|Continuing operations||31 March 2018||31 March 2017|
|Underlying operating profit(1)||£645.1m||£622.9m|
|Total dividend per ordinary share (pence)||39.73p||38.87p|
- Underlying profit measures have been provided to give a more representative view of business performance and are defined in the underlying profit measure tables below.
- Regulatory capital value (RCV) gearing calculated as group net debt/United Utilities Water Limited's shadow RCV (outturn prices).
United Utilities delivered a strong set of financial results for the year ended 31 March 2018.
Revenue was up £32 million, at £1,736 million, reflecting our allowed regulatory revenue changes, partly offset by the impact of our Water Plus JV, which completed on 1 June 2016 and the below regulatory adjustments.
With regard to Ofwat's revenue correction mechanism relating to the 2014/15 financial year, we have around £9 million to return to customers. As we have previously indicated, we have begun to return this to customers with a revenue reduction of around £3 million in 2017/18, with further revenue reductions proposed of around £3 million in both of 2018/19 and 2019/20. This approach has been adopted to help aid a smoother bill profile.
Separately, consistent with Ofwat's annual wholesale revenue forecasting incentive mechanism (WRFIM), revenue has also been reduced in 2017/18 by £10 million as actual volumes in 2015/16 were higher than our original assumptions. We will further be reducing revenues in 2018/19 by £4 million as actual volumes in 2016/17 were also higher than our original assumptions.
Reported operating profit increased by £31 million, to £636 million, reflecting the increase in underlying operating profit, along with a reduction in adjusted items. Adjusted items for 2017/18 amounted to £9 million, £6 million of which related to restructuring costs. Adjusted items in the prior year amounted to £17 million, £10 million of which related to restructuring costs.
Underlying operating profit at £645 million was £22 million higher than last year. This reflects our allowed regulatory revenue changes, partly offset by an expected increase in depreciation and the accounting impact of our Water Plus JV. The JV completed on 1 June 2016 and, from that date, its contribution is no longer included within operating profit and is, instead, included within the share of profits of joint ventures line in the income statement.
Investment income and finance expense
Reported net finance expense of £207 million was higher than the £189 million expense in 2016/17. This £18 million increase principally reflects the increased indexation charge in the year of £57 million which has been partly offset by an increase in the fair value gains on debt and derivative instruments, from a £24 million gain in 2016/17 to a £47 million gain in 2017/18.
The underlying net finance expense of £277 million was £40 million higher than last year, mainly due to the impact of higher RPI inflation on the group's index-linked debt, particularly on the portion of index-linked debt with a three-month lag. Interest on non index-linked debt of £92 million was £17 million lower than last year, due to the lower rates locked in on our interest rate swaps and the re-couponing of a portion of our regulatory swap portfolio. The indexation of the principal on our index-linked debt amounted to a net charge in the income statement of £138 million, compared with a net charge of £81 million last year. As at 31 March 2018, the group had approximately £3.7 billion of index-linked debt at an average real rate of 1.3 per cent.
The higher RPI inflation charge compared with last year contributed to the group's average underlying interest rate of 4.2 per cent being higher than the rate of 3.8 per cent for the year ended 31 March 2017. The average underlying interest rate represents the underlying net finance expense divided by average debt.
The group has fixed the substantial majority of its non index-linked debt for the 2015–20 regulatory period.
Profit before tax
Reported profit before tax was £432 million, £10 million lower than last year due to the increase in operating profit being more than offset by fair value movements, as outlined in the underlying profit measures tables below and the £22 million profit in 2016/17 on disposal of the non-household business.
Underlying profit before tax was £370 million, £19 million lower than last year, primarily reflecting the £22 million increase in underlying operating profit more than offset by the £40 million increase in underlying net finance expense. This underlying measure reflects the adjusting items, as outlined in the operating profit section above, and other items such as fair value movements in respect of debt and derivative instruments, as outlined in the underlying profit measures table below.
