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FULL YEAR RESULTS FOR THE YEAR ENDED 31 MARCH 2015

Continuing operationsYear ended
31 March 2015
Year ended
31 March 2014 (Restated(1))
Revenue£1,720.2m£1,688.8m
Underlying operating profit(2)£664.3m£634.6m
Operating profit£653.3m£630.2m
Total dividends per ordinary share (pence)37.70p36.04p
Regulatory capital expenditure(3)£869m£836m
RCV gearing(4)59%58%
  1. The comparatives have been restated to reflect the requirements of accounting standard IFRS 11 ‘Joint Arrangements’.
  2. Underlying profit measures have been provided to give a more representative view of business performance and are defined in the underlying profit tables.
  3. Regulatory capex represents fixed asset additions and infrastructure renewals expenditure using regulatory accounting guidelines; there is no equivalent GAAP measure.
  4. Regulatory capital value or RCV gearing calculated as group net debt/United Utilities Water’s RCV (outturn prices).

Step change in performance in 2010-15 regulatory period delivers benefits for all stakeholders

  • Significant customer service improvements, as measured through Ofwat’s SIM mechanism
  • Much improved delivery of capital investment programme; Time:Cost:Quality index above 95 per cent
  • Investment totalling c£3.8 billion over the five years, enhancing assets and services for customers
  • Upper quartile operational performance on Ofwat and Environment Agency KPI assessments
  • Strong shareholder returns and dividend policy delivered
  • Exceeded regulatory outperformance targets, enabling us to reinvest c£280 million to benefit customers
  • Responsible business practice, reflected by Dow Jones Sustainability Index ‘World Class’ rating

Strong 2014/15 financial performance

  • Underlying operating profit up £30 million to £664 million
  • RCV gearing at 59 per cent, well within our target range of 55 per cent to 65 per cent
  • Final dividend of 25.14 pence per share (total for the year of 37.70 pence), in line with policy

Good platform to deliver further value in next regulatory period

  • Already a leading operational performer, providing a solid foundation for further improvements
  • ‘Systems thinking’ approach, leveraging technology and data intelligence to improve efficiency
  • Regulatory capital investment of £3.5 billion+; network resilience, customer and environmental benefits
  • Robust capital structure and strong credit ratings
  • Dividend growth rate target of at least RPI inflation each year through to 2020
  • Below inflation growth in average household bills for the decade to 2020

OPERATIONAL PERFORMANCE

We aim to deliver long-term shareholder value by providing:

  • the best service to customers;
  • at the lowest sustainable cost; and
  • in a responsible manner.

Throughout the 2010–15 period, we demonstrated a strong link between performance and employee remuneration and we intend to continue with this approach across the new regulatory period.

Best service to customers

Improving customer service will continue to be a significant area of management focus and we see opportunities to deliver further benefits for our customers.

Customer service – our continuing strong focus on dealing effectively with customer enquiries has helped us deliver further improvements in our performance, as measured by Ofwat’s service incentive mechanism (SIM) and outlined in the KPIs section (see panel). This is also reflected in a reduction in the number of customer complaints received, which has contributed to improvements in opex efficiency. The overall number of customer complaints has reduced by approximately 75 per cent across the 2010–15 period.

Our significant improvements over the regulatory period were recognised by Ofwat in the final determination in December 2014, resulting in the company avoiding a revenue penalty. Over this period, we have continued to develop our systems and processes to deliver the experience our customers seek when they need to contact us, including multi-channel contact centre technology. We have placed a strong emphasis on striving for first time resolution of customer enquiries, keeping customers informed of progress until resolution. This has been underpinned by investment in our people in terms of better training and improved systems. We have also enhanced our customer feedback process to help us respond to customers’ evolving needs and continually improve.

Leading North West service provider – we are pleased to have been consistently ranked third out of 10 leading organisations in the North West, through an independent brand tracker survey which is undertaken quarterly. This covers key attributes such as ‘reputation’, ‘trustworthy’ and ‘customer service’. We are behind only Marks & Spencer and John Lewis, and ahead of seven other major organisations covering utilities, telecoms, media and banking services.

Robust water supply – our customers continue to benefit from our robust water supply and demand balance, along with high levels of water supply reliability. We continue to supply a high level of water quality, with mean zonal compliance in excess of 99.9 per cent.

Mitigating sewer flooding – we have continued to invest heavily in schemes designed to mitigate the risk of flooding of our customers’ homes, including incidence-based targeting on areas more likely to experience flooding and defect identification through CCTV sewer surveys. Our plan for the 2015–20 period includes a target of reducing sewer flooding incidents by over 40 per cent, in line with customers’ affordability preferences. Our wastewater network will continue to benefit from significant investment going forward as we adapt to weather patterns likely to result from climate change.

