.2) (1.2)
Other reorganisation costs - - (5.4)
(5.4) ------ ------ ------ ------ Segmental operating profit/ 678.4 63.4 (12.3) 729.5(loss) ------ ------ ------ Investment income 70.7 Finance expense (270.9) ------ Profit before taxation 529.3 ------NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the year ended 31 March 2010 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 2010.
The adoption of the following standards and interpretations, at 1 April 2009, has had no material impact on the group's financial statements:
IFRIC 12 `Service Concession Arrangements'
The interpretation addresses accounting by private sector operators involved inthe provision of public sector infrastructure assets and services. Relevantassets within its scope have been reclassified from property, plant andequipment to financial assets (where the operator has an unconditional right toreceive a specified amount of cash or other financial asset over the life ofthe arrangement); or intangible assets (where the operator's future cashflowsare not specified); or a combination of both (where the operator's return isprovided partially by a financial asset and partially by an intangible asset).Its application is retrospective and hence requires the restatement of theinformation presented for the years ended 31 March 2009 and 31 March 2008.Operating profit for the year ended 31 March 2009 has been reduced by £5.7million, broadly offset by a corresponding increase in investment income of £5.2 million.
IAS 23 `Borrowing Costs (March 2007)'
Borrowing costs directly attributable to the acquisition, construction orproduction of a qualifying asset have been capitalised as part of the cost ofthat asset. Qualifying assets include property, plant and equipment,inventories and intangible assets developed in projects that take a significantperiod of time to complete. The standard has been adopted as a prospectivechange and borrowing costs have been capitalised on projects commencing from 1April 2009. No changes have been made for borrowing costs incurred prior tothis date that have been expensed. During the year ended 31 March 2010,borrowing costs of £0.5 million have been capitalised.
IAS 1 `Presentation of Financial Statements (September 2007)'
The application of this standard has resulted in the consolidated balance sheetand consolidated cashflow statement being renamed the `consolidated statementof financial position' and the `consolidated statement of cashflows'respectively. The shareholders' equity note is presented as a primary statementand is renamed the `consolidated statement of changes in equity'. Theconsolidated statement of recognised income and expense is also presented as aprimary statement and is renamed the `consolidated statement of comprehensiveincome'. Taxation on each item within the consolidated statement ofcomprehensive income is shown separately.
`Improvements to IFRS (2008)'
The amendments to IAS 1 clarify the categorisation of derivative financialinstruments as current or non-current. Previously the group has categorised ascurrent all derivative financial instruments classified as `held for trading'under IAS 39 `Financial Instruments: Recognition and Measurement'. As a resultof these amendments, `held for trading' derivatives have now been categorisedbetween current and non-current, based upon the contractual maturity date or,where applicable, the contractual early termination date.
IFRS 2 `Share-based Payments' (June 2009)
The amendment to IFRS 2 is effective for periods commencing on or after 1 January 2010, was endorsed by the EU on 23 March 2010, and has been early adopted.
IFRS 8 `Operating Segments'
The application of this standard requires disclosure of information about thegroup's operating segments on the same basis as that used for internalreporting, and replaces the requirement to determine the primary (business) andsecondary (geographical) reporting segments. The group determined that itsoperating segments were the same as the business segments previously identifiedunder IAS 14 `Segment Reporting', except that the `other activities' segmenthas been renamed `all other segments'. Additional disclosures about each ofthese segments are provided.
As a result of the adoption of these standards, the group has presented a restated consolidated statement of financial position for each of the years ended 31 March 2009 and 31 March 2008, together with notes for the relevant restated comparatives.
The consolidated income statement for the year ended 31 March 2009 has been re-presented to better reflect the nature of restructuring and reorganisation costs.
At the date of authorisation of these condensed consolidated financial statements, the following relevant standards and interpretations were in issue but not yet effective.
