Revenue

Underlying operating profit (1)

Reported operating profit

61%

RCV gearing(2) (%)

41.28p

Total dividend per share ordinary share (pence)

  1. Underlying profit measures have been provided to give a more representative view of business performance and are defined in the underlying profit measure tables in Our performance in 2018/19.
  2. Regulatory capital value (RCV) gearing calculated as group net debt/United Utilities Water Limited shadow RCV (out-turn prices).

 

United Utilities delivered a strong set of financial results for the year ended 31 March 2019.

Revenue

Revenue was up £83 million, at £1,819 million, largely reflecting our allowed regulatory revenue changes.

As a result of Ofwat's annual wholesale revenue forecasting incentive mechanism (WRFIM), we have reduced revenue by £8 million in 2018/19 and will reduce revenue by a further £14 million in 2019/20 (out-turn prices). This consists of two components; firstly reflecting actual volumes being higher than our original assumptions during AMP6, and secondly reductions relating to the 2014/15 'AMP5 blind year', which are £4 million in 2018/19 and £5 million in 2019/20.

Operating profit

Underlying operating profit at £685 million was £40 million higher than last year. This reflects our allowed regulatory revenue changes, partly offset by an £18 million increase in IRE and a £16 million increase in depreciation. The remaining cost base has increased by £9 million as a result of small increases in employee costs, materials, bad debts and property rates, partly offset by a credit resulting from the settlement of an historical commercial claim.

Reported operating profit decreased by £1 million, to £635 million, reflecting the increase in underlying operating profit being more than offset by an increase in adjusted items. Adjusted items for 2018/19 included £36 million of costs associated with the dry weather of 2018, £7 million associated with the equalisation of pension benefits between males and females in relation to Guaranteed Minimum Pension (GMP) benefits, and £7 million of restructuring costs. Adjusted items in the prior year amounted to £9 million, of which £6 million related to restructuring costs.

Investment income and finance expense

The underlying net finance expense of £231 million was £46 million lower than last year, mainly due to the impact of lower RPI inflation on the group's index-linked debt.

Interest of £84 million on non-index-linked debt was £8 million lower than last year, due to the lower rates locked in, including the full year impact of re-couponing a portion of the group's regulatory swap portfolio in the prior year. The indexation of principal on index-linked debt amounted to a net charge in the income statement of £98 million, compared with a net charge of £138 million last year. As at 31 March 2019, the group had approximately £3.8 billion of index-linked debt at an average real rate of 1.3 per cent.

The lower RPI inflation charge compared with last year contributed to the group's average underlying interest rate of 3.3 per cent being lower than the rate of 4.2 per cent for the year ended 31 March 2018. The average underlying interest rate represents the underlying net finance expense divided by average debt.

Reported net finance expense of £205 million was broadly in line with the £207 million expense in 2017/18, principally reflecting a decrease in the fair value gains on debt and derivative instruments, from a £47 million gain in 2017/18 to a £9 million gain in 2018/19 offset by the £39 million decrease in the indexation charge in the year.

The group has fixed the interest rates on most of its non-index-linked debt for the 2015–20 regulatory period.

Profit before tax

Underlying profit before tax was £460 million, £90 million higher than last year, primarily reflecting the £40 million increase in underlying operating profit and the £46 million decrease in underlying net finance expense. This underlying measure excludes the adjusted items, as outlined in the underlying profit measures table in Our performance in 2018/19.

Reported profit before tax increased by £4 million to £436 million reflecting the £1 million reduction in reported operating profit more than offset by a £1 million reduction in reported net finance expense including fair value movements and a £4 million increase in our share of profits from joint ventures.

Tax

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 further amounts for its 5,000 strong workforce. The total payments for 2018/19 were around £241 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 2018/19, we paid corporation tax of £28 million, which represents an effective cash tax rate on underlying profits of 6 per cent, which is 13 per cent lower than the headline rate of corporation tax of 19 per cent. 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.