Asset serviceability – we have a range of actions to help support the serviceability of our assets. We are improving the robustness of our water treatment processes, refurbishing service reservoir assets, continuing with our comprehensive mains cleaning programme and optimising water treatment to reduce discoloured water events. Our good asset serviceability performance over the last few years was recognised by Ofwat in the final determination, in December 2014, with United Utilities not receiving any penalty.

Ofwat KPIs – our overall good operational performance is reflected in Ofwat’s latest (2013/14) key performance indicators report. The balance of ratings for United Utilities across the 15 assessment measures represented an upper quartile performance, in respect of the 10 water and sewerage companies. Our performance in 2014/15 has improved further, although the industry comparatives are not available until later in the year.

Key performance indicators:

Serviceability – long-term stewardship of assets is critical and Ofwat measures this through its serviceability assessment (Ofwat defines serviceability as the capability of a system of assets to deliver a reference level of service to customers and to the environment now and in the future). We are currently assessed as ‘improving’ for our water infrastructure and wastewater non-infrastructure assets and ‘stable’ for our water non-infrastructure and wastewater infrastructure assets. The aim is to continue to hold at least a ‘stable’ rating for all four asset classes, which aligns with Ofwat’s target.

Service incentive mechanism (SIM) – United Utilities continued its progress on Ofwat’s combined (qualitative and quantitative) SIM assessment for 2013/14 (latest available), moving up to 9th place out of the 18 water companies. This compares with joint 13th position for 2012/13 (although Ofwat previously measured out of 21 water companies). At the start of this regulatory period, United Utilities was an outlier in last position. Our continued progress is encouraging, although we recognise that there is still more to do. Ofwat is amending its SIM methodology for the 2015–20 period, based on domestic retail only and with more emphasis on qualitative performance, and Ofwat and the water companies have been piloting the new process. This revised methodology is based on a different data set and quarterly results may well produce wider fluctuations compared with the last regulatory period.

Lowest sustainable cost

Power and chemicals – our asset optimisation programme continues to provide the benefits of increased and more effective use of operational site management to optimise power and chemical use and the development of more combined heat and power assets to generate renewable energy. We have already substantially locked in our power commodity costs across 2015–20, providing greater cost certainty for the regulatory period.

Proactive network management – we are implementing a more proactive approach to asset and network management, with the aim of improving our modelling and forecasting to enable us to address more asset and network problems before they affect customers, thereby reducing the level of reactive work and improving efficiency.

Debt collection – we highlighted in May 2014 that debt collection was likely to become more challenging for United Utilities, particularly as our region suffers from high levels of income deprivation. Notwithstanding our industry-leading debt management processes and wide-ranging schemes to help customers struggling to pay, including our trust fund, deprivation remains the principal driver of our higher than average bad debt and cost to serve. In 2014/15, bad debt expense has increased by £16 million, from 2.2 per cent to 3.1 per cent of regulated revenue, as a result of four main factors:

  • the cumulative impact of economic factors on customers’ ability to pay;
  • under IFRS accounting, an increase in the number of customers re-commencing payment through our help-to-pay initiatives has resulted in additional revenue recognition and associated bad debt;
  • a review of bad debt provisions for business customers in preparation for systems upgrades, ahead of full market opening; and
  • a review of operational debt processes and bad debt provisions in domestic retail in preparation for the 2015–20 period.

Although bad debts will continue to be challenging for us, we do expect the level to fall to around 2.5 per cent of regulated revenue in 2015/16 as our recent reviews have resulted in an additional current year charge which is not expected to continue at the same level.

Pensions – United Utilities placed its pension provision on a more sustainable footing in 2010 and has subsequently taken additional steps to de-risk the pension scheme further. Further details on the group’s pension provision are provided in the pensions section.

Capital delivery and regulatory commitments – the business is strongly focused on delivering its commitments efficiently and on time and has a robust commercial capital delivery framework in place. Regulatory capital investment in the year, including £148 million of infrastructure renewals expenditure and £30 million of transitional spend, was £869 million, an increase of £33 million compared with 2013/14. Following our rapid increase in our internal Time: Cost: Quality index (TCQi) score from around 50 per cent in 2010/11 to approximately 90 per cent in 2012/13, we further improved our score and have achieved over 95 per cent in both 2013/14 and 2014/15.