IFRS 3 `Business Combinations'
This revised standard, issued in January 2008, is effective for periodscommencing on or after 1 July 2009 and was endorsed by the EU on 12 June 2009.This will have a material impact on the group's financial statements only if itenters into any relevant transactions in the future.
IFRIC 18 `Transfers of Assets from Customers'
This interpretation was issued in January 2009, it is effective for transfersfrom customers received on or after 1 July 2009, for periods commencing on orafter 31 October 2009 and was endorsed by the EU on 27 November 2009. Thisinterpretation will therefore be adopted by the group in the year ending 31March 2011. The adoption of IFRIC 18 is expected to change the group's policyfor the valuation of assets transferred from customers and may lead to anincrease in revenue, the value of assets capitalised and future depreciationcosts.
The impact of all other IFRS's and IFRIC's issued but not yet adopted is not considered to be material to the group.
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 435 of theCompanies Act 2006 and should be read in conjunction with the group's annualreport and financial statements for the year ended 31 March 2010.The comparative figures for the years ended 31 March 2009 and 31 March 2008 donot comprise the group's statutory accounts for those financial years. Thoseaccounts have been reported upon by the group's auditors and delivered to theregistrar of companies. The reports of the auditors were unqualified and didnot include a reference to any matters to which the auditors drew attention byway of emphasis without qualifying their report. The report for the year ended31 March 2009 did not contain a statement under section 498(2) or (3) of theCompanies Act 2006, and the report for the year ended 31 March 2008 did notcontain a statement under section 237(2) or (3) of the Companies Act 1985.
Going concern
The directors have reviewed the financial resources available to the group andhave concluded that the group is a going concern. This conclusion is basedupon, amongst other matters, a review of the group's financial projectionstogether with a review of the cash and committed borrowing facilities availableto the group.2. Investment income Restated Year ended Year ended 31 March 31 March 2010 2009 £m £m Interest receivable 14.1 27.8
Foreign exchange gains on forward -
36.1contracts ------ ------ 14.1 63.9 ------ ------ Expected return on pension schemes' - 124.3assets (note 8) Interest cost on pension schemes' - (117.5)obligations (note 8) ------ ------ Net pension interest income - 6.8 ------ ------ 14.1 70.7 ------ ------3. Finance expense Year ended Year ended 31 March 31 March 2010 2009 £m £m Interest payable (224.6) (246.6) Fair value losses on debt and (135.8) (24.3)derivative instruments ------ ------ (360.4) (270.9)
Expected return on pension schemes' 94.1
-assets (note 8)
Interest cost on pension schemes' (117.3)
-obligations (note 8) ------ ------
Net pension interest expense (23.2)
- ------ ------ (383.6) (270.9) ------ ------The group follows a policy of economic hedging of its interest rate andcurrency exposures, with particular regard to the five-year regulatory period.Including the interest element of swaps and interest on debt under the fairvalue option within interest payable, as opposed to within the fair valuelosses, adjusting for the reclassification of interest income and expenditureassociated with the group's defined benefit pension schemes and adjusting forthe reclassification of financing income relating to the group's serviceconcession arrangements, would give an economic underlying cost of netborrowings of £235.6 million (2009: £196.2 million): Restated Year ended Year ended 31 March 31 March 2010 2009 £m £m Finance expense (383.6) (270.9)
Fair value losses on debt and 135.8
24.3derivative instruments Add back interest on swaps and debt (22.2) (8.3)under fair value option Investment income 14.1 70.7 Adjustment for net pension interest 23.2 (6.8)expense/(income) Adjustment for service concession (2.9) (5.2)financing income (note 1) ------ ------ Underlying cost of net borrowings (235.6) (196.2) ------ ------4. Taxation Restated Year ended Year ended 31 March 31 March 2010 2009 £m £m Current taxation UK corporation tax (71.0) (147.0) Foreign tax 1.1 (2.1) Prior year adjustments 47.9 10.0 ------ ------ (22.0) (139.1) ------ ------ Deferred taxation Current year (55.3) 0.7 Prior year adjustments 6.6 (4.2) ------ ------ (48.7) (3.5) Abolition of industrial buildings - (206.4)allowances ------ ------ (48.7) (209.9) ------ ------ Total tax charge for the year (70.7) (349.0) ------ ------
The prior year adjustments relate to agreement of prior years' UK tax returns.
