United Utilities Regulatory News (UU.)

1 Jun 2006 07:00

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2006 STRONG PERFORMANCE FROM UTILITY OPERATIONS HIGHLIGHTS‚£m (except dividends) Year ended % 31 March 31 March Change 2006 2005 Revenue from continuing operations 2,387 2,104 +13% Profit before tax* 481 397 +21% Operating profit from continuing 766 681 +12% operations** Net finance expense*** 285 284 - Total dividends per ordinary share, pence 43.87 42.43**** +3.4% Basic earnings per share (pence) Year ended 31 March 31 March 2006 2005 Continuing operations 37.3 34.5 Discontinued operation (13.0) (1.2) Continuing and discontinued basic 24.3 33.3 earnings per share * Profit before tax*increased by 21% to ‚£481 million * Licensed multi-utility operations segmental operating profit** increased by 16% to ‚£652 million * Infrastructure management - significant 35% increase in revenue and continued profit growth * Vertex consolidates its move into the financial services outsourcing sector * Capital investment in the regulated businesses totalled ‚£582 million - the sixteenth consecutive year in which the company has invested more than the profit earned * New management to focus on service and operational improvements Commenting, Philip Green, Chief Executive Officer, said:"United Utilities has again delivered good profit growth. These resultsunderline continued progress for the group and highlight the benefits ofleveraging our core utility skills to secure attractive outsourcingopportunities. Looking ahead, our regulated businesses should continue todeliver strong profit growth. Our infrastructure management business has arobust order book and is well positioned to pursue further outsourcingopportunities. Vertex has good prospects, particularly in the public andfinancial services sectors."With such a firm foundation, the outlook for the group is positive. I carepassionately about providing good customer service and an integral part of myleadership will be to build a culture of customer focus and operationalexcellence throughout the group to create a high performance company."*Relating to continuing operations and before restructuring costs and theimpact of IAS 39. This adjusted measure is reconciled to reported profit beforetax in note 2 of this announcement**References to operating profit, operating loss and operating margin andrelated percentage movements are stated before restructuring costs. Referencesto segmental operating profit, segmental operating margin and relatedpercentage movements are stated before restructuring costs and the amortisationof certain intangible assets as shown in the segmental analysis by class ofbusiness*** Excludes the impact of IAS 39***** Re-presented dividend per ordinary share post rights issueFor further information on the day, please contact:Philip Green - Chief Executive Officer +44 (0) 20 7307 0300 Simon Batey - Chief Financial Officer +44 (0) 20 7307 0300 Darren Jameson - Investor Relations Manager +44 (0) 7733 127707 Evelyn Brodie - Head of Corporate and Financial +44 (0) 20 7307 0309 Communications A presentation to investors and analysts starts at 8.30 am on Thursday, 1 June2006, in the Auditorium, Deutsche Bank, Winchester House, 1 Great WinchesterStreet, London, EC2N 2DB. The presentation can be accessed via a one-way listenin conference call facility, by dialing: + 44 (0) 20 7162 0025. This recordingis available for 7 days following 1 June, on +44 (0) 20 7031 4064, access code704320.The presentation, with further information on United Utilities, will beavailable at 8.30 am on the day at: http://www.unitedutilities.com and, later,on Bloomberg at: UUIR, where a multimedia version will be available.Photographs to support these results can be downloaded via http://www.vismedia.co.uk.CHIEF EXECUTIVE OFFICER'S REVIEWUnited Utilities has delivered another strong financial performance in the yearto 31 March 2006 and has announced a 21% increase in profit before tax* to ‚£481million. Operating profit from continuing operations** increased by 12%, to ‚£766 million. The difference in these growth rates was largely attributable toshareholder support of the second stage of the rights issue and lower interestrates on debt, which has helped to maintain a broadly flat interest charge.The Board is proposing a final dividend in respect of the year ended 31 March2006 of 29.58 pence per ordinary share. Together with the interim dividend of14.29 pence per ordinary share, the ordinary dividend for the year is 43.87pence. This is an increase of 3.4%, consistent with the group's 2005-10 policyof growing dividends in line with inflation.Our regulated business had a successful year with segmental operating profit**up 16%, in part benefiting from the planned re-scheduling of the infrastructurerenewals programme, which has resulted in the deferral of around ‚£15 million ofexpenditure to 2006/07 and 2007/08.Although water and