As we strive to improve efficiency further, we have implemented new contracting arrangements for the 2015–20 regulatory period to help deliver our regulatory capital investment programme of over £3.5 billion. We have re-tendered our engineering and construction partners and selected a single engineering partner and four new design and construction partners. We are involving our partners much earlier in project definition and packaging projects by type, geography and timing to deliver efficiencies. Projects will be allocated to partners on an incentive basis or competed between the partners and, where appropriate, third parties. Early results are encouraging. Our partners have come forward with a range of solutions, innovations and pricing which is building our confidence that the final determination targets we have accepted are tough but within reach.

Key performance indicators:

Financing outperformance – United Utilities set a financing outperformance target, across the 2010–15 period, of at least £300 million, based on an average RPI inflation rate of 2.5 per cent per annum, and we have exceeded this target. We have reinvested over £30 million of our financing outperformance in private sewers costs, which were not reflected in 2010–15 price limits.

Operating expenditure outperformance – the business targeted total operating expenditure outperformance over the 2010–15 period of at least £50 million, or approximately 2 per cent, compared with the regulatory allowance. This was in addition to the base operating expenditure efficiency targets set by Ofwat, which equated to a total of approximately £150 million over the five years. We are pleased to report that we have exceeded our outperformance target.

Capital expenditure outperformance – United Utilities has delivered significant efficiencies in the area of capital expenditure and we have reinvested over £200 million of capital expenditure outperformance for the benefit of our customers and the environment.

Phone App 2015

Pictured: One of our process controllers takes part in a trial of a new custom-built phone application, which aims to makes us an industry leader in how we manage our assets.

Responsible manner

Acting responsibly is fundamental to the manner in which we undertake our business and the group has for many years included corporate responsibility factors in its strategic decision making. Our environmental and sustainability performance across a broad front has received external recognition. United Utilities retained its ‘World Class’ rating in the Dow Jones Sustainability Index for the seventh consecutive year, achieving industry leading performance status in the multi-utility/water sector in the most recent assessment. Retaining ‘World Class’ status for this length of time is a significant achievement, particularly as the assessment standards continue to increase and evolve. United Utilities also holds membership of the FTSE 350 Carbon Disclosure Project Leadership Index. We are the only UK water company to hold both accolades.

Leakage – our strong, year round, operational focus on leakage and the implementation of a range of initiatives, such as active pressure management, enabled us to again beat our leakage target in 2014/15. Our leakage performance, alongside the network resilience improvements we are making, are helping us to maintain a robust water supply and demand balance, and deliver high levels of reliability for our customers.

Environmental performance – this is a high priority for United Utilities and we are pleased to be an upper quartile company in the Environment Agency’s latest available performance metrics (2013/14), as described in the KPIs section.

Carbon footprint – we are committed to reducing our carbon footprint and increasing our generation of renewable energy. In 2014/15, our carbon footprint totalled 473,708 tonnes of carbon dioxide equivalent. We set a target of achieving a 21 per cent reduction in carbon emissions by 2015, measured from a 2005/06 baseline. We have achieved significant reductions and were pleased to meet this target in 2013/14. However, we narrowly missed the target in 2014/15, being 19 per cent below the baseline, impacted adversely by an 11 per cent increase in the carbon content in the UK energy mix in the year which increased our reported carbon emissions. Notwithstanding this, in 2014/15, we have purchased less electricity than in any of the previous 10 years and still achieved our highest ever renewable energy production of 144 GWh. This is the equivalent of c18 per cent of our total electricity consumption, up from c17 per cent in the previous year and c13 per cent in 2012/13. We are already implementing plans to significantly increase self-generation over the next few years, with a target of around 35 per cent of our electricity consumption by 2020 (see business insight).

Business Insight

Energy: increasing self-generation

To supplement the electricity we generate from sludge and hydro, we have created an energy business to exploit other opportunities using the company’s land, assets and skills. This business has three key aims: to use less electricity, generate more, and use our assets smarter. This should help to save energy costs, which is one of our biggest expenses at around £65 million a year, and generate revenue from renewable incentives, which currently stands at around £5 million per year.

Using less: through a series of operational projects and behavioural programmes we are targeting energy efficiency savings across our water and wastewater sites over the next five years.

Generating more: we have secured planning approvals for two 500kW wind generation facilities at two of our sites and expect these turbines to be generating power in 2015. We have a number of potential schemes at the early stages of development with two schemes currently in the planning process.

Last year we installed 2 megawatts of solar panels across four sites. This included our Fleetwood treatment works, (pictured below), which, with 5,281 panels, is now one of the biggest solar panel installations in the North West.

We have a further 8 megawatts of solar under construction and plan to add a further 20 megawatts of solar this year.