In addition to corporation tax, the group pays significant other contributions to the public finances on its own behalf as well as collecting and paying over further amounts for its 5,000 strong workforce. The total payments for 2017/18 were around £242 million and included business rates, employment taxes, environmental taxes and other regulatory service fees such as water abstraction charges as well as corporation tax.
In 2017/18, we paid corporation tax of £36 million, which represents an effective cash tax rate on underlying profits of 10 per cent, which is 9 per cent lower than the headline rate of corporation tax of 19 per cent. Consistent with prior years, the key reconciling item to the headline rate was allowable tax deductions on capital investment. We have expressed the effective cash tax rate in terms of underlying profits as this measure excludes fair value movements on debt and derivative instruments and thereby enables a medium-term cash tax rate forecast. We would expect the average cash tax rate on underlying profits through to the end of the current regulatory period in March 2020 to be around 12 per cent. The key risk to sustaining this rate is any unexpected changes in tax legislation or practice and, as necessary, we would actively engage with the relevant authorities in order to manage this risk.
The current tax charge was £25 million in 2017/18, compared with £54 million in the previous year; the main differences being timing in nature with a corresponding equal and opposite adjustment to deferred tax. There were current tax credits of £7 million in 2017/18 and £23 million in 2016/17, following agreement of prior years' tax matters; in addition to UK tax, the prior year figure also included the release of a provision in relation to agreed historic overseas tax matters.
For 2017/18, the group recognised a deferred tax charge of £52 million, compared with a charge of £28 million for 2016/17. In addition, the group recognised a deferred tax charge of £7 million in both 2016/17 and 2017/18 relating to prior years' tax matters. In 2016/17, the group also recognised a deferred tax credit of £58 million relating to the enacted reduction in the headline rate of corporation tax from 18 per cent to 17 per cent from 1 April 2020.
The total tax charge for 2017/18 was £78 million as compared to a total tax charge of £9 million for 2016/17, the main differences being the £58 million deferred tax credit relating to changes in tax rates in 2016/17 together with the higher current tax credit in 2016/17 in respect of prior years. For both periods, the total underlying tax effective rate was in line with the headline rate (currently at 19 per cent) and subject to any legislative or tax practice changes, we would expect this to continue for the medium term.
Summary of net debt movement
Profit after tax
Reported profit after tax was £355 million, compared with £434 million in the previous year, due to the £10 million reduction in reported profit before tax and the £69 million higher tax charge as 2016/17 included a deferred tax credit of £58 million relating to changes in the Government's future planned tax rate and a further tax credit of £16 million relating to prior years' tax matters.
Underlying profit after tax of £305 million was £8 million lower than last year, principally reflecting the £19 million decrease in underlying profit before tax partly offset by lower underlying tax on lower profits and the reduction in the headline rate of corporation tax.
Earnings per share
Basic earnings per share decreased from 63.6 pence to 52.0 pence, for the same reasons that decreased profit after tax.
Underlying earnings per share decreased from 46.0 pence to 44.7 pence. This underlying measure is derived from underlying profit after tax which decreased by £8 million.
Dividend per share
The board has proposed a final dividend of 26.49 pence per ordinary share in respect of the year ended 31 March 2018. Taken together with the interim dividend of 13.24 pence per ordinary share, paid in February, this produces a total dividend per ordinary share for 2017/18 of 39.73 pence. This is an increase of 2.2 per cent, compared with the dividend relating to last year, in line with the group's dividend policy of targeting a growth rate of at least RPI inflation each year through to 2020. The inflationary increase of 2.2 per cent is based on the RPI element included within the allowed regulated revenue increase for the 2017/18 financial year (i.e. the movement in RPI between November 2015 and November 2016).
The final dividend is expected to be paid on 3 August 2018 to shareholders on the register at the close of business on 22 June 2018. The ex-dividend date is 21 June 2018.
Our dividend policy targets a growth rate of at least RPI inflation each year through to 2020, with further details set out below.