Our normal effective cash tax rate on underlying profits is around 11 per cent with the key reconciling items to the headline rate of corporation tax (currently at 19 per cent) being allowable tax deduction on capital investment and pension payments, these being deductions put in place by successive governments to encourage such investment and thus reflecting responsible corporate behaviour in relation to taxation.

In the current year the effective rate is further reduced as a result of the phasing of quarterly tax payments and also the impact of increased underlying profits as the relevant quarterly payments relate to 2017/18 whereas the underlying profits relate to 2018/19. This phasing of tax payments will not be an issue going forward, as from next year the quarterly instalment tax payment rules are being amended to ensure that payments become aligned with financial years.

The total tax charge for 2018/19 was £73 million as compared to a total tax charge of £78 million for 2017/18. For both periods, the total effective underlying tax rate remains 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.

The current tax charge was £42 million in 2018/19, compared with £25 million in the previous year; the main differences relating to timing with a corresponding equal and opposite adjustment to deferred tax. There were current tax credits of £3 million in 2018/19 and £7 million in 2017/18, following agreement of prior years' tax matters.

For 2018/19, the group recognised a deferred tax charge of £35 million, compared with a charge of £52 million for 2017/18. In addition, the group recognised a deferred tax credit of £1 million in 2018/19 and a deferred tax charge of £7 million in 2017/18 relating to prior years' tax matters.

Summary of net debt movement

Profit after tax

Underlying profit after tax of £379 million was £74 million higher than last year, principally reflecting the £90 million increase in underlying profit before tax.

The approach used to derive underlying profit after tax is not consistent across the industry, with the most significant difference relating to the treatment of deferred tax. Having considered whether to change our calculation of underlying profit after tax to exclude the impact of deferred tax, we have decided to retain our current methodology, therefore retaining comparability with our past performance and most FTSE companies but not our listed water peers. We will reassess this position once we have clarity of Ofwat's final determination, by which time it is also possible that there could be further clarity on the direction of travel of the IASB's rate-regulated activities project which could also have an impact on the underlying profit measures.

Reported profit after tax was £363 million, compared with £355 million in the previous year, largely reflecting the £4 million increase in the reported profit before tax.

Earnings per share

Underlying earnings per share increased from 44.7 pence to 55.5 pence. This underlying measure is derived from underlying profit after tax.

As noted above, we have considered whether to change our calculation of underlying profit after tax to exclude the impact of deferred tax and we have decided to retain our current methodology.

Basic earnings per share increased from 52.0 pence to 53.3 pence for the same reasons that caused the increase in profit after tax.

Dividend per share

The board has proposed a final dividend of 27.52 pence per ordinary share in respect of the year ended 31 March 2019. Taken together with the interim dividend of 13.76 pence per ordinary share, paid in February, this results in a total dividend per ordinary share for 2018/19 of 41.28 pence. This is an increase of 3.9 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 3.9 per cent is based on the RPI element included within the allowed regulated revenue increase for the 2018/19 financial year (i.e. the movement in RPI between November 2016 and November 2017).

The final dividend is expected to be paid on 1 August 2019 to shareholders on the register at the close of business on 21 June 2019. The ex-dividend date is 20 June 2019.

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 2019, the company had distributable reserves of £3,139 million. The total external dividends relating to the 2018/19 financial year amounted to £282 million. The company's distributable reserves support over 11 times this annual dividend.

Financing headroom – supporting the group's cash flow, we adopt 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. We have had a relatively stable RCV gearing level over the last nine years, always comfortably within our target range of 55 to 65 per cent, supporting a solid A3 credit rating for United Utilities Water Limited (UUW) with Moody's. RCV gearing at 31 March 2019 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, during the current regulatory period the executive directors' long-term incentive awards have been directly linked to a measure of sustainable dividends. While 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 (contained within the group's annual report and financial statements). 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.

Policy sustainability

2015–20

  • The policy is considered by the board to be sufficiently robust to withstand 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.

2020–25

  • 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).

