Sections in this page:
| |
Year ended
31 March
2010
£m
|
Restated1
Year ended
31 March
2009
£m
|
|
Operating profit
|
817.9
|
729.5
|
|
Underlying operating profit(2)
|
756.3
|
736.1
|
|
Profit before tax
|
474.2
|
529.3
|
|
Underlying profit before tax(2)
|
500.4
|
531.3
|
|
Basic earnings per share(3) (pence)
|
59.2
|
26.5
|
|
Total dividends per ordinary share (pence)
|
34.30
|
32.67
|
(1) In accordance with International Financial Reporting Standards, IFRIC 12 ‘Service Concession Arrangements’ is applied retrospectively hence the prior year has been restated.
(2) Underlying operating profit and underlying profit before tax are defined in the underlying profit measure tables below.
(3) One-off factors affecting earnings per share are explained in the earnings per share section below.
- Sound results in a challenging economic environment: underlying operating profit of £756 million
- Final dividend increased by 5.0 per cent 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 September 2009: more sustainable and lower risk approach
- As outlined previously 2010/11 dividend of 30 pence per share and two per cent per annum 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
United Utilities has delivered a sound set of financial results for the year ended 31 March 2010. Revenue from continuing operations rose by £12 million to £2,439 million. Underlying operating profit increased by three per cent to £756 million. Underlying profit before tax decreased by six per cent to £500 million, principally due to an increase in the underlying cost of net borrowings.
The regulated business has delivered a modest increase in underlying operating profit, which is up three per cent at £701 million. This result primarily reflects the price increase allowed by Ofwat coupled with tight cost control, offset as expected by reduced water demand and ongoing cost pressures in areas such as power and bad debts, alongside an expected increase in depreciation. The price increase supports the high levels of essential investment in UUW’s assets, which helps the business meet strict environmental standards and deliver an improved service for its customers.
Capital expenditure in the regulated water and wastewater business amounted to £620 million during the year, including infrastructure renewals expenditure. This level of spend is consistent with the planned investment profile for the final year of the 2005–10 capital expenditure programme.
In the second half of the year, United Utilities completed the disposals of its holdings in Northern Gas Networks and Manila Water Company for a combined price of £132 million. The dividends from these 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 underlying non-regulated operating profit of £7 million.
Earlier this month, the group also agreed to sell its Australian business for a total of approximately £135 million. United Utilities intends to retain the proceeds from these disposals within the group. The group is continuing to evaluate the expressions of interest it has received for its remaining non-regulated businesses.
The group has sought to adopt a more sustainable approach to the delivery of pension provision and has amended the terms of its defined benefit pension schemes. This reduces future funding and deficit risk as well as future service cost, thereby enabling the company to retain defined benefit pension schemes for existing members. Following consultation, the changes to the rules of the pension scheme were supported by the company’s trade unions. The reduction in service cost for 2010/11 is expected to be approximately £7 million, although the lower risk investment strategy is likely to reduce investment income and result in a lower net benefit at the profit before tax level. The amendments have also resulted in a reduction of £92 million to the group’s pension deficit, which is required to be accounted for as a credit to operating profit in the group’s income statement. Overall, the group’s net pension deficit at the year end has decreased by £87 million, compared with the position at 30 September 2009, reflecting the aforementioned changes to the pension schemes and the routine actuarial assessment of movements in assets and liabilities.
The group benefits from headroom to cover its projected financing needs through to the spring of 2012. During the year, United Utilities enhanced its liquidity through the issuance of £220 million of new bonds and £150 million of term extensions to existing committed bank facilities. This provides the group with good flexibility in terms of when and how it raises further debt finance.
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 and derivative instruments, compared with £24 million of net fair value losses in 2008/09. The impact of changes in credit spreads on debt accounted for at fair value through profit or loss can result in significant volatility and this is the principal reason for the large net fair value movement in the year. In addition, the volatility in financing expense reflects the fact that, in order to provide a hedge of the interest cost implicit in the regulatory period, the group fixes interest rates for the duration of each five-year review period for a substantial proportion of its debt using interest rate swaps. International Financial Reporting Standards (IAS 39) limit the use of hedge accounting for these commercial hedges, thereby increasing the potential volatility of the income statement. However, this volatility in fair values has no cashflow impact. A reduction in returns on the group’s pension schemes’ assets in 2009/10, compared with the prior year, has also contributed to 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 of approximately £1.5 billion to shareholders in the previous financial year, and lower returns on cash deposits.