wastewater customers have continued to benefit from overallimproved levels of service and efficiency, there is scope for furtherimprovement. The business intends to focus on improving its efficiency and anumber of initiatives are already in place, which are progressing well. Withregard to operational performance, the company achieved its economic level ofleakage, at 31 March 2006, in line with its action plan agreed with Ofwat. Inaddition, our reservoirs are over 90% full and we expect to maintain a healthysupply-demand balance, avoiding the need for water restrictions.United Utilities Electricity was assessed by Ofgem at the 2004 price review asbelow average for efficiency. There is significant scope for improvement andthe business has made good progress this year, substantially reducing directoperating costs. Operationally, United Utilities Electricity has performedwell, particularly as measured by Ofgem's customer interruptions and customerminutes lost assessments.Capital investment across our regulated water, wastewater and electricityoperations totalled ‚£582 million. For the sixteenth consecutive year, capitalexpenditure has exceeded the profit earned as the company invests to improvequality and service for its customers.United Utilities Contract Solutions has delivered impressive growth by usingthe group's core utility skills and further consolidated its position as theleading utility infrastructure outsourcing company in the United Kingdom. Themobilisation of a number of significant new contracts during the year led to a35% increase in revenue.As our infrastructure management business grows, it provides the opportunityfor the group to benefit from further economies of scale and exchange of bestpractice. A focus on strong performance, driven from the disciplines ofoperating within robust contractual frameworks, gives us a solid base fromwhich to pursue other infrastructure outsourcing opportunities.Vertex has successfully renewed a number of significant contracts and hasadjusted its cost base to enhance the business' competitiveness. VertexFinancial Services has built on the Marlborough Stirling acquisition throughthe purchase of 1st Software Group Limited and will provide independentfinancial advisers with a single system covering the front and back office,enhancing its market offering and providing the opportunity to drive growth.The financial services order book has also benefited from securing our largestmortgage outsourcing deal to date, with db mortgages (a new specialist lenderowned by Deutsche Bank).Since the start of the financial year, new contracts valued at more than ‚£40million have been signed in the life and pensions business of Vertex FinancialServices. It has a pipeline of opportunities going forward worth over ‚£300million, with many of the potential outsourcing contracts offering attractivemargins.Following the successful completion of the second stage of the rights issue inJuly last year, in the second half of the year we took advantage of thefavourable market opportunities to raise long-term, index-linked debt. SinceSeptember 2005, we have agreed the issue of a total of ‚£600 million of thisdebt, with maturities ranging from 30 to 43 years and real interest ratesranging from 1.3 to 2.0%. We have also agreed a drawdown of around ‚£200 millionfrom a ten-year loan facility provided by the European Investment Bank, in theform of index-linked debt with an effective real interest rate of 2.25%. Inaddition to providing a good match for our revenue profile which is linked toinflation, the relatively low cost of this funding has secured substantialadditional value for our shareholders, representing outperformance of over ‚£80million, when compared to the regulator's cost of debt allowance, in thecurrent five-year period.During the year, the company's pension scheme investments achieved an averageinvestment return of around 23% across all asset classes. Following the ‚£320million lump sum prepayment made in March 2005, which rolled up the 2005-10contributions, the pension schemes are showing a net surplus of ‚£19 million.Early observationsIn the few weeks since I joined United Utilities, I've seen the good progressalready made in meeting the efficiency challenges set by our regulators.Successful delivery of the capital investment programme is vital and I'mimpressed with the partnership framework approach that has been developed tohelp optimise our performance. I believe the current strategy of targetingcustomer service and operational performance improvement is the right approach,and there is plenty of scope for further progress.The core skills from our regulated businesses apply directly within UnitedUtilities Contract Solutions. I've had the opportunity to reflect on its marketleadership position and believe that we are well placed to take advantage ofoutsourcing opportunities that seem likely to arise in the utility