Policy period – the dividend policy aligns with the five-year regulatory period which runs from 1 April 2015 to 31 March 2020.
Policy approval process – the dividend policy was considered and approved by the United Utilities Group Board in January 2015, as part of a comprehensive review of the 2015–20 regulatory final determination in the context of a detailed business planning process, with due regard for the group's financial metrics, credit ratings and long-term financial stability, and is reviewed at least annually.
Distributable reserves – as at 31 March 2018, the company had distributable reserves of £3,163 million. The total external dividends relating to the 2017/18 financial year amounted to £271 million. The company distributable reserves support over 11 times this annual dividend.
Financing headroom – supporting the group's cash flow, United Utilities adopts a funding/liquidity headroom policy of having available resources to cover the next 15–24 months of projected cash outflows on a rolling basis.
Cash flows from subsidiaries – the directors consider that the group's principal operating subsidiary, United Utilities Water Limited, has sufficient resources to pay dividends to United Utilities Group PLC for the duration of the current dividend policy period to support the external payment of dividends to shareholders.
Financial stability – the water industry has invested significant capital since privatisation in 1989 to improve services for customers and provide environmental benefits, a large part of which is driven by legislation. Water companies have typically raised borrowings to help fund the capital investment programme. Part of total expenditure is additive to the regulatory capital value, or RCV, on which water companies earn a return allowed by the economic regulator, Ofwat. RCV gearing is useful in assessing a company's financial stability in the UK water industry and is one of the key credit metrics that the credit rating agencies focus on. United Utilities has had a relatively stable RCV gearing level over the last seven years, always comfortably within its target range of 55 per cent to 65 per cent, supporting a solid A3 credit rating for UUW with Moody's. RCV gearing at 31 March 2018 was 61 per cent and the movement in net debt is outlined in the cash flow section below.
Dividend sustainability – in approving the policy, the board is satisfied that across the current regulatory period, the projected dividend is adequately covered by underlying profit after tax. Separately, the executive directors' long-term remuneration plan is directly linked to a measure of sustainable dividends. Whilst specific targets are not disclosed in advance, for commercial sensitivity reasons, there is a major focus on the creation of strong earnings that ensure the sustainability of dividends.
Viability statement – the dividend policy is underpinned by the group's long-term viability statement (which is in the Corporate governance report). Assurance supporting this statement is provided by the review of: the group's key financial measures; the key credit financial metrics; the group's liquidity position; the contingent liabilities of the group; and the key risks of the group together with the associated mitigating actions.
Annual dividend approval process – the group places significant emphasis on strong corporate governance, and before declaring interim and proposing final dividends, the United Utilities Group board undertakes a comprehensive assessment of the group's key financial metrics.
- The policy is considered by the board to be robust to reasonable changes in assumptions, such as inflation, opex, capex and interest rates; and
- Extreme economic, regulatory, political or operational events, which could lead to a significant deterioration in the group's financial metrics during the policy period, may present risks to policy sustainability.
- A dividend policy for the 2020–25 regulatory period will be formulated after Ofwat announces the outcome of the regulatory price review (currently expected in December 2019).
Net cash generated from continuing operating activities for the year ended 31 March 2018 was £816 million, and therefore broadly consistent with £821 million in the previous year. The group's net capital expenditure was £710 million, principally in the regulated water and wastewater investment programmes. This excludes infrastructure renewals expenditure which is treated as an operating cost under IFRS. Cash flow capex differs from regulatory capex, since regulatory capex includes infrastructure renewals expenditure and is based on capital work done in the period, rather than actual cash spent.
Net debt including derivatives at 31 March 2018 was £6,868 million, compared with £6,579 million at 31 March 2017. This increase reflects regulatory capital expenditure, payments of dividends, interest and tax, the inflationary uplift on index-linked debt and loans to joint ventures, partly offset by operating cash flows.
