UU has delivered a good set of financial results for the year ended 31 March 2014. Revenue increased by £69 million to £1,705 million, principally reflecting a 4.0 per cent nominal (1.0 per cent real price increase plus 3.0 per cent RPI inflation) allowed regulated price increase.

Operating profit

Underlying operating profit increased by 6 per cent to £641 million, primarily as a result of an increase in revenue and benefitting from tight cost control with operating costs up at a lower rate than revenue. Reported operating profit similarly increased by 6 per cent to £637 million.

Investment income and finance expense

The underlying net finance expense of £252 million was broadly in line with the prior year. The indexation of the principal on our index-linked debt amounted to a net charge in the income statement of £83 million, compared with a net charge of £86 million last year. The group had approximately £2.9 billion of index-linked debt as at 31 March 2014. The lower RPI inflation charge contributed to the group's average underlying interest rate of 4.6 per cent being lower than the rate of 4.9 per cent for the prior year.

Reported investment income and finance expense of £92 million was significantly lower than the £290 million expense in 2012/13. This £198 million reduction principally reflects a change in the fair value gains and losses on debt and derivative instruments, from a £42 million loss last year to a £129 million gain in 2013/14. The £129 million fair value gain in 2013/14 is largely due to gains on the regulatory swap portfolio, resulting from a significant increase in medium-term sterling interest rates during the period and the unwinding of the opening liability position. 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 five per cent.

Profit before tax

Underlying profit before tax was £390 million, £38 million higher than last year, due to the £37 million increase in underlying operating profit and the £1 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 increased by £233 million to £545 million.


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;
  • are committed to an open, transparent and professional relationship with HMRC based on mutual trust and collaborative working.

Under the regulatory framework the company operates within, the majority of any benefit from reduced tax payments will typically not be retained by the company but will pass to customers via reduced bills. For 2013/14, the company has 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 company, following the industry-wide agreement with HMRC in relation to the abolition of industrial buildings allowances in 2008.

In any given year, the company'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 company'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 HMRC are now reviewing the relevant tax rules with the stated aim of achieving greater accounting and tax alignment. However, any changes are not expected to affect the UU group before year ended 31 March 2017.

The group's principal subsidiary, United Utilities Water, operates solely in the UK and its customers are based here. All of the group's profits are taxable in the UK (other than around £1 million Estonian tax paid in relation to the group's 35 per cent holding in Tallinn Water).

For 2013/14, we paid corporation tax of £65 million which represents an effective cash tax rate of 12 per cent, 11 per cent lower than the mainstream rate of corporation tax of 23 per cent. For 2012/13, we paid corporation tax of £55 million (18 per cent), six per cent lower than the mainstream rate for that year. For both years, the key reconciling items to the respective mainstream rates were tax deductions on capital investment and pension contributions and timing differences in relation to certain unrealised profits/losses on treasury derivatives, where the corresponding profits or losses are only taxed when realised.

For 2013/14, the company also received an exceptional cash tax refund of £96 million in relation to prior years' tax matters, covering a period of over ten years in total. The amount principally related to tax deductions on capital expenditure and included the revised tax treatment for capital expenditure at water and sewage treatment works agreed between the Industry and HMRC, following the abolition of industrial buildings allowances. Taking account of this one-off repayment, the net effective cash tax rate for 2013/14 reduced to a credit of six per cent.

The current tax charge was £77 million in the year, compared with £81 million in the previous year. In addition, there was a current tax credit of £141 million relating to matters agreed with HMRC in respect of prior years. On top of the £96 million cash refund, the £141 million current tax credit also includes the release of an accounting accrual, which is a non-cash item.

For 2013/14, the group recognised a deferred tax charge of £41 million, compared with a credit of £3 million in 2012/13. In addition, the group has recognised a deferred tax credit of £157 million relating to the three 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. A deferred tax credit of £53 million relating to a similar one per cent reduction in the mainstream rate of corporation tax was included in 2012/13. The group also recognised a deferred tax credit of £13 million relating to prior years' matters.

An overall tax credit of £194 million has been recognised for 2013/14. Excluding the deferred tax impact of the future reduction in the corporation tax rate and the adjustments relating to recently agreed matters in relation to prior years, the total tax charge would have been £117 million or 22 per cent compared with a £78 million charge or 25 per cent in the previous year. This reduction in total tax rate is due to the decrease in the mainstream rate of corporation tax from 24 per cent for 2012/13 to the current rate of 23 per cent, together with the year-on-year movement in tax disallowable items.

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, green taxes and other regulatory service fees such as water abstraction charges.

Profit after tax

Underlying profit after tax of £305 million was £41 million higher than the previous year, principally reflecting the increase in underlying profit before tax. Reported profit after tax was £739 million, compared with £288 million last year, impacted by the £171 million improvement in fair value gains on debt and derivative instruments and the £218 million increase in the net tax credit between the two periods.

