united-utilities-annual-report-2015

UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2015Stock Code: UU.unitedutilities.comOur performance 2014/15FINANCIAL PERFORMANCERevenueWe have delivered a good set offinancial results for the year ended31 March 2015. Revenue increasedby £31 million to £1,720 million. Thisincrease principally reflects the allowedregulated price rise, partly offset by thepreviously announced special customerdiscount of £21 million.Operating profitUnderlying operating profit was up £30million to £664 million, as we tightlymanaged our cost base despite theexpected increase in depreciation andother cost pressures, including bad debt.As planned, there was also a £17 millionreduction in infrastructure renewalsexpenditure this year as we transitionfrom this regulatory period to the next.Reported operating profit increased by£23 million, to £653 million.Investment income and financeexpenseThe underlying net finance expense of£222 million was £29 million lower thanlast year, primarily reflecting the impactof lower RPI inflation on the group’sindex-linked debt. The indexation ofthe principal on our index-linked debtamounted to a net charge in the incomestatement of £47 million, comparedwith a net charge of £83 million lastyear. The group had approximately£3.1 billion of index-linked debt as at31 March 2015 at an average real rateof 1.6 per cent. The lower RPI inflationcharge contributed to the group’saverage underlying interest rate of 4.0per cent being lower than the rate of 4.6per cent for 2013/14.Reported investment income andfinance expense of £317 million wassignificantly higher than the £92 millionexpense in 2013/14. This £225 millionincrease principally reflects a changein the fair value gains and losses ondebt and derivative instruments, froma £129 million gain in 2013/14 to a£105 million loss in 2014/15. The £105million fair value loss is largely due tolosses on the regulatory swap portfolio,resulting from a significant decreasein medium-term sterling interest ratesduring the period, partly offset by a gainfrom the unwinding of the derivativeshedging interest rates to 2015. Thegroup uses these swaps to fix interestrates on a substantial proportion ofits debt to better match the financingcash flows allowed by the regulator ateach price review. The group fixed themajority of its non index-linked debt forthe 2010–15 financial period, providinga net effective nominal interest rate ofapproximately 5 per cent.Profit before taxUnderlying profit before tax was £447million, £59 million higher than lastyear, due to the £30 million increasein underlying operating profit and the£29 million decrease in underlyingnet finance expense. This underlyingmeasure adjusts for the impact of oneoffitems, principally from restructuringwithin the business, and other itemssuch as fair value movements in respectof debt and derivative instruments.Reported profit before tax decreasedby £202 million to £342 million,primarily due to the aforementionedfair value movements.TaxationConsistent with our wider businessobjectives, we are committed to actingin a responsible manner in relation toour tax affairs.Our tax policies and objectives, whichare approved by the board on a regularbasis, ensure that we:• only engage in reasonable taxplanning aligned with our commercialactivities and we always comply withwhat we believe to be both the letterand the spirit of the law;• do not engage in aggressive orabusive tax avoidance; and• are committed to an open,transparent and professionalrelationship with HMRC basedon mutual trust and collaborativeworking.Under the regulatory framework thegroup operates within, the majority ofany benefit from reduced tax paymentswill typically not be retained by thegroup but will pass to customers viareduced bills. For 2013/14, the groupagreed, over and above the normalregulatory rules, to voluntarily sharewith customers the one-off net cashbenefit of £75 million due to the group,following the industry-wide agreementwith HMRC in relation to the abolitionof industrial buildings allowances in2008.In any given year, the group’s effectivecash tax rate may fluctuate from thestandard UK rate due to the availabletax deductions on pension contributionsand capital investment. Thesedeductions are achieved as a result ofutilising tax incentives, which have beenexplicitly put in place by successivegovernments precisely to encouragesuch investment. This reflectsresponsible corporate behaviour inrelation to taxation.The group’s effective cash tax ratemay also fluctuate from the standardUK rate due to unrealised profitsor losses in relation to treasuryderivatives where the correspondingprofits or losses are only taxed whenrealised. These movements are purelytiming differences and are expectedto continue going forward, followingHMRC’s recent review of the relevanttax rules.The group’s principal subsidiary, UnitedUtilities Water Limited (UUW), operatessolely in the UK and its customers arebased here. All of the group’s profits aretaxable in the UK (other than the group’s35 per cent holding in Tallinn Waterwhich generates around £6 millionprofit before tax with around £1 millionEstonian tax paid).In 2014/15, we paid corporation taxof £62 million, which represents aneffective cash tax rate of 18 per cent,3 per cent lower than the mainstreamrate of corporation tax of 21 per cent.In 2013/14, we paid corporation taxof £64 million. For both years, the keyreconciling items to the mainstreamrate were allowable tax deductionson net capital investment and timingdifferences in relation to fair valuemovements on treasury derivatives. In2013/14, the group also received anexceptional tax refund of £96 millionin relation to prior years’ tax matters,covering a period of over 10 years intotal.40