Following Royal Assent of the 2008 Finance Act on 21 July 2008, the abolitionof industrial buildings allowances was formally enacted. The financial impactas a consequence of this legislation was a one-off deferred tax charge of £206.4 million, which was included in the deferred tax charge for the year ended31 March 2009; however the cash impact will be spread over a period ofapproximately 20 years.
5. Disposal of investmentsand discontinued operations
The group disposed of its 11.7 per cent economic interest in Manila WaterCompany (MWC) to Ayala Corporation and Philwater Holdings Company Inc, bothexisting shareholders of MWC, for a cash consideration of US$73 million (£46.3million) on 12 November 2009. On completion of the transaction in March 2010,the group has reinvested approximately US$1.2 million (£0.8 million) in newpreference shares in Philwater Holdings Company Inc.
In addition, the group disposed of its 15.0 per cent economic interest in Northern Gas Networks Holdings Limited (NGN) to Cheung Kong Infrastructure Holdings Limited (CKI) and SAS Trustee Corporation (managed by RREEF Alternative Investments), both existing shareholders of NGN, for a cash consideration of £85.8 million on 16 November 2009. These disposals, combined, generated a profit of £36.6 million in the year ended 31 March 2010.
The contributions from the group's investments in MWC and NGN have beenincluded in continuing operations, within the non-regulated activities businesssegment, in the group's results for the year ended 31 March 2010 (£2.4 million)and 31 March 2009 (£12.3 million).The group has previously reported as discontinued operations the disposal ofUnited Utilities Electricity (UUE), which took place on 19 December 2007. Theresults of UUE, along with the profit on disposal of £493.0 million, weredisclosed as discontinued operations in the group's financial statements in theyear ended 31 March 2008. An adjustment of £1.2 million loss was recorded inthe year ended 31 March 2009.
6. Earnings per share
Basic and diluted earnings per share are calculated by dividing profit for the year by the following weighted average number of shares in issue:
Basic Diluted million million Year ended 31 March 2010 681.5 682.0 Year ended 31 March 2009 681.4 682.3To enable a meaningful comparison and in compliance with IAS 33 `Earnings perShare', the weighted average number of shares for the prior year has been basedon the 681,381,233 new ordinary shares in United Utilities Group PLC issued on28 July 2008.The difference between the weighted average number of shares used in the basicand diluted earnings per share calculations represents those ordinary sharesdeemed to have been issued for no consideration on the conversion of allpotential dilutive ordinary shares in accordance with IAS 33 `Earnings perShare'.The basic and diluted earnings per share for the current and prior year are asfollows: Restated Year ended Year ended 31 March 31 March 2010 2009
From continuing and discontinued
operations Basic 59.2p 26.3p Diluted 59.2p 26.2p From continuing operations Basic 59.2p 26.5p Diluted 59.2p 26.4p7. Dividends Year ended Year ended 31 March 31 March 2010 2009 £m £m
Dividends relating to the year
comprise: Interim dividend 76.1 72.5 Final dividend 157.6 150.1 ------ ------ 233.7 222.6 ------ ------ Year ended Year ended 31 March 31 March 2010 2009 £m £m
Dividends deducted from shareholders'
equity comprise: Interim dividend 76.1 72.5 Final dividend 150.1 277.4 ------ ------ 226.2 349.9 ------ ------
The proposed final dividends for the years ended 31 March 2010 and 31 March2009 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 2010 and 31 March 2009 respectively.The final dividend of 23.13 pence per ordinary share (2009: final dividend of22.03 pence per ordinary share) will be paid on 2 August 2010 to shareholderson the register at the close of business on 18 June 2010. The ex-dividend datefor the final dividend is 16 June 2010.