sectors.There is potential for further exchange of best practice within the group, andI would like to see further performance improvements in operating both our ownand other companies' assets.Vertex's growth record is impressive. Few businesses have profitably grownthird party revenue from zero to over ‚£300 million within six years andprospects for third party growth are good. As a mark of this success, as aproportion of sales, client revenues from United Utilities are likely to reducefurther over the next two years, from around a quarter today. Financialservices and the public sector continue to offer good prospects in the mediumterm.OutlookWith further real price increases ahead, our regulated businesses shouldcontinue to deliver strong profit growth. Infrastructure management has arobust order book in place, which should drive continued growth in revenue andhas a solid base from which to pursue other outsourcing opportunities. Vertexhas some good opportunities in the pipeline, particularly in the public sectorand financial services sector. Overall, the group's progress means we have astrong platform from which to develop the business further.OPERATING PERFORMANCELICENSED MULTI-UTILITY OPERATIONS * Revenue increased by 9% to ‚£1,503 million * Segmental operating profit** increased by 16% to ‚£652 million Revenue increased by 9% to ‚£1,503 million, driven by allowed price increases,including inflation, of 8.4% in our water and wastewater business and 11.5% inour electricity business.Segmental operating profit** increased by 16% to ‚£652 million for the period,despite increasing costs that are a function of the growth in the asset base.The results also reflect the re-scheduling of the infrastructure renewalsprogramme, resulting in the deferral to 2006/07 and 2007/08 of approximately ‚£15 million of expenditure, as the new five-year programme gets underway.Excluding this benefit, the year-on-year increase would have been around 13%.Capital investment in the period was ‚£582 million, of which ‚£441 millionrelated to water and wastewater and ‚£141 million to electricity distribution.This is within the regulatory allowance for the year and reflects there-phasing of expenditure from the first year of the capital programmes tofuture years. Capital expenditure is likely to peak in year three of thefive-year programme, at around ‚£1 billion, and then gradually phase down as thebusiness moves towards the conclusion of the 2005-10 regulatory review period.The capital investment partnership framework approach is now embedded into thebusiness. A range of integrated work teams have been set up to help reduceproject management costs. A new project and investment management system tosupport delivery of the capital programmes is now up and running and benefitshave also been realised through co-location of activities, shared systems andgreater collaboration through the supply chain.Good progress has been made in delivering the operating efficiency initiativesand the business remains confident that it can achieve its regulatoryefficiency targets. * At the start of the year, the Customer Sales and Service Delivery businesses were merged to form United Utilities North West. This has rationalised operations and reduced management costs. * A new customer billing system, to improve customer service and increase efficiency, was implemented and the entire customer base has been successfully migrated onto it. * Increased focus on work planning, scheduling and field force productivity, with a new mobile communications system being rolled-out. * The company has been looking to optimise the way it manages its major assets in the North West, through its Integrated Performance Management project. The successful pilot programmes have now been extended across the region. * A number of transformation initiatives have been developed, which are primarily focused around implementing a range of business process changes to improve the way the business operates. * Additionally, the company is continuing to increase its focus on service and performance levels and new programmes and initiatives are being introduced to link remuneration and performance for all staff. The group has a number of initiatives in place to leverage its increasing sizeand achieve additional efficiencies, particularly in the area of procurement.Earlier in the year the group signed a contract with a sole supplier to providehigh-pressure and medium density polyethylene pipes to United Utilities Water,in addition to servicing the water and gas outsourcing contracts in theinfrastructure management business. These initiatives should help to offsetother cost pressures. For example, the business expects energy costs toincrease by over 30% in 2006/07.United Utilities Water has reduced its leakage level in the year by around 50megalitres per day, to 470 megalitres per day. In line with an action planagreed with Ofwat, it achieved