Fair value of debt
The group's gross borrowings at 31 March 2018 had a carrying value of £7,912 million. The fair value of these borrowings was £9,052 million. This £1,140 million difference principally reflects the significant fall in real interest rates, compared with the rates at the time we raised a portion of the group's index-linked debt. This difference has decreased from £1,218 million at 31 March 2017 due primarily to an increase in credit spreads.
Debt financing and interest rate management
Gearing, measured as group net debt divided by UUW's shadow (adjusted for actual spend) regulatory capital value, was 61 per cent at 31 March 2018. This is the same gearing as at 31 March 2017 and remains comfortably within our target range of 55 per cent to 65 per cent.
Gross debt – total carrying value £7,912.3m
- Yankee bonds (USD) 780.1
- Euro bonds (EUR) 636.1
- GBP bonds 1,544.2
- GBP RPI-linked bonds 1,990.6
- GBP CPI-linked bonds 168.0
- EIB and other RPI-linked bonds 1,571.2
- Other EIB loans 637.5
- Other borrowings 584.6
UUW has long-term credit ratings of A3/A- and United Utilities PLC (UU PLC) has long-term credit ratings of Baa1/BBB from Moody's Investors Service (Moody's) and Standard & Poor's (S&P) Ratings Services respectively. The split rating for UU PLC reflects differing methodologies used by the credit rating agencies. Both Moody's and S&P have the group's ratings on a stable outlook.
The group has access to the international debt capital markets through its €7 billion euro medium-term note (EMTN) programme. 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 2018 amounted to £510 million. Over 2015–20 we have financing requirements totalling around £2.5 billion to cover refinancing and incremental debt, supporting our five-year investment programme, and we have now raised over £2.2 billion of this requirement.
In April 2016, UUW signed a £250 million index-linked term loan facility with the European Investment Bank (EIB) to support the delivery of UUW's AMP6 investment programme. In October 2017 the final £75 million was drawn down such that as at 31 March 2018, the full £250 million had been drawn down. This is an amortising facility with an average loan life of 10 years and a final maturity of 18 years from draw down.
In December 2017, UUW's financing subsidiary, United Utilities Water Finance PLC (UUWF), raised around £23 million of term funding, via the issue of €26 million private placement notes, with a 15-year maturity, off our EMTN programme. In January 2018, UUWF raised around £27 million of term funding, via the issue of €30 million private placement notes, with a 15-year maturity, off our EMTN programme. In February 2018, UUWF raised around £68 million of term funding, via the issue of HKD739 million private placement notes, with an 8-year maturity, off our EMTN programme. Also in February 2018, UUWF issued £300 million fixed rate notes in the public bond market, with a 7-year maturity. This was the group's first public bond issue since 2009 and was well received by the market with good investor participation generating an order book in excess of £600 million. Notwithstanding a degree of market volatility at the time of issuance, we were pleased to price the bond at a very satisfactory level.
We remain the sector leader in CPI based financing having previously raised £165 million, in response to Ofwat's decision to transition away from RPI inflation linkage.
In addition, since September 2017, the group has renewed £100 million of committed bank facilities.
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 2018, approximately 54 per cent of the group's net debt was in index-linked form, representing around 33 per cent of UUW's regulatory capital value, with an average real interest rate of 1.3 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 just under 20 years.
Recognising Ofwat's intention to transition to the use of CPIH as part of its PR19 methodology, the group has undertaken a review of its inflation hedging policy. This review involved a balanced assessment across a range of factors including maintaining an appropriate economic hedge of the RCV and associated cash flows, the availability and costs of hedging instruments, the impact of different hedging strategies on key financial indicators including income statement metrics, along with a consideration of broader sector positioning. Taking account of these factors, along with the intention of the group's defined benefits pension schemes to implement further de-risking by increasing their hedges of RPI inflation with a corresponding reduction/removal of the pension Inflation Funding Mechanism, has resulted in a revised inflation hedging policy whereby the group intends to maintain around half of net debt in index-linked form.
Where nominal debt is raised in a currency other than sterling and/or with a fixed interest rate, 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 ten years on a reducing balance basis. Historically, this has been 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 fixed interest costs for substantially all of its floating rate exposure over the 2015–20 regulatory period, locking in an average annual interest rate of around 3.2 per cent nominal (inclusive of credit spreads).
Recognising Ofwat's intention to apply debt indexation for new debt raised during the 2020–25 regulatory period, we will retain the hedge to fix underlying interest costs on nominal debt out to ten years on a reducing balance basis, but we will no longer supplement this with the additional 'top up' hedge at the start of each new regulatory period.
Term debt maturity per regulatory period*
* Future repayments of index-linked debt include inflation based on an average annual RPI rate of 3% and an average annual CPI rate of 2%.
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 EMTN programme provides further support.
Available headroom at 31 March 2018 was £435 million based on cash, short-term deposits and committed bank facilities, net of short-term debt as well as committed facilities and term debt falling due within 12 months.
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.
As at 31 March 2018, the group had an IAS 19 net pension surplus of £344 million, compared with a net pension surplus of £248 million at 31 March 2017. This £97 million increase mainly reflects the impact of a decrease in credit spreads and the favourable impact of updating mortality assumptions. 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 a blend of the inflation market hedge and the Inflation Funding Mechanism and a prudent, fixed credit spread assumption. Therefore, any 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.
Further detail on pensions is provided in note 17 ('Retirement benefit surplus').
The underlying profit measures in the following table represent alternative performance measures (APMs) as defined by the European Securities and Markets Authority (ESMA). These measures are linked to the group's financial performance as reported under International Financial Reporting Standards (IFRSs) as adopted by the European Union in the group's consolidated income statement. As such, they represent non-GAAP measures.
These APMs have been presented in order to provide a more representative view of business performance. The group determines adjusted items in the calculation of its underlying measures against a framework which considers significance by reference to profit before tax, in addition to other qualitative factors such as whether the item is deemed to be within the normal course of business, its assessed frequency of reoccurrence and its volatility which is either outside the control of management and/or not representative of current year performance.
Guide to Alternative Performance Measures (APMs)
The underlying profit measures in the table opposite represent the group's alternative performance measures (APMs) under the definition given by the European Securities and Markets Authority (ESMA). These measures are linked to the group's financial performance as reported under International Financial Reporting Standards (IFRSs) as adopted by the European Union in the group's consolidated income statement. As such, they represent non-GAAP measures.
These APMs are reviewed internally by management and reported to the board, and have been presented in order to provide a more representative view of business performance. The group determines adjusted items in the calculation of its underlying measures against a framework which considers significance by reference to profit before tax, in addition to other qualitative factors such as whether the item is deemed to be within the normal course of business, its assessed frequency of reoccurrence and its volatility which is either outside the control of management and/or not representative of current year performance.
|Adjustments in arriving at underlying profit measures|
|Flooding incidents||Two significant flooding incidents in the year ended 31 March 2016 caused extensive damage to localised parts of our infrastructure, resulting in significant levels of remedial operating expenditure and a large claim under the group's insurance cover. Management's view is that these were significant and infrequent events and as such, were not part of the normal course of business.|
|Non-household retail market reform||The group has incurred significant costs since the year ended 31 March 2015 relating to the non-household retail market opening to competition in April 2017. This represents a one-off event and as such, is not considered part of the normal course of business.|
|Restructuring costs||The group has incurred restructuring costs in the past in relation to a number of discrete underlying events which can cause volatility in the reported results. Management adjusts internally for these costs to provide an underlying view of performance which it views as being more representative of the normal course of business and more comparable period to period.|
|Net fair value (gains)/losses on debt and derivative instruments||Fair value movements on debt and derivatives can be both very significant and volatile from one period to the next. These movements are determined by macro economic factors which are outside the control of management and these instruments are purely held for funding and hedging purposes (not for trading purposes). Taking these factors into account, management believes it is useful to adjust for this to provide a more representative view of performance.|
|Interest on swaps and debt under fair value option||Net fair value losses on debt and derivative instruments includes interest on swaps and debt under fair value option. In adjusting for the former, it is appropriate to add back interest on swaps and debt under fair value option to provide a view of the group's cost of debt which is better aligned to the return on capital it earns through revenue.|
|Net pension interest (income)/expense||This item can be very volatile from one period to the next and it is a direct function of the extent to which the pension scheme is in an accounting deficit or surplus position. Management believes it is useful to adjust for this to provide a more representative view of performance which is better aligned to the return on capital it earns through revenue.|
|Capitalised borrowing costs||Accounting standards allow for the capitalisation of borrowing costs in the cost of qualifying assets. Management believes it is appropriate to adjust for these significant costs to provide a representative cost of borrowings and current year performance which is better aligned to the return on capital it earns through revenue.|
|Profit on disposal of business||This relates to the disposal of the group's non-household retail business during the year ended 31 March 2017 which represents a significant one-off event and as such is not considered part of the normal course of business.|
|Deferred tax credit-change in tax rate||The deferred tax impacts from changes to the corporation tax rate announced by the UK Government represent both significant and volatile impacts which are outside the control of management. Management adjusts for this to provide a more representative view of current year performance.|
|Agreement of prior years' tax matters||The agreement of prior years' tax matters can be significant, volatile and often related to the final settlement of numerous prior year periods. Management adjusts for this to provide a more representative view of current year performance.|
|Tax in respect of adjustments to underlying profit before tax||Management adjusts for the tax impacts of the above adjusted items to provide a more representative view of current year performance.|
|Operating profit||Year ended |
31 March 2018
31 March 2017
|Operating profit per published results||636.4||605.5|
|Flooding incidents (net of insurance proceeds)||1.7||1.5|
|Non-household retail market reform||1.0||5.8|
|Underlying operating profit||645.1||622.9|
|Net finance expense||£m||£m|
|Net finance expense per published results||(206.6)||(189.0)|
|Net fair value gains on debt and derivative instruments||(47.3)||(24.3)|
|Interest on swaps and debt under fair value option||23.5||15.4|
|Net pension interest income||(7.1)||(10.2)|
|Adjustment for capitalised borrowing costs||(39.7)||(29.2)|
|Underlying net finance expense||(277.2)||(237.3)|
|Profit before tax||£m||£m|
|Share of profits of joint ventures||2.3||3.8|
|Profit before tax per published results||432.1||442.4|
|Non-household retail market reform||1.0||5.8|
|Net fair value gains on debt and derivative instruments||(47.3)||(24.3)|
|Interest on swaps and debt under fair value option||23.5||15.4|
|Net pension interest income||(7.1)||(10.2)|
|Capitalised borrowing costs||(39.7)||(29.2)|
|Profit on disposal of business||–||(22.1)|
|Underlying profit before tax||370.2||389.4|
|Profit after tax||£m||£m|
|Underlying profit before tax||370.2||389.4|
|Reported tax charge||(77.5)||(8.5)|
|Deferred tax credit – change in tax rate||–||(58.2)|
|Agreement of prior years' tax matters||0.4||(15.5)|
|Tax in respect of adjustments to underlying profit before tax||11.8||6.2|
|Underlying profit after tax||304.9||313.4|
|Earnings per share||£m||£m|
|Profit after tax per published results (a)||354.6||433.9|
|Underlying profit after tax (b)||304.9||313.4|
|Weighted average number of shares in issue, in millions (c)||681.9m||681.9m|
|Earnings per share per published results, in pence (a/c)||52.0p||63.6p|
|Underlying earnings per share, in pence (b/c)||44.7p||46.0p|
|Dividend per share||39.73p||38.87p|