Including our sludge to energy programmes, we have increased energy production from our facilities by around a third over the last two years and are targeting to increase energy self- generation to around 35 per cent by 2020, contingent on good projected returns. Using our own energy has helped us avoid energy purchase costs of around £13 million in 2014/15.

Using smarter: we were the first water company to sign up to National Grid’s Dynamic Frequency Response scheme under which we reduce our electricity consumption when demand on the network is greater than supply or conversely to consume energy when supply exceeds demand. These schemes offer incentives linked to response times and availability of service.

Fleetwood Solar Panels

Employees – we work hard to sustain high levels of engagement by our employees. The company has seen significant change over the last four years and our plans will engage our teams for further improvements. Employee engagement is 79 per cent, well above the norm for UK companies going through business transition and just below the norm for high performing UK companies, so our employees demonstrate a strong capability to adapt. We continue to be successful in attracting and retaining people and have continued to expand our apprentice and graduate programmes, having recruited a further 22 graduates and 32 apprentices in 2014/15, taking the current total to 56 graduates and 97 apprentices. As part of our health and safety improvement programme, we have implemented a number of initiatives which helped reduce the employee accident frequency rate to 0.112 accidents per 100,000 hours for 2014/15, compared with a rate of 0.137 in 2013/14 and 0.188 in the previous year. Whilst we are pleased with our performance improvement, we recognise we still have more to do. Health and safety will continue to be a significant area of focus, as we strive for continuous improvement.

Communities – we continue to support partnerships, both financially and in terms of employee time through volunteering, with other organisations across the North West that share our objectives. We recently set up Catchment Wise, our new approach to tackling water quality issues in lakes, rivers and coastal waters across the North West, and our ‘Beachcare’ employee volunteering scheme helps to keep our region’s beaches tidy. We continue to support local communities, through contributions and schemes such as providing debt advisory services and our Community Fund, offering grants to local groups impacted by our capital investment programme.

Key performance indicators:

Leakage – we met our economic level of leakage target for the ninth consecutive year in 2014/15, with a performance of 454 megalitres per day versus the regulatory target of 463 megalitres per day.

Environmental performance – on the Environment Agency’s latest assessment (2013/14 report), which covers a broad range of operational metrics, United Utilities is an upper quartile company. Based on our performance across the range of metrics, this indicates we were in joint 2nd position among the 10 water and sewerage companies and aligns with our medium-term goal of being a first quartile company on a consistent basis.

Corporate responsibility – we have a strong focus on operating in a responsible manner and are the only UK water company to have a ‘World Class’ rating as measured by the Dow Jones Sustainability Index. The group has retained its ‘World Class’ rating and aims to retain this rating each year.

Systems thinking approach

To support the delivery of our objectives, we are focused on continuous improvement and over the last few years have progressively instilled a ‘systems thinking’ approach into the way we run our business. This is an engineering-led approach which integrates the use of our assets, leverages data intelligence and employs technology and new work processes to deliver improved customer satisfaction and operational efficiency. We have made good progress over the last few years and this ‘systems thinking’ approach is expected to deliver benefits of over £100 million over the 2015–20 regulatory period, which are already built into our business plan assumptions.

The step change in performance of the business over the 2010–15 period has its origins in good management practice; constancy of purpose, clear objectives, attention to detail, good people and performance management. However, it was also clear to us that we could improve further if we took the learning from other sectors to transform the way a water company is run and we started that transformation over three years ago. There are five key phases of transformation:

    • ‘Systems thinking’ – we have progressively instilled an engineering-led ‘systems thinking’ approach which integrates the use of our assets, leverages data intelligence and employs technology and new work processes. We have audited our asset base and are investing in a new enterprise asset management system and field force scheduling system, supported by the recruitment of new people from other sectors with experience in these areas. By capturing and processing data from multiple information points, we are aiming for ever-improving asset intelligence. We have fitted sensors in our water networks to provide visibility as to how they are performing, helping us to reduce burst frequency, and we are currently piloting drainage system performance monitoring in our wastewater networks. We are building enhanced visibility of our assets and more effective monitoring and control, enabling us to make more informed and proactive management decisions. This should lead to better modelling and prediction of events before they occur, reducing reactive work and thereby improving efficiency, operational performance and, importantly, customer service.
    • Production lines – for the last few years we have considered our treatment works as ‘factories’, each with its own production line. We have over 600 of these ‘factories’, small and large, producing clean water, bio waste and energy. Our business has been restructured to create a strong focus on accountability and delivery, integrating the disciplines often found as functional silos in other companies. Our managers are responsible for the performance of their production lines including investment of capital to optimise operational performance, to deliver environmental or water quality requirements and to maximise energy production, providing a more integrated approach.
    • Organisational structure aligned with new price control – we recognised that we would best address the regulatory reform agenda by aligning our organisational structure with the new price control, with three business areas: Wholesale, Domestic Retail and Business Retail. We did this nearly three years ago and recruited a business retail team experienced in competitive utility markets.
    • Wholesale business split – we subsequently subdivided our Wholesale business to concentrate on three business areas: Water, Wastewater and Energy, with a strong focus on increasing our renewable and self-generation to reduce the amount of electricity we purchase. Our people are all aligned to this model and our production leadership team has responsibility, authority and accountability for the performance of their assets using a total expenditure, whole life cost approach to decision management.
    • Integrated control centre – underpinning our ‘systems thinking’ ethos is our recently opened integrated control centre in Warrington (see ‘business insight’ below).

This has all been supported by a significant cultural change in the company over the last few years, which has helped United Utilities progress into a leading operational performer in the sector. A critical enabler has been our people and we continue to invest in attracting talent and in developing the best, giving us a powerful mix of water experience and knowledge of other sectors.

Business Insight

New integrated control centre acts as the ‘digital brain’ of our systems

Like many companies in our sector, we have no real time view of how our gigantic water and wastewater system is performing. Too often our customers tell us when the service has failed and then we react but incidents are expensive, disruptive for us and more importantly for our customers.

In April 2015, we opened our new integrated control centre (ICC) (pictured below) at our head office in Warrington. This acts as the ‘digital brain’ of our network, providing visualisation of the service we are providing right across the region.

In preparation, we have been investing in a new digital network with over 3,000 facilities which are now able to talk to each other and the ICC over our data highway. We are now beginning to share real time information about the performance of our assets.

With our new ’systems thinking’ approach, our goal is to improve both efficiency and performance and aim to prevent a problem or fix it before a customer’s service is disturbed.

Icc Opening

Financial Performance

Revenue

We have delivered a good set of financial results for the year ended 31 March 2015. Revenue increased by £31 million to £1,720 million. This increase principally reflects the allowed regulated price rise, partly offset by the previously announced special customer discount of £21 million.

Operating profit

Underlying operating profit was up £30 million to £664 million, as we tightly managed our cost base despite the expected increase in depreciation and other cost pressures, including bad debt. As planned, there was also a £17 million reduction in infrastructure renewals expenditure this year as we transition from this regulatory period to the next. Reported operating profit increased by £23 million, to £653 million.

Investment income and finance expense

The underlying net finance expense of £222 million was £29 million lower than last year, primarily reflecting the impact of lower RPI inflation on the group’s index-linked debt. The indexation of the principal on our index-linked debt amounted to a net charge in the income statement of £47 million, compared with a net charge of £83 million last year. The group had approximately £3.1 billion of index-linked debt as at 31 March 2015 at an average real rate of 1.6 per cent. The lower RPI inflation charge contributed to the group’s average underlying interest rate of 4.0 per cent being lower than the rate of 4.6 per cent for 2013/14.

Reported investment income and finance expense of £317 million was significantly higher than the £92 million expense in 2013/14. This £225 million increase principally reflects a change in the fair value gains and losses on debt and derivative instruments, from a £129 million gain in 2013/14 to a £105 million loss in 2014/15. The £105 million fair value loss is largely due to losses on the regulatory swap portfolio, resulting from a significant decrease in medium-term sterling interest rates during the period, partly offset by a gain from the unwinding of the derivatives hedging interest rates to 2015. The group uses these swaps to fix interest rates on a substantial proportion of its debt to better match the financing cash flows allowed by the regulator at each price review. The group fixed the majority of its non index-linked debt for the 2010–15 financial period, providing a net effective nominal interest rate of approximately 5 per cent.

Profit before tax

Underlying profit before tax was £447 million, £59 million higher than last year, due to the £30 million increase in underlying operating profit and the £29 million decrease in underlying net finance expense. This underlying measure adjusts for the impact of one-off items, principally from restructuring within the business, and other items such as fair value movements in respect of debt and derivative instruments. Reported profit before tax decreased by £202 million to £342 million, primarily due to the aforementioned fair value movements.

Taxation

Consistent with our wider business objectives, we are committed to acting in a responsible manner in relation to our tax affairs.