The underlying cost of net borrowings for continuing operations of £236 million was £39 million higher than in 2008/09. This reflects higher average net debt in 2009/10 and an increase in the group’s average net borrowing rate from around 4.7 per cent to 4.9 per cent. Average net debt was lower in 2008/09, primarily due to the group holding approximately £1.1 billion of cash proceeds from the sale of United Utilities Electricity (UUE) prior to the return of approximately £1.5 billion to shareholders in August 2008.
Underlying profit before taxation was £500 million, six per cent lower than 2008/09, principally reflecting an increase in interest expense as a result of higher average net debt, following the return of £1.5 billion to shareholders in August 2008, an increase in the underlying cost of net borrowings, a reduction in investment income and lower expected returns on pension assets. This underlying measure adjusts for the impact of one-off items, fair value movements in respect of debt and derivative instruments and the short-term interest benefit in the previous year associated with the cash proceeds from the sale of UUE, prior to the £1.5 billion return to shareholders. Reported profit before taxation decreased by 10 per cent to £474 million principally as a result of an increase in finance expense and lower investment income, partly offset by the £92 million one-off credit associated with the changes to the group’s pension schemes and a £37 million profit on disposal of investments.
During the year the group received a cash tax inflow 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 was five per cent, compared with 26 per cent in the prior year. The current tax charge included a £48 million credit in relation to the agreement with the tax authorities of prior years’ tax returns.
In the prior year, the group recognised a one-off deferred tax charge of £206 million relating to the abolition of industrial buildings allowances with a cash impact expected to be spread over a period of approximately 20 years. This one-off item resulted in a significant increase in the effective tax rate for the prior year.
The group has recognised a net deferred tax charge of £49 million compared with a deferred tax charge in the prior year of £210 million. This included a £7 million credit in relation to the agreement with the tax authorities of prior years’ tax returns.
An overall tax charge of £71 million has been recognised for the year ended 31 March 2010. Excluding the impact of prior years’ adjustments and the abolition of industrial buildings allowances, the total tax charge relating to continuing operations would be £125 million or 26 per cent compared with a £148 million charge or 28 per cent in the prior year.
Basic earnings per share relating to continuing operations increased from 26.5 pence 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 (equivalent to 8.0 pence per share).
The board has proposed a final dividend of 23.13 pence per ordinary share in respect of the year ended 31 March 2010. This is an increase of 5.0 per cent, in line with the group’s dividend policy of targeting a real growth rate of RPI plus 2.0 per cent. The inflationary increase of 3.0 per cent is based on the RPI element included within the 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 on the register at the close of business on 18 June 2010.The ex-dividend date is 16 June 2010.
As outlined on 21 January 2010, following detailed analysis and assessment of the final determination, the board intends to pay a dividend per share of 30.0 pence for the 2010/11 financial year. Thereafter, the intention is to continue to target a dividend per share growth rate of RPI plus 2 per cent per annum through to 2015.
Cash generated for the year ended 31 March 2010 was £1,016 million, compared with £911 million in the prior year. The group’s net capital expenditure was £573 million (including the purchase of intangible assets and proceeds from sales of property, plant and equipment), principally in the regulated water and wastewater investment programmes. This excludes infrastructure renewals expenditure which is treated as an operating cost under International Financial Reporting Standards.
Net debt including derivatives at 31 March 2010 was £4,906 million, compared with £4,895 million at 31 March 2009. Expenditure on the regulatory capital investment programmes and payments of dividends and interest, were broadly offset by the proceeds from the disposals of the group’s holdings in Northern Gas Networks and Manila Water Company, operational cashflows and the aforementioned cash tax receipt.
Gearing (measured as group net debt divided by UUW’s regulatory capital value) decreased to 64 per cent at 31 March 2010, compared with 66 per cent at 31 March 2009. Adjusting for the group’s non-recourse joint venture debt of £234 million, gearing was 61 per cent.