Earnings per share

Underlying earnings per share increased from 38.7 pence to 44.7 pence. This underlying measure is derived from underlying profit after tax. This includes the adjustments for the deferred tax credits in both 2013/14 and 2012/13, associated with the reductions in the corporation tax rate and an adjustment for the tax credit arising from agreement of prior years' tax matters in 2013/14. Basic earnings per share increased from 42.2 pence to 108.3 pence.

Dividend per share

The board has proposed a final dividend of 24.03 pence per ordinary share in respect of the year ended 31 March 2014. Taken together with the interim dividend of 12.01 pence per ordinary share, paid in February, this produces a total dividend per ordinary share for 2013/14 of 36.04 pence. This is an increase of 5.0 per cent, compared with the dividend relating to the previous year, in line with group's dividend policy of targeting a growth rate of RPI+2 per cent per annum through to at least 2015. The inflationary increase of 3.0 per cent is based on the RPI element included within the allowed regulated price increase for the 2013/14 financial year (i.e. the movement in RPI between November 2011 and November 2012). 

The final dividend is expected to be paid on 1 August 2014 to shareholders on the register at the close of business on 20 June 2014. The ex-dividend date is 18 June 2014.

Cash flow

Net cash generated from continuing operating activities for the year ended 31 March 2014 was £805 million, compared with £631 million last year. This mainly reflects the receipt of the exceptional tax refund, an improvement in working capital cash flows, impacted by the reduction in the total pension contribution payments between the two periods, and an increase in operating profit. The group's net capital expenditure was £683 million, principally in the regulated water and wastewater investment programmes. This excludes infrastructure renewals expenditure which is treated as an operating cost under International Financial Reporting Standards (IFRS).

Net debt including derivatives at 31 March 2014 was £5,532 million, compared with £5,451 million at 31 March 2013. This slight increase reflects expenditure on the regulatory capital expenditure programmes and payments of dividends, interest and tax, alongside an increase in the principal of our index-linked debt, largely offset by operating cash flows, fair value gains on our debt and derivative instruments and the one-off tax refund.

Summary of net debt movement

Gross debt

title value
Yankee bonds (USD) 672.8
Euro bonds (EUR) 476.2
GBP bonds 1604.9
GBP indexlinked bonds 1682.3
EIB and other index-linked 1254.5
Other borrowings 378.6

show raw data

A detailed debt listing is shown within the note 18 to the financial statements.

Debt financing and interest rate management

Gearing (measured as group net debt divided by United Utilities Water's (UUW's) regulatory capital value adjusted for actual capital expenditure) decreased to 58 per cent at 31 March 2014, compared with 60 per cent at 31 March 2013, remaining well within Ofwat's 55 per cent to 65 per cent assumed gearing range. The group's pension accounting position has moved to a deficit of £177 million at 31 March 2014, on an IFRS basis, compared with a small pension surplus of £15 million as at 31 March 2013. Taking account of the group's pension deficit, and treating it as debt, gearing would be 60 per cent.

UUW has long-term credit ratings of A3/BBB+ and United Utilities PLC had 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. Standard & Poor's currently have the group's ratings on positive outlook, citing improving financial metrics and operational performance.

Cash and short-term deposits at 31 March 2014 amounted to £127 million. In December 2013, UUW agreed a new £500 million term loan facility with the European Investment Bank (EIB). As at 31 March 2014, UUW had drawn down £100 million on this facility as a floating rate amortising term loan with semi-annual repayments, a final maturity in 18 years and an initial capital repayment holiday of two and a half years. The remaining £400 million is expected to be drawn down in tranches over the next year or so. The group also renewed £100 million of committed bank facilities prior to 31 March 2014 and a further £50 million since the year end. The group has headroom to cover its projected financing needs into 2016.

The group has access to the international debt capital markets through its €7 billion euro medium-term note programme which provides for the periodic issuance by United Utilities PLC and UUW of debt instruments on terms and conditions determined at the time the instruments are issued. The programme does not represent a funding commitment, with funding dependent on the successful issue of the debt securities.

Long-term borrowings are structured or hedged to match assets and earnings, which are largely in sterling, indexed to UK retail price inflation and subject to regulatory price reviews every five years.

Long-term sterling inflation index-linked debt provides a natural hedge to assets and earnings. At 31 March 2014, approximately 53 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 1.7 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, which is approximately 25 years.