Our tax policies and objectives, which are approved by the board on a regular basis, ensure that we:

  • only engage in reasonable tax planning aligned with our commercial activities and we always comply with what we believe to be both the letter and the spirit of the law;
  • do not engage in aggressive or abusive tax avoidance; and
  • are committed to an open, transparent and professional relationship with HMRC based on mutual trust and collaborative working

Under the regulatory framework the group operates within, the majority of any benefit from reduced tax payments will typically not be retained by the group but will pass to customers via reduced bills. For 2013/14, the group agreed, over and above the normal regulatory rules, to voluntarily share with customers the one-off net cash benefit of £75 million due to the group, following the industry-wide agreement with HMRC in relation to the abolition of industrial buildings allowances in 2008.

In any given year, the group’s effective cash tax rate may fluctuate from the standard UK rate due to the available tax deductions on pension contributions and capital investment. These deductions are achieved as a result of utilising tax incentives, which have been explicitly put in place by successive governments precisely to encourage such investment. This reflects responsible corporate behaviour in relation to taxation.

The group’s effective cash tax rate may also fluctuate from the standard UK rate due to unrealised profits or losses in relation to treasury derivatives where the corresponding profits or losses are only taxed when realised. These movements are purely timing differences and are expected to continue going forward, following HMRC’s recent review of the relevant tax rules.

The group’s principal subsidiary, United Utilities Water Limited (UUW), operates solely in the UK and its customers are based here. All of the group’s profits are taxable in the UK (other than the group’s 35 per cent holding in Tallinn Water which generates around £6 million profit before tax with around £1 million Estonian tax paid).

In 2014/15, we paid corporation tax of £62 million, which represents an effective cash tax rate of 18 per cent, 3 per cent lower than the mainstream rate of corporation tax of 21 per cent.  In 2013/14, we paid corporation tax of £64 million. For both years, the key reconciling items to the mainstream rate were allowable tax deductions on net capital investment and timing differences in relation to fair value movements on treasury derivatives. In 2013/14, the group also received an exceptional tax refund of £96 million in relation to prior years’ tax matters, covering a period of over 10 years in total.

The current tax charge was £57 million in 2014/15, compared with a charge of £75 million in the previous year. In addition, there were current tax credits of £10 million in 2014/15 and £141 million in 2013/14, both following agreement with the UK tax authorities of prior years’ tax matters.

For 2014/15, the group recognised a deferred tax charge of £14 million, compared with a charge of £41 million in 2013/14. In addition, in 2014/15 the group recognised a deferred tax charge of £9 million relating to prior years’ tax matters, compared to a deferred tax credit of £13 million in 2013/14. In 2013/14, the group also recognised a deferred tax credit of £157 million relating to the 3 per cent staged reduction in the mainstream rate of corporation tax, substantively enacted on 2 July 2013, to reduce the rate to 20 per cent by 2015/16. 

The total tax charge, excluding one-off charges and credits, of £71 million for 2014/15 represents a rate of 21 per cent, similar to the rate in 2013/14.

In addition to corporation tax, the group pays and bears further annual economic contributions, typically of around £140 million per annum, in the form of business rates, employer’s national insurance contributions, environmental taxes and other regulatory service fees such as water abstraction charges.

Profit after tax

Underlying profit after tax of £354 million was £49 million higher than for 2013/14, reflecting an increase in underlying profit before tax partly offset by an increase in underlying tax charge due on higher profits. Reported profit after tax was £271 million, compared with £739 million for 2013/14, impacted by the £234 million movement in fair value on debt and derivative instruments and the £266 million net increase in tax between the two periods.

Earnings per share

Underlying earnings per share increased from 44.7 pence to 51.9 pence. This underlying measure is derived from underlying profit after tax. This includes the adjustments for the deferred tax credits in 2013/14 associated with the reductions in the corporation tax rate and an adjustment for the tax credit arising from agreement of prior years’ tax matters. Basic earnings per share decreased from 108.3 pence to 39.8 pence, for the same reasons that reduced profit after tax.

Summary of net debt movement

AR Uu Summary Of Net Debt Movement

Dividend per share

The board has proposed a final dividend of 25.14 pence per ordinary share in respect of the year ended 31 March 2015. Taken together with the interim dividend of 12.56 pence per ordinary share, paid in February, this produces a total dividend per ordinary share for 2014/15 of 37.70 pence. This is an increase of 4.6 per cent, compared with the dividend relating to last year, in line with group’s dividend policy of targeting a growth rate of RPI+2 per cent per annum through to 2015. The inflationary increase of 2.6 per cent is based on the RPI element included within the allowed regulated price increase for the 2014/15 financial year (i.e. the movement in RPI between November 2012 and November 2013).

The final dividend is expected to be paid on 3 August 2015 to shareholders on the register at the close of business on 26 June 2015. The ex-dividend date is 25 June 2015.

Cash flow

Net cash generated from continuing operating activities for the year ended 31 March 2015 was £707 million, compared with £797 million in the previous year. This reduction mainly reflects the receipt of the aforementioned exceptional tax refund in 2013/14. The group’s net capital expenditure was £709 million, principally in the regulated water and wastewater investment programmes. This excludes infrastructure renewals expenditure which is treated as an operating cost under IFRS.

Net debt including derivatives at 31 March 2015 was £5,924 million, compared with £5,516 million at 31 March 2014. This increase reflects expenditure on the regulatory capital expenditure programmes and payments of dividends, interest and tax, alongside fair value losses on the group’s debt and derivative instruments, partly offset by operating cash flows.

Chart42

Fair value of debt

The group’s gross borrowings at 31 March 2015 had a carrying value of £6,645 million. The fair value of these borrowings was £7,350 million. This £705 million difference principally reflects the significant fall in real interest rates, compared with the rates at the time we raised our index-linked debt. This difference has increased from £267 million at 31 March 2014.

Debt financing and interest rate management

Gearing (measured as group net debt divided by UUW’s regulatory capital value) was 59 per cent at 31 March 2015, an increase of 1 per cent compared with the position at 31 March 2014, remaining well within our target range of 55 per cent to 65 per cent.

UUW has long-term credit ratings of A3/BBB+ and United Utilities PLC has long-term credit ratings of Baa1/BBB- from Moody’s Investors Service and Standard & Poor’s Ratings Services respectively. The split rating reflects differing methodologies used by the credit rating agencies. Both agencies have the group’s ratings on stable outlook.

The group has access to the international debt capital markets through its €7 billion euro medium-term note programme (EMTN). On 19 November 2014, the EMTN programme was updated adding a new financing subsidiary of UUW, United Utilities Water Finance PLC (UUWF), to issue new listed debt on behalf of UUW going forwards following UUW’s re-registration as a private limited company. The EMTN programme provides for the periodic issuance by United Utilities PLC and UUWF (guaranteed by UUW) of debt instruments on terms and conditions determined at the time the notes are issued. The EMTN programme does not represent a funding commitment, with funding dependent on the successful issue of the notes.

Cash and short-term deposits at 31 March 2015 amounted to £244 million. Over 2015–20 we have financing requirements totalling around £2.5 billion to cover refinancing and incremental debt, supporting our 2015–20 investment programme. In December 2013, UUW agreed a new £500 million term loan facility with the European Investment Bank (EIB) and as at 31 March 2015 UUW had drawn down £350 million on this facility, all on a floating rate basis. The remaining £150 million is expected to be drawn down during the first half of 2015/16. In March 2015, UUW signed a new £250 million index-linked term loan facility with the EIB. This is an amortising facility with an average loan life of 10 years and a final maturity of 18 years from draw down and we expect to draw the new loan in tranches over the next year or so. In the same month, UUW arranged a new £100 million, 10-year index-linked loan with an existing relationship bank, at a real interest rate of around 0.5 per cent. The group also agreed £150 million of committed bank facilities during 2014/15.

Term-debt maturity per regulatory period

Ar Uu Term Debt Maturity

Following the year-end, UUWF issued two index-linked notes totalling £60 million, split by a £25 million, 10-year maturity and a £35 million, 15-year maturity. UUWF also issued a €52 million note (swapped to floating sterling) with a 12-year maturity. All these notes were issued via private placement off our EMTN programme. The group now has headroom to cover its projected financing needs into 2017.

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.

Long-term sterling inflation index-linked debt provides a natural hedge to assets and earnings. At 31 March 2015, approximately 52 per cent of the group’s net debt was in index-linked form, representing around 31 per cent of UUW’s regulatory capital value, with an average real interest rate of 1.6 per cent. The long-term nature of this funding also provides a good match to the company’s long-life infrastructure assets and is a key contributor to the group’s average term-debt maturity profile, which is over 20 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 debt. To manage exposure to medium-term interest rates, the group fixes underlying interest costs on nominal debt out to 10 years on a reducing balance basis. This is supplemented by fixing substantially all remaining floating rate exposure across the forthcoming regulatory period around the time of the price control determination. 

In line with this, the group has now fixed interest costs for substantially all of its floating rate exposure over the 2015–20 period, locking in an average annual interest rate of around 3.75 per cent (inclusive of credit spreads). For 2015/16, the rate is slightly higher, as we transition between the two regulatory periods.

Liquidity

Short-term liquidity requirements are met from the group’s normal operating cash flow and its short-term bank deposits and supported by committed but undrawn credit facilities. The group’s €7 billion euro medium-term note programme provides further support.