its economic level of leakage at 31 March 2006.Meeting this year-end spot leakage target places the business in a strongposition to sustain performance at around this level in order to achieveOfwat's 12-month rolling leakage target of 470 megalitres per day for 2006/07.The company will be spending around ‚£70 million on finding and fixing leaksover the next four years, in addition to its water mains rehabilitation andreplacement programmes. Reservoir levels are currently over 90%, in line withexpectations for this time of year. The business expects to maintain a healthysupply-demand balance, avoiding the need for water restrictions.United Utilities Water met or outperformed its key internal outputs targetsduring the year. It replaced 802 kilometres of water mains, removed a number ofproperties from the low pressure and flooding registers and is on track withdelivery of its water treatment works quality programme. Drinking water qualityhas continued to improve and 2005 mean zonal quality was 99.94%.United Utilities Electricity continued to focus on maintaining the integrity,security and safety of its electricity distribution network and outputs are inline with its five year delivery plan. During the year the business replaced orrefurbished 221 kilometres of overhead lines and replaced 95 kilometres ofunderground cables. It also replaced or refurbished 428 switchgear units andreplaced 223 transformers in the twelve month period.At the time the water price review was concluded in December 2004, it wasrecognised that there was potential for additional investment relating toprojects that were not part of United Utilities' 2005-10 regulatory contract,but which may be confirmed as additional obligations during this period by theregulators. These potential projects, with an estimated maximum value of ‚£500million, continue to be the subject of discussions with the regulators and theevaluation process is not expected to be concluded before the end of the 2006calendar year.Approximately ‚£200 million of funding was provided in the 2000-05 period todeliver a number of obligations, primarily relating to the UnsatisfactoryIntermittent Discharge (UID) programme, which have been carried over into AMP4. United Utilities Water, in its negotiations with the Environment Agency andOfwat, is seeking to finalise requirements relating to those UID outputs andexpects the bulk of this capital expenditure programme to be incurred over thenext two financial years.INFRASTRUCTURE MANAGEMENT * Revenue increased by 35% to ‚£692 million * Segmental operating profit** increased by 6% to ‚£96 million * Segmental operating margin** of 14% United Utilities Contract Solutions applies the core utility skills of thelicensed multi-utility businesses, through outsourcing contracts, and isinvolved in the operation or management of assets representing around 35% ofthe UK water industry's asset base. The business also provides gas services toover 6 million people and now serves a population of over 17 million in the UK.The infrastructure management business has grown rapidly since its creation andincreasingly benefits from economies of scale and exchange of best practiceacross its range of contracts. The value of the outsourced utility contractswhich commenced in this year total approximately ‚£3.3 billion. United UtilitiesContract Solutions' total order book stands at around ‚£5 billion.United Utilities Contract Solutions has improved both the operational andfinancial performance of the companies with which it holds contracts. Thedisciplines of operating within robust contractual frameworks have helped thebusiness to balance risk and reward and ensure that significant focus is placedon performance. This experience has improved the commercial skill sets of thebusiness and places it in a strong position from which to pursue otherinfrastructure outsourcing opportunities.After the successes in securing contract wins during 2004/05, 2005/06 has beena year of implementation for United Utilities Contract Solutions, which hasresulted in a 35% rise in revenue. The business also continued its profitgrowth record, delivering a 6% increase in segmental operating profit**, theslower growth reflecting the planned start-up costs associated with thesubstantial new contracts, and the rebasing of performance targets on contractsrenewed in the year.Utility SolutionsUtility Solutions is responsible for United Utilities' utility outsourcingcontracts in the United Kingdom. This includes contracts with Southern Water,Scottish Water, Dwr Cymru Welsh Water, Northern Gas Networks and three ScottishPFI operations.The five-year Southern Water contract, worth around ‚£750 million to theconsortium, of which United Utilities has a 40% share, commenced on 1 April2005 when around 120 Southern Water employees transferred to United UtilitiesContract Solutions. Performance to date has been good, with the value of workand