Where nominal debt is raised in a currency other than sterling and/or with a fixed interest rate, to manage exposure to long-term interest rates, the debt is generally swapped to create a floating rate sterling liability for the term of the liability. To manage exposure to medium-term interest rates, the group fixes underlying interest costs on nominal debt out to ten 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 fixed interest costs for a substantial proportion of the group's debt for the duration of the 2010–15 regulatory period around the time of the 2009 price review. In addition, we have already fixed just over half of our floating rate exposure over the 2015–20 period. Following Ofwat's 2015–20 cost of debt guidance, which was published as part of its risk and reward guidance in January, we intend to fix underlying interest rates on substantially all of the group's projected nominal debt for the duration of the 2015–20 regulatory period, during 2014/15.

Term debt maturity per regulatory period



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. In addition to its €7 billion euro medium-term note programme, the group has a €2 billion euro-commercial paper programme, both of which do not represent funding commitments.

In line with the board's treasury policy, UU aims to maintain a robust liquidity position. Available headroom at 31 March 2014 was £864 million based on cash, short-term deposits, medium-term committed bank facilities, along with the undrawn portion of the EIB term loan facility, net of short-term debt.

UU 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. UU's cash is held in the form of short-term money market deposits with either prime commercial banks or with triple A rated money market funds.

UU 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 2014, the group had an IAS 19 net retirement benefit, or pension, deficit of £177 million, compared with a net pension surplus of £15 million at 31 March 2013. This £192 million adverse movement principally reflects the movement of long-term market rates during the period, particularly influenced by the significant reduction in corporate credit spreads. In contrast, the scheme specific funding basis does not suffer from volatility due to credit spread movements as it uses a prudent, fixed credit spread assumption.

Therefore, the recent 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. The group has already completed early all scheduled deficit repair payments through to March 2015.

Further detail is provided in note 19 ('Retirement benefit (obligations)/surplus') of these consolidated financial statements.

Statutory audit

KPMG LLP have issued an unqualified opinion on the financial statements of United Utilities Group PLC for the year ended 31 March 2014 (can be found in the independent auditor's report).

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 2014
Year ended
31 March 2013
Operating profit per published results636.9601.6
One-off items(2)4.42.6
Underlying operating profit641.3604.2
Net finance expense£m£m
Finance expense(99.2)(292.1)
Investment income7.02.3
Net finance expense per published results(92.2)(289.8)
Net fair value (gains)/losses on debt and derivative instruments(129.2)41.5
Adjustment for interest on swaps and debt under fair value option8.18.3
Adjustment for net pension interest (income)/expense(1.3)1.5
Adjustment for capitalised borrowing costs(19.4)(14.3)
Adjustment for release of tax interest accrual(13.3)
Adjustment for interest receivable on tax settlement(4.5)
Underlying net finance expense(251.8)(252.8)
Profit before tax£m£m
Profit before tax per published results544.7311.8
One-off items(2)4.42.6
Net fair value (gains)/losses on debt and derivative instruments(129.2)41.5
Adjustment for interest on swaps and debt under fair value option8.18.3
Adjustment for net pension interest (income)/expense(1.3)1.5
Adjustment for capitalised borrowing costs(19.4)(14.3)
Adjustment for release of tax interest accrual(13.3)
Adjustment for interest receivable on tax settlement(4.5)
Underlying profit before tax389.5351.4
Profit after tax£m£m
Underlying profit before tax389.5351.4
Reported tax credit/(charge)193.9(24.0)
Deferred tax credit – change in tax rate(156.8)(53.0)
Agreement of prior years' UK tax matters(154.3)(0.7)
Tax in respect of adjustments to underlying profit before tax32.6(9.5)
Underlying profit after tax304.9264.2
Earnings per share£m£m
Profit after tax per published results (a)738.6287.8
Underlying profit after tax (b)304.9264.2
Weighted average number of shares in issue, in millions (c)681.9m681.9m
Earnings per share per published results, in pence (a/c)108.3p42.2p
Underlying earnings per share, in pence (b/c)44.7p38.7p


  1. In accordance with the revised accounting standard IAS 19 'Employee Benefits' which applies retrospectively, 2012/13 has been restated.
  2. Principally 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 PLC historical cost regulatory underlying operating profit (non-GAAP measures) as follows:

Continuing operations
Underlying operating profit
Year ended
31 March 2014
Year ended
31 March 2013
Group underlying operating profit641.3604.2
Underlying operating profit not relating to United Utilities Water(7.1)(0.8)
Infrastructure renewals accounting46.832.6
Other differences2.11.9
United Utilities Water statutory underlying operating profit683.1637.9
Revenue recognition(0.2)1.7
Infrastructure renewals accounting6.15.1
Non-appointed business(7.4)(6.2)
United Utilities Water regulatory underlying operating profit681.6638.5


  1. In accordance with the revised accounting standard IAS 19 'Employee Benefits' which applies retrospectively, 2012/13 has been restated.