The interim dividend of 11.17 pence per ordinary share (2009: interim dividend of 10.64 pence per ordinary share)
was paid on 4 February 2010 to shareholders on the register at the close of business on 18 December 2009.
8. Retirement benefit obligations
The main financial assumptions used by the actuary were as follows:
Year Year ended ended 31 March 31 March 2010 2009 % pa % pa
Discount rate - United Utilities Pension Scheme (UUPS) 5.70
7.00
Discount rate - United Utilities Group section of the 5.70
7.00
Electricity Supply Pension Scheme (ESPS) Discount rate - Northern Gas Networks Pension Scheme 5.70
6.90(NGNPS)
Expected return on assets - UUPS 6.20
6.60
Expected return on assets - ESPS 6.30
6.20
Expected return on assets - NGNPS 6.10
5.90
Pensionable salary growth - UUPS 3.30
4.15
Pensionable salary growth - ESPS 3.30
4.20
Pensionable salary growth - NGNPS 4.30
4.20 Pension increases 3.30 3.20 Price inflation 3.30 3.20The net pension income/(expense) credited/(charged) before taxation in theincome statement in respect of the defined benefit schemes is summarised asfollows: Year ended Year ended 31 March 31 March 2010 2009 £m £m Current service cost (26.0) (36.7) Curtailments/settlements - arising on reorganisation* (17.2) -
- arising on amendment of pension 92.3
-obligations Past service cost (2.8) (3.1) ------ ------ Pension income/(expense) credited/ 46.3 (39.8)(charged) to operating profit ------ ------ Expected return on schemes' assets 94.1
124.3
Interest on schemes' obligations (117.3) (117.5) ------ ------
Pension (expense)/income (charged)/ credited to investment income and (23.2)
6.8
finance expense (note 3, 2)
------ ------ Net pension income/(expense) credited/ 23.1 (33.0)(charged) before taxation ------ ------
* Curtailments arising on reorganisation of £17.2 million (2009: £nil) are included within restructuring costs of £30.7 million (2009: £1.2 million) within total employee benefits expense.
The reconciliation of the opening and closing statement of financial positionbalances is as follows: Year ended Year ended 31 March 31 March 2010 2009 £m £m At the start of the year (213.1) (101.2) Income/(expense) recognised in the 23.1 (33.0)income statement Contributions paid 44.1 45.4 Actuarial losses gross of taxation (125.4) (124.3) ------ ------ At the end of the year (271.3) (213.1) ------ ------
The closing obligation at each reporting date is analysed as follows:
Year ended Year ended 31 March 31 March 2010 2009 £m £m Present value of defined benefit (2,182.2) (1,696.9)obligations Fair value of schemes' assets 1,910.9 1,483.8 ------ ------ Net retirement benefit obligations (271.3) (213.1) ------ ------9. Additional disclosuresThe following items are considered material in size or nature and are thereforedisclosed separately in accordance with IAS 1 `Presentation of FinancialStatements': Re-presented Year ended Year ended 31 March 31 March 2010 2009 £m £m Operating profit items: Restructuring costs 30.7 1.2
Pension schemes curtailment gains arising on (92.3)
-
amendment of pension obligations
Other reorganisation costs - 5.4 Finance expense items:
Fair value losses on debt and derivative instruments 135.8 24.3
Interest on swaps and debt under fair value option 22.2
(8.3)
Interest associated with cash proceeds from UUE sale - (20.6) Investing activity items:
Profit on disposal of investments (36.6)
-
Evaluation and disposal costs relating to 10.8
-
non-regulated businesses
10. Shareholders' equity - capital reorganisation
The movements on the accounts within shareholders' equity of the group whichare affected by the capital reorganisation which took place during the prioryear are shown below: Share Merger Share premium reserve Total capital account £m £m £m £m At 1 April 2008 881.6 1,429.3 - 2,310.9 New share capital issued 499.8 0.7 - 500.5 Capital reorganisation (881.6) (1,429.3) 313.0 (1,997.9) ------ ------ ------ ------ At 31 March 2009 499.8 0.7 313.0 813.5 New share capital issued - 0.2 - 0.2 Capital reorganisation - - 16.7 16.7 ------ ------ ------ ------ At 31 March 2010 499.8 0.9 329.7 830.4 ------ ------ ------ ------
In July 2008 the High Court (the "Court") approved a scheme of arrangement (the "Scheme") of United Utilities PLC to establish a new listed company, United Utilities Group PLC, as the holding company of United Utilities PLC. United Utilities PLC shareholders received 17 United Utilities Group PLC ordinary shares for every 22 United Utilities PLC shares, together with one United Utilities Group PLC B share of 170.0 pence for each United Utilities PLC share.