outputs exceeding Southern Water's expectations.The success of the original four-year contract with Dwr Cymru Welsh Waterhelped United Utilities secure a ‚£1.5 billion, 15-year contract renewal toprovide operations, maintenance and shared services, which commenced in April2005. United Utilities Contract Solutions has assisted in significantlyimproving service levels and has helped to move Dwr Cymru Welsh Water fromseventh position to joint first position in Ofwat's latest overall performanceassessment league table.United Utilities acquired a 15% stake in the CKI-led consortium that purchasedthe North of England gas distribution network from National Grid Transco earlyin the financial year. Subsequently, United Utilities Contract Solutionssecured a ‚£1.1 billion, 8-year contract to operate and maintain the network,and manage the capital expenditure programme, on behalf of the consortium. Thiscontract successfully commenced on 1 June 2005, when around 1,100 employeestransferred to United Utilities Contract Solutions under TUPE regulations.First year progress has been excellent. The business has outperformed itsoperating and capital expenditure targets and its cash targets and has met itsreplacement expenditure targets.Industrial and Commercial SolutionsIndustrial and Commercial Solutions is responsible for multi-utilityconnections and metering services to domestic, commercial and industrialdevelopers, and the provision of specialist water and liquid waste services toindustrial customers. The business also includes United Utilities ContractSolutions' facilities services and energy management services businesses.The ‚£225 million metering contract with British Gas Trading, which wassubsequently increased to ‚£276m, was the first major meter installationcontract to be outsourced and has around three years left to run. The contractcontinues to progress well.Since April 2005, the business has been working in partnership with Vertex todeliver the ‚£427 million contract with Thurrock Council to transform a numberof the authority's business processes, from administration and customerservices through to procurement and highways maintenance. Industrial andCommercial Solutions is focusing on providing facilities management, highwaysengineering and transportation services and the contract is progressing well.InternationalInternational applies United Utilities' expertise in infrastructure managementand operations to develop and manage utility projects around the world. Thebusiness currently operates concessions in Bulgaria, Estonia, Poland, thePhilippines and Australia.United Utilities continues to retain operational responsibility for TallinnaVesi and Manila Water, which were both successfully listed on their stockexchanges in 2005/06 and 2004/05, respectively, via initial public offerings.These transactions resulted in gains on partial disposal of ‚£7.0 million (2004/05 ‚£1.3 million).BUSINESS PROCESS OUTSOURCING * Revenue of ‚£405 million (2005 - ‚£396 million) * Segmental operating profit2of ‚£21 million (2005 - ‚£24 million) Vertex is a leading international provider of business process outsourcingservices and technology solutions and is also one of the UK's major customermanagement service suppliers. The business has clients in the privateenterprise, financial services, utility, central and local government sectors.This has been a year of transition for Vertex. The successful contract with theDepartment for Work and Pensions came to a natural close and the strongperformance on this contract positions Vertex well to compete for futurepotential contracts in the public sector, a market which continues to offergood prospects in the medium-term.Vertex has adjusted its cost base in the 2005/06 financial year to enhance thebusiness' competitiveness. The company has moved more of its IT and supportfunctions offshore and has also undertaken a property rationalisation programmein the UK. The associated restructuring charges are one-off in nature.The company has been successful in renewing a number of significant contracts.As a mark of this success, given the growth in Vertex's overall portfolio ofactivity, as a proportion of sales, client revenues from United Utilities arelikely to reduce further over the next two years, from around a quarter today.Significant progress has been made in relation to Vertex Financial Services.The business has built on the Marlborough Stirling acquisition through thepurchase of 1st Software Group Limited in March 2006. The initial considerationwas ‚£25 million, plus a maximum of up to ‚£13.5 million subject to certainperformance criteria being achieved over the next two years. This transactionstrengthens Vertex Financial Services' leading position in the market providingsoftware to independent financial advisers (IFAs). The combination of front andback office capabilities, offered through the integration of The Exchange and1st