In line with the board’s treasury policy, United Utilities aims to maintain a robust liquidity position. Available headroom at 31 March 2015 was £616 million based on cash, short-term deposits, medium-term committed bank facilities, along with the undrawn portion of the EIB term loan facilities, net of short-term debt.

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 money market deposits with prime commercial banks.

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.

Pensions

As at 31 March 2015, the group had an IAS 19 net pension surplus of £79 million, compared with a net pension deficit of £177 million at 31 March 2014. This £256 million favourable movement mainly reflects a decrease in inflation expectations alongside an increase in corporate credit spreads. In contrast, the scheme specific funding basis does not suffer from volatility due to inflation and credit spread movements as it uses a fixed inflation assumption via the inflation funding mechanism and a prudent, fixed credit spread assumption. Therefore, the recent inflation and credit spread movements have not had a material impact on the deficit calculated on a scheme specific funding basis or the level of deficit repair contributions.

The triennial actuarial valuations of the group’s defined benefit pension schemes were carried out as at 31 March 2013 and the overall funding position has improved since March 2010. Following the de-risking measures we have implemented over recent years, our pension funding position remains well placed and in line with our expectations. There has been no material change to the scheduled cash contributions as assessed at the previous valuations in 2010.

Further detail is provided in note 18 (‘Retirement benefit obligations’) of these consolidated financial statements.

Underlying profit

In considering the underlying results for the period, the directors have adjusted for the items outlined in the table below to provide a more representative view of business performance. Reported operating profit and profit before tax from continuing operations are reconciled to underlying operating profit, underlying profit before tax and underlying profit after tax (non-GAAP measures) as follows:

Continuing operations
Operating profit
Year ended
31 March 2015 £m
Restated(1) Year ended
31 March 2014 £m
Operating profit per published results653.3630.2
One-off items(2)11.04.4
Underlying operating profit664.3634.6
Net finance expense£m£m
Finance expense(317.8)(98.7)
Investment income1.06.8
Net finance expense per published results(316.8)(91.9)
Adjustments:
Net fair value losses/(gains) on debt and derivative instruments104.7(129.2)
Interest on swaps and debt under fair value option4.08.1
Net pension interest expense/(income)7.0(1.3)
Capitalised borrowing costs(20.9)(19.4)
Release of tax interest accrual(13.3)
Interest receivable on tax settlement(4.5)
Underlying net finance expense(222.0)(251.5)
Profit before tax£m£m
Share of profits of joint ventures5.15.0
Profit before tax per published results341.6543.3
Adjustments:
One-off items(2)11.04.4
Net fair value losses/(gains) on debt and derivative instruments104.7(129.2)
Interest on swaps and debt under fair value option4.08.1
Interest on swaps and debt under fair value option4.08.1
Net pension interest expense/(income)7.0(1.3)
Capitalised borrowing costs(20.9)(19.4)
Release of tax interest accrual(13.3)
Interest receivable on tax settlement(4.5)
Underlying profit before tax447.4388.1
Profit after tax£m£m
Underlying profit before tax447.4388.1
Reported tax (charge)/credit(70.4)195.3
Deferred tax credit – change in tax rate(156.8)
Agreement of prior years’ UK tax matters(0.7)(154.3)
Tax in respect of adjustments to underlying profit before tax(22.2)32.6
Underlying profit after tax354.1304.9
Earnings per share£m£m
Profit after tax per published results (a)271.2738.6
Underlying profit after tax (b)354.1304.9
Weighted average number of shares in issue, in millions (c)681.9m681.9m
Earnings per share per published results, in pence (a/c)39.8p108.3p
Underlying earnings per share, in pence (b/c)51.9p44.7p
  1. The comparatives have been restated to reflect the requirements of IFRS 11 ‘Joint Arrangements’. See accounting policies for details.
  2. Relates to restructuring costs within the business.

Underlying operating profit reconciliation

The table below provides a reconciliation between group underlying operating profit and United Utilities Water Limited (UUW) historical cost regulatory underlying operating profit (non-GAAP measures) as follows:

Continuing operations
Underlying operating profit
Year ended
31 March 2015
£m
Restated(1)
Year ended
31 March 2014
£m
Group underlying operating profit664.3634.6
Underlying operating profit not relating to UUW2.5(0.4)
UUW statutory underlying operating profit666.8634.2
Revenue recognition9.8(0.2)
Infrastructure renewals accounting30.652.9
Other differences (including non-appointed business)(5.9)(5.3)
UUW regulatory underlying operating profit701.3681.6
  1. The prior year has been restated to reflect the requirements of IFRS11 and to reflect that UUW now reports in accordance with IFRS accounting standards, rather than UK GAAP previously.