Cash flow

Net cash generated from continuing operating activities for the year ended 31 March 2019 was £832 million, and therefore broadly consistent with £816 million in the previous year. The group's net capital expenditure was £625 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 2019 was £7,067 million, compared with £6,868 million at 31 March 2018. This increase largely reflects regulatory capital expenditure, payments of dividends, interest and tax, the inflationary uplift on index-linked debt and fair value movements, partly offset by operating cash flows.

Gross debt – total carrying value £7,815.7 million

Yankee bonds (USD) £373.9m

Euro bonds (EUR) £619.8m

GBP bonds £1,801.1m

GBP RPI-linked bonds £2,045.2m

GBP CPI-linked bonds £171.0m

EIB and other RPI-linked bonds £1,559.5m

Other EIB loans £606.2m

Other borrowings £639.0m

 

Fair value of debt

The group's gross borrowings at 31 March 2019 had a carrying value of £7,816 million. The fair value of these borrowings was £8,905 million. This £1,089 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 £1,140 million at 31 March 2018 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 2019. This is the same level of gearing as at 31 March 2018 and remains comfortably within our target range of 55 to 65 per cent.

UUW's senior unsecured debt obligations are rated A3 from Moody's Investors Service (Moody's), A- from Standard & Poor's Ratings Services (S&P) and A- from Fitch Ratings (Fitch), all on stable outlook. United Utilities PLC's (UU PLC's) senior unsecured debt obligations are rated Baa1 from Moody's, BBB from S&P and A- from Fitch, all on 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 2019 amounted to £339 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 all of this requirement.

In January 2019, UUW's financing subsidiary, United Utilities Water Finance PLC (UUWF), raised around £32 million of term funding, via the issue of HKD320 million private placement notes, with a seven-year maturity, off our EMTN programme. Also in January 2019, UUWF increased the amount outstanding on its £350 million public bond with a maturity date in February 2025 by an additional £100 million, taking the total size to £450 million. In February 2019, UUWF raised £250 million fixed rate notes in the public bond market with a 12-year maturity.

UUW remains one of the sector leaders in the issuance of CPI-linked debt having previously raised £165 million, in response to Ofwat's decision to transition away from RPI inflation linkage. In April 2019, we have increased the CPI-linkage in our debt portfolio by a further £200 million by executing a new £100 million bank loan with a 10-year maturity, and entering into inflation swaps against three existing RPI-linked bonds with a notional value of around £100 million, swapping cash flows from RPI to CPI-linkage. As both the CPI-linked loan and inflation swaps were executed subsequent to the year end, neither are included in the statement of financial position as at 31 March 2019.

Since September 2018, the group has renewed £100 million of committed bank facilities for an initial five-year term, extended a further £50 million by one year to 2024 and signed £50 million of new committed bank facilities with a five-year term. The group has sufficient headroom to cover its financing needs into late 2020.

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 2019, approximately 53 per cent of the group's net debt was in index-linked form, representing around 32 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.

Our inflation hedging policy is to target around 50 per cent of net debt to be maintained in index-linked form. This reflects a balanced assessment across a range of factors.

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' fixing at the start of each new regulatory period.

Term debt maturity per regulatory period

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 EMTN programme provides further support.

Available headroom at 31 March 2019 was £357 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.

We consider that we operate 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. Our cash is held in the form of short-term money market deposits with prime commercial banks.

We operate a bilateral rather than a syndicated approach to our 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 2019, the group had an IAS 19 net pension surplus of £484 million, compared with a net pension surplus of £344 million at 31 March 2018. This £140 million increase mainly reflects the favourable impact of updating mortality assumptions and updating membership data based on the 2018 funding valuations. The scheme-specific funding basis does not suffer from volatility due to inflation and credit spread movements as it uses 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.

The most recent pension scheme valuation was signed off as at 31 March 2018 and confirmed the existing schedule of contributions which aimed to eliminate the funding deficit by December 2021 for the United Utilities Pension Scheme (UUPS) and by September 2024 for the United Utilities PLC group of the Electricity Supply Pension Scheme (ESPS). As of April 2019, the group has prepaid at a discount the agreed deficit recovery contributions, resulting in a one-off contribution of around £100 million, and has therefore eliminated any deficit on a scheme-specific funding basis. As this took place subsequent to the year end, it has had no impact on the financial statements for the year ended 31 March 2019.

Further detail on pensions is provided in notes 18 and A5 ('Retirement benefit surplus') of these financial statements.

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 incidentsTwo 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 reformThe 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.
Dry weather eventAn extreme period of hot and dry weather during the summer of 2018 led to significant strain being placed on our water resources and network and as a result our reservoir levels ran extremely low. Activities were carried out to safeguard supplies, generating significant costs which would not have been incurred under normal conditions. Given the infrequent nature of periods of dry weather of this severity, this event is not considered part of the normal course of business.
GMP equalisationThe group has recognised an additional part service cost in respect of its defined benefit pension schemes. This reflects a change in benefits following a legal ruling during the year relating to the equalisation of Guaranteed Minimum Pension (GMP) benefits between males and females. This is a one-off adjustment, which is not representative of costs incurred in the normal course of business, is a direct consequence of the ruling and is not expected to reoccur in future years.
Restructuring costsThe 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 on debt and derivative instrumentsFair value movements on debt and derivatives can be both very significant and volatile from one period to the next. These movements are determined by macroeconomic 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 derivatives and debt under fair value optionNet fair value gains on debt and derivative instruments includes interest on derivatives and debt under fair value option. In adjusting for net fair value gains on debt and derivatives, it is appropriate to add back interest on derivatives 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 incomeThis 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.
Capitalised borrowing costsAccounting 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.
Agreement of prior years' tax mattersThe 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 taxManagement adjusts for the tax impacts of the above adjusted items to provide a more representative view of current year performance.

Underlying profit

Operating profitYear ended
31 March 2019
£m
Year ended
31 March 2018
£m
Reported operating profit634.9636.4
Flooding incidents (net of expected insurance proceeds)1.7
Non-household retail market reform1.0
Dry weather event36.1
GMP equalisation6.6
Restructuring costs7.26.0
Underlying operating profit684.8645.1
 
Net finance expense£m£m
Finance expense(222.5)(218.6)
Investment income17.112.0
Reported net finance expense(205.4)(206.6)
Adjustments:
Net fair value gains on debt and derivative instruments(9.5)(47.3)
Interest on derivatives and debt under fair value option30.623.5
Net pension interest income(9.5)(7.1)
Adjustment for capitalised borrowing costs(37.4)(39.7)
Underlying net finance expense(231.2)(277.2)
 
Profit before tax£m£m
Share of profits of joint ventures6.72.3
Reported profit before tax436.2432.1
Adjustments:
Flooding incidents1.7
Non-household retail market reform1.0
Dry weather event36.1
GMP equalisation6.6
Restructuring costs7.26.0
Net fair value gains on debt and derivative instruments(9.5)(47.3)
Interest on derivatives and debt under fair value option30.623.5
Net pension interest income(9.5)(7.1)
Capitalised borrowing costs(37.4)(39.7)
Underlying profit before tax460.3370.2
 
Profit after tax£m£m
Underlying profit before tax460.3370.2
Reported tax charge(72.8)(77.5)
Agreement of prior years' UK tax matters(4.2)0.4
Tax in respect of adjustments to underlying profit before tax(4.6)11.8
Underlying profit after tax378.7304.9
 
Earnings per share£m£m
Reported profit after tax (a)363.4354.6
Underlying profit after tax (b)378.7304.9
Weighted average number of shares in issue, in millions (c)681.9m681.9m
Reported earnings per share, in pence (a/c)53.3p52.0p
Underlying earnings per share, in pence (b/c)55.5p44.7p
 
Dividend per share41.28p39.73p