Software, provides a compelling strategic fit. It will deliver a singlesystem for seamless, straight-through-processing for independent financialadvisers along with a significant reduction in administration and transactioncosts. This combination enhances Vertex Financial Services' market offering andprovides additional opportunity to drive growth.The financial services order book has also grown substantially following thecompany's largest mortgage outsourcing contract win to date. In March 2006, a ‚£45 million, five-year outsourcing contract was secured with db mortgages (a newspecialist lender owned by Deutsche Bank) to support its entry into the UKintermediary mortgage market. Vertex will deliver application processing andmortgage servicing utilising its Omiga and Optimus software. In addition, inMarch 2006, Vertex purchased Egg's 49% stake in its mortgage subsidiary,extended its mortgage services agreement with Egg and secured other contractswith Livingstone Mortgages and GMAC-RFC in Canada.In the public sector, during April 2005, Vertex successfully commenced thefirst phase of its ‚£427 million, 15-year contract with Thurrock Council, toprovide customer management, information technology and business processservices. Progress is good, with the customer contact centre, which went livein June 2005, exceeding its service level targets. Vertex also mobilised thefirst phase of its strategic partnership with Hertfordshire County Council inOctober 2005. Around 100 employees have transferred to Vertex and theimplementation of a new customer relationship management system is nowunderway.The company continues to pursue the significant opportunities afforded byderegulation in the North American utilities market. Vertex entered into analliance deal with IBM in June 2005 and the first stage of this allianceinitiative was to team with IBM on its $1.6 billion contract with USmulti-state utility NiSource to provide customer contact centre, sales andbilling services. This contract continues to progress well.As anticipated, margins in 2005/06 have been affected by the start-up costsassociated with the Thurrock Council contract and the weak trading position ofMarlborough Stirling that was recognised at the time of its acquisition. Growthprospects for Vertex remain promising in the medium-term with a number ofopportunities in the pipeline, particularly in the public sector and financialservices sector.FINANCIAL PERFORMANCEInternational Financial Reporting Standards (IFRS)From 1 April 2005, United Utilities has been required to comply withInternational Financial Reporting Standards (IFRS). These results, and priorperiod comparisons, are in accordance with IFRS, with the exception of IAS 39which, as previously announced, has been applied only from 1 April 2005. Areconciliation between IFRS and UK accounting standards is provided for theyear ended 31 March 2005 in note 11 of this announcement. It should be notedthat there are no cash flow or financing implications for the group as a resultof IFRS compliance.American Depositary SharesThe company will be filing with the US Securities and Exchange CommissionForm F-6 notifying the change of American Depositary Receipts (ADR) depositaryfrom the Bank of New York to JPMorgan Chase Bank, N.A. and raising the limiton issuance in its ADR Programme from 50,000,000 to 100,000,000 American Depositary Shares (ADSs) evidenced by ADRs, each ADR evidencing two ordinaryshares in the company.Revenue and operating profit from continuing operationsRevenue from continuing operations rose 13.5% to ‚£2,386.8 million, reflectinggrowth across our licensed multi-utility and support services businesses.Group operating profit** from continuing operations rose 12.4% to ‚£765.5million. This increase reflects improved operating profit** in licensedmulti-utility operations and infrastructure management. Group operating profitfrom continuing operations after restructuring costs increased by 13.6% to ‚£740.0 million.Financing expenseNet finance expense*** was broadly the same as last year at ‚£285 million,principally reflecting receipt of the proceeds from the second stage of therights issue and lower interest costs on debt, offset by additional fundingrequirements of the capital investment programme. As a result of this, profitbefore tax* increased by 20.9% to ‚£480.5 million, compared to a 12.4% increasein operating profit from continuing operations**. As expected, the impact ofIAS 39 has introduced some volatility to the income statement and across thefull year this has increased the reported finance expense by ‚£15.7 million.Since IAS 39 only applies from 1 April 2005, it should be noted that there isno impact on comparative periods.In order to hedge the interest cost implicit in the regulatory contracts, thegroup fixes interest rates for the duration of each five-year review period bytypically swapping fixed rate debt to floating rate at the time