The Court then approved the reduction of the capital of United Utilities GroupPLC, whereby the nominal value of each ordinary share was reduced from 500.0pence to five pence.
In addition, a merger reserve was created in the United Utilities Group PLC company, which was capitalised into A shares that were cancelled as part of the reduction of capital.
The Scheme and the subsequent reduction in capital increased the distributablereserves of United Utilities Group PLC by £4.8 billion enabling the return of £1,499.0 million capital and allowing future dividends.
On 14 April 2009, the remaining B shares were redeemed. This has been recorded as an adjustment to equity and has eliminated the outstanding financial liability. This transaction concluded the capital reorganisation.
The merger reserve, as shown above, arises on consolidation and represents thecapital adjustment required to effect the reverse acquisition, being thedifference between the existing share capital and share premium of UnitedUtilities PLC at the date of the reverse acquisition and the share capital ofUnited Utilities Group PLC following the reduction of capital of UnitedUtilities Group PLC.
11. 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 2010 2009 £m £m Sales of services 92.9 109.8
Purchases of goods and services 4.8
11.4 ------ ------
Amounts owed by and to the group's joint ventures are as follows:
Year ended Year ended 31 March 31 March 2010 2009 £m £m
Amounts owed by related parties 19.2
12.8
Amounts owed to related parties 0.9
1.9 ------ ------
Sales of services to related parties were on the group's normal trading terms.
The amounts outstanding are unsecured and will be settled in accordance withnormal credit terms. The group has issued guarantees of £126.8 million (2009: £80.7 million) to its joint ventures, which are included in the total disclosedin note 12. A £0.4 million provision has been made for doubtful receivables inrespect of the amounts owed by related parties (2009: £0.1 million). A £0.3million expense has been recognised for bad and doubtful receivables in respectof the amounts owed by related parties (2009: £nil).
12. Contingent liabilities
The group has entered into performance guarantees as at 31 March 2010, where a financial limit has been specified, of £201.2 million (2009: £119.8 million).
13. Events after the reporting period
In May 2010 the group agreed the disposal of its Australian business forapproximately £135 million comprising £106 million in cash and £29 million innet debt assumed by the purchaser. The transaction is subject to a number ofconsents and regulatory approvals and financial close is expected in the secondhalf of 2010. The results of the Australian business are included withincontinuing operations for the year ended 31 March 2010 and are presented withinthe group's non-regulated activities segment.
The group's contract with Welsh Water has not been renewed for the 2010-15 regulatory period. The contribution from this contract was immaterial to the non-regulated activities segmental result for the year ended 31 March 2010.
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 2010. Certain parts thereof are not included within this announcement.
Responsibility statement
We confirm that to the best of our knowledge:
* the financial statements, prepared in accordance with IFRSs as adopted by
the European Union, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the company and the undertakings
included in the consolidation taken as a whole; and
* the management report, which is incorporated into the directors' report,
includes a fair review of the development and performance of the business
and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. This responsibility statement was approved by the board on 20 May 2010 andsigned on its behalf by:Philip Green Tim WellerChief executive officer Chief financial officer
mapperRelated Shares:
United Utilities