At the year end, United Utilities Water PLC had long-term credit ratings of A3/BBB+ and United Utilities PLC had long-term credit ratings of Baa1/BBB– from Moody’s Investors Services and Standard & Poor’s Ratings Services respectively. Shortly after UUW accepted Ofwat’s final determination on 21 January 2010, Moody’s reaffirmed its credit ratings of A3 for United Utilities Water PLC and Baa1 for United Utilities PLC, both with stable outlook. However, as expected, Standard & Poor’s downgraded United Utilities Water PLC to BBB+ from A– and United Utilities PLC to BBB– from BBB+, both with stable outlook, reflecting differing methodologies particularly with regard to the treatment of infrastructure renewals expenditure.
Cash and short-term deposits at 31 March 2010 amounted to £302 million. During the year, the group’s financing headroom position was enhanced through the issuance of an additional £100 million, 5.75 per cent bond maturing in March 2022; an additional £50 million, 6.125 per cent bond maturing in December 2015; and a new £70 million, 2.40 per cent plus RPI index-linked bond maturing in July 2039. United Utilities has headroom to cover its projected financing needs through to the spring of 2012.
The group has access to the international debt capital markets through its €7 billion medium-term note programme which provides for the periodic issuance by United Utilities PLC and United Utilities Water PLC of debt instruments on terms and conditions determined at the time the instruments are issued. The programme does not represent a funding commitment, with funding dependent upon the successful issue of the debt securities.
Long-term borrowings are structured or hedged to match assets and earnings, which are largely in sterling, indexed to UK retail price inflation and subject to regulatory price reviews every five years.
Very long-term sterling inflation index-linked debt is the group’s preferred form of funding as this provides a natural hedge to assets and earnings. At 31 March 2010, approximately 42 per cent of the group’s net debt was in index-linked form, representing around 27 per cent of UUW’s regulatory capital value, with an average real interest rate of 1.8 per cent. The long-term nature of this funding also provides a good match to the group’s long-life infrastructure assets and is a key contributor to the group’s average term debt maturity profile which is in excess of 25 years.
Where nominal debt is raised in a currency other than sterling and/or with a fixed interest rate, to manage exposure to long-term interest rates, the debt is generally swapped to create a floating rate sterling liability for the term of the liability. To manage exposure to mediumterm interest rates, the group fixes interest costs for a substantial proportion of the group’s debt for the duration of each price control period at around the time of that price control determination. The group does not undertake any speculative trading activity.
The group enters into joint ventures with consortium partners. The financial and legal structure of joint ventures is designed to limit the group’s exposure to the extent of the equity investment and loans provided by the group, with no further recourse should the joint venture default. All joint venture arrangements have been incorporated into the group’s results on a proportionate consolidation basis.
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 a healthy headroom position. Available headroom at 31 March 2010 was £1,100 million based on cash, short-term deposits and medium-term committed bank facilities, net of short-term debt. This headroom is sufficient to cover the group’s projected financing needs through to the spring of 2012.
Headroom/prefunding = £1,100 million
| |
£m |
| Cash and short-term deposits |
301.5 |
| Medium-term committed bank facilities* |
966.8 |
| Short-term debt |
(101.1) |
| Term debt maturing within one year† |
(67.2) |
| Total headroom/prefunding |
1,100.0 |
* Excludes £100 million facilities maturing within one year.
† Includes amounts relating to joint ventures of £17 million.
United Utilities believes that it operates a prudent approach to managing banking counterparty risk. Counterparty risk, in relation to both cash deposits and derivatives, is controlled through the use of counterparty credit limits. United Utilities’ cash is held in the form of short-term (generally no longer than three months) money market deposits with either prime commercial banks or with triple A rated money market funds. As at 31 March 2010, no cash deposits were held in money market funds.
United Utilities operates a bilateral, rather than a syndicated, approach to its core relationship banking facilities. This approach spreads maturities more evenly over a longer time period, thereby reducing refinancing risk and providing the benefit of several renewal points rather than a large single refinancing requirement.
The group has sought to adopt a more sustainable approach to the delivery of pension provision and has amended the terms of its defined benefit pension schemes. The measures taken include a cap on the increase in pensionable earnings, an increase in the normal retirement age, an increase in employee contribution rates, an adjustment to the accrual rates and a rebalancing of the pensions investment strategy. This reduces both the future service cost and the future funding risk to the company, thereby enabling the company to retain defined benefit pension schemes for existing members. The changes to the scheme rules were supported by the company’s trade unions. The reduction in service cost for 2010/11 is expected to be approximately £7 million, although the lower risk investment strategy is likely to reduce investment income and result in a lower net benefit at the profit before tax level. These amendments have also resulted in a reduction of £92 million to the group’s pension deficit, which is required to be accounted for as a credit to operating profit in the group’s income statement.
Overall, the group’s net pension deficit at the year end has decreased by £87 million, compared with the position at 30 September 2009, reflecting the aforementioned changes to the pension schemes and the routine actuarial assessment of movements in assets and liabilities. As a result of changes in market conditions over the 12 months, the group’s net pension obligations increased during the year from £213 million at 31 March 2009 to £271 million at 31 March 2010. Further detail is provided in note 20 (‘Retirement benefit obligations’) of these financial statements. The group will continue to evaluate its pensions investment strategy to de-risk further its pension provision.
In considering the underlying results for the year, the directors have excluded fair value movements on debt and derivative instruments and those significant items identified as non-recurring. Statutory operating profit and profit before taxation from continuing operations are reconciled to underlying operating profit from continuing operations and underlying profit before taxation from continuing operations as follows:
Continuing operations
Operating profit/(loss) for the year
ended 31 March 2010 |
Regulated activities
£m
|
Non-regulated activities
£m
|
All other segments
£m
|
Group
£m
|
| Operating profit/(loss) per published results |
761.7
|
63.1
|
(6.9)
|
817.9
|
|
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
Operating profit/(loss) for the year
ended 31 March 2009 (restated) |
Regulated activities
£m
|
Non-regulated activities
£m
|
All other segments
£m
|
Group £m
|
|
Operating profit/(loss) per published results
|
678.4
|
63.4
|
(12.3)
|
729.5
|
|
Restructuring costs
|
1.0
|
(1.0)
|
1.2
|
1.2
|
|
Other reorganisation costs(4)
|
–
|
–
|
5.4
|
5.4
|
|
Underlying operating profit/(loss)
|
679.4
|
62.4
|
(5.7)
|
736.1
|
Continuing operations
| Profit before taxation |
Year ended
31 March 2010
£m
|
Restated
Year ended
31 March 2009
£m
|
|
Profit before taxation per published results
|
474.2
|
529.3
|
|
Impact of changes to pension schemes
|
(92.3)
|
–
|
|
Restructuring costs
|
30.7
|
1.2
|
|
Other reorganisation costs(4)
|
–
|
5.4
|
|
Profit on disposal of investments
|
(36.6)
|
–
|
|
Evaluation and disposal costs relating to non-regulated businesses
|
10.8
|
–
|
|
Net 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(5)
|
–
|
(20.6)
|
|
Underlying profit before taxation
|
500.4
|
531.3
|
Continuing operations
| Underlying cost of net borrowings |
Year ended
31 March 2010 £m
|
Restated
Year ended
31 March 2009
£m
|
| Finance expense |
(383.6)
|
(270.9)
|
|
Net 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)
|
|
Investment income
|
14.1
|
70.7
|
|
Adjustment for net pension interest expense/(income)
|
23.2
|
(6.8)
|
|
Adjustment for service concession financing income
|
(2.9)
|
(5.2)
|
|
Underlying cost of net borrowings
|
(235.6)
|
(196.2)
|
|
Add back adjustment for net pension interest (expense)/income
|
(23.2)
|
6.8
|
|
Add back adjustment for service concession financing income
|
2.9
|
5.2
|
|
Interest associated with cash proceeds from UUE sale(5)
|
–
|
(20.6)
|
|
Underlying net interest payable
|
(255.9)
|
(204.8)
|
(4)Relates to the capital restructuring associated with the £1.5 billion return to shareholders.
(5)The interest associated with the cash proceeds from the sale of UUE has been 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 £1.5 billion return to shareholders in August 2008, this resulted in a short-term net debt and interest reduction.