of issue andthen swapping back to fixed rate at the outset of each five-year regulatorycontract period. IAS 39 limits the use of hedge accounting for these commercialhedges, thereby increasing the potential volatility of the income statement.However, this has no cash flow impact and the effect of IAS 39 on the reportedprofit should substantially balance out over the 2005-10 period.Restructuring costs and the amortisation of certain intangible assetsThe amortisation of certain intangible assets (relating to acquisitionsundertaken since the date of transition to IFRS 3 `Business Combinations', thevalue of which, prior to the adoption of IFRS, would have been reflected ingoodwill) was ‚£14.7 million, compared with ‚£9.3 million last year. Of thistotal charge, ‚£4.9 million related to Your Communications and this is includedin the discontinued operation line of the income statement. The remaining ‚£9.8million principally results from the intangible assets arising from theacquisition of Marlborough Stirling by Vertex which was completed in May 2005.During the year there was a total restructuring charge of ‚£25.5 million to theincome statement, mainly arising from the Marlborough Stirling integration andfrom further restructuring and rationalisation of property requirements inVertex during the second half of the year.TaxationThe group recorded a current tax charge, relating to continuing operations, of‚£47.7 million during the period, compared with a tax credit of ‚£30.0 million inthe previous year. The cash impact of the ‚£47.7 million current tax charge wasoffset by a cash benefit of around ‚£47 million secured through the manner inwhich the Your Communications disposal was structured. The deferred tax chargerelating to continuing operations was ‚£72.6 million, which primarily relates tothe requirement to provide in full for deferred tax under IAS 12. This compareswith a ‚£126.1 million charge in the corresponding period last year. The totaltax charge relating to continuing operations is ‚£120.3 million.The effective current tax rate for the year relating to continuing operationsis 10.9% (27.4% including deferred tax).Discontinued operationAs outlined in the 2005/06 interim results, Your Communications, in accordancewith IFRS, was classified as a discontinuing business held for sale in thecontext of United Utilities' consolidated accounts. Following the sale of YourCommunications to THUS Group plc, which completed on 26 February 2006, theresultant 21.7% holding in THUS will be treated as an associate company infuture accounting periods. However, due to its immateriality in the context ofthe United Utilities group, the company's share of the financial performance ofTHUS Group plc has not been shown as a separate item in the financial statementfor the year ended 31 March 2006.Earnings per shareBasic earnings per share, relating to continuing operations, increased by 8.1%to 37.3 pence. Diluted adjusted earnings per share, relating to continuingoperations and excluding deferred tax, the impact of IAS 39 and restructuringcosts, which excludes the effects of the rights issue, increased by 2.2% to50.3 pence.Dividends per shareThe Board is proposing a final dividend in respect of the year ended 31 March2006 of 29.58 pence per ordinary share. Together with the interim dividend of14.29 pence per ordinary share, the ordinary dividend for the year is 43.87pence. This is an increase of 3.4%, consistent with the group's 2005-10 policyof growing dividends in line with inflation, subject to at least meeting itsregulated cost savings targets, and continuing profitability in Vertex andContract Solutions. The Board believes that the group is on track to achievethese objectives.As previously communicated to the market, the 2004/05 dividend for comparativepurposes has been adjusted to take account of the second stage of the rightsissue. Throughout the rights issue period, dividend yield and overall cashreturn have been maintained for shareholders who subscribed in full to bothstages of the rights issue.This dividend will be paid on 25 August 2006 to shareholders on the register atthe close of business on 30 June 2006. The ex-dividend date for the finaldividend is 28 June 2006.Cash and short term deposits and borrowingsCash and short term deposits at 31 March 2006 were ‚£1,513.5 million. Unutilisedmedium term bank facilities (maturing in more than one year) totalled ‚£450.4million. Combining these sources, with an undrawn ‚£200 million loan facilityagreed with the European Investment Bank, total available liquidity was ‚£2,163.9 million. This gives United Utilities an excellent pre-funded positionfor its capital investment programmes in both its regulated businesses.Borrowings, net of cash and short term deposits, at 31 March 2006 were ‚£4,186.7million, a decrease of ‚£91.9 million compared with 31 March 2005. Thisreduction principally reflects operational cash flows and proceeds from thesecond stage of the rights issue exceeding capital expenditure in the regulatedbusinesses and payment of the 2004/05 final dividend and 2005/06 interimdividend. The balance comprised ‚£4,272.6 million of bonds, ‚£519.6 million ofloans from the European Investment Bank, ‚£80.5 million of long term leasing, ‚£196.9 million of joint venture borrowings and ‚£630.6 million of other loans andoverdrafts, offset by ‚£1,513.5 million of cash and short term deposits.Index-linked debtIn the second half of 2005/06, the group agreed the issue of a total of ‚£550million of long-term, index-linked debt with 30, 35, 36, 37 and 40 yearmaturities at real interest rates ranging from 1.3 to 2.0%. After the year-end,the company also agreed to raise a further ‚£50 million of index-linkedborrowings with a term of 43 years and real interest rate of approximately1.8%. The group also agreed a drawdown of around ‚£200 million, from a ten-yearloan facility provided by the European Investment Bank, in the form ofindex-linked borrowings with an effective interest rate of 2.25%. The principalamount of this borrowings will be adjusted upward with inflation (or downwardin the event of deflation), tracking movements in the UK Retail Price Index("RPI"). This form of liability is a good match for the group's regulatedassets, which are also linked to RPI.PensionsPensions schemes investments had a good year, with an average investment returnof around 23% return across all asset classes. More specifically, investmentreturns on the ‚£320 million lump sum prepayment made in March 2005, whichrolled up the 2005-10 annual contributions, have helped to eliminate thefunding gap during the course of the year.Taking account of the lump sum prepayment, the pension schemes had a netsurplus at 31 March 2006 of ‚£19.3 million.The final regulatory price determinations provide for ongoing pension schemefunding requirements, as assessed by the regulators at the time, and makeexplicit allowance for funding of the relevant elements of the pension schemedeficits. United Utilities has estimated the proportion of the gross deficitnot explicitly funded through the regulatory price controls, over the five-yearperiod, to be no more than around ‚£25 million across both regulated businesses. -o0o- Consolidated income statement Year ended Year ended 31 March 31 March 2006 2005 ‚£m ‚£m Continuing operations Revenue 2,386.8 2,103.7 ----- ----- Other income 21.8 19.8 Employee benefit expense (429.0) (392.8) Depreciation and amortisation (320.3) (330.7)expense Other operating costs (893.8) (718.9) Restructuring costs (25.5) (29.7) ----- ----- Total operating expenses (1,646.8) (1,452.3) ----- ----- Operating profit 740.0 651.4 Investment income 54.0 38.3 Finance costs: Fair value loss on debt and (15.7) derivative instruments Other finance expense (339.0) (322.1) ----- ----- Investment income and finance (300.7) (283.8)expense ----- ----- Profit before taxation 439.3 367.6 Current taxation (charge)/ (47.7) 30.0credit (note 3) Deferred taxation charge (72.6) (126.1)(note 3) ----- ----- Taxation (120.3) (96.1) ----- ----- Profit for the year 319.0 271.5continuing operations Loss for the period/year from (110.8) (9.4)discontinued operation (note 6) ----- ----- Profit for the year 208.2 262.1 ----- ----- Attributable to: Equity holders of the company 207.9 260.3 Minority interest 0.3 1.8 ----- ----- 208.2 262.1 ----- ----- Earnings per sharefrom continuing and discontinued operations(note 4) - Basic 24.3p 33.3p - Diluted 24.2p 30.1p From continuing operations (note 4) - Basic 37.3p 34.5p - Diluted 37.1p 31.2p Adjusted basic earnings per 50.5p 54.5pshare (note 5) Adjusted dilutedearnings per 50.3p 49.2pshare (note 5) Dividend per ordinary share 43.87p 45.42p(note 10) Re-presented dividend per 43.87p 42.43pordinary share - post rights issue (note 10) Dividend cover (note 8) 0.9 0.9 Dividend cover (pre deferred 1.1 1.3tax) (note 9) Interest cover (note 7) 2.7 2.4Consolidated balance sheet 31 March 31 March 2006 2005 ‚£m ‚£m Assets Property, plant and equipment 8,543.9 8,474.5 Goodwill 153.1 100.6 Other intangible assets 236.2 192.8 Investments 170.7 9.7 Trade and other receivables 22.0 23.4 Retirement benefit surplus 19.3 - Derivative financial instruments 40.8 - ----- ----- Total non-current assets 9,186.0 8,801.0 ----- ----- Inventories 28.2 40.9 Trade and other receivables 490.1 385.0 Investments 29.7 19.7 Cash and short term deposits 1,513.5 902.7 Derivative financial instruments 48.9 - ----- ----- Total current assets 2,110.4 1,348.3 ----- ----- Total assets 11,296.4 10,149.3 ----- ----- Liabilities Trade and other payables 383.7 337.3 Borrowings 5,081.1 4,669.0 Retirement benefit obligations - 84.6 Deferred taxation 1,426.6 1,337.3 Provisions 16.6 - Derivative financial instruments 57.6 - ----- ----- Total non-current liabilities 6,965.6 6,428.2 ----- ----- Trade and other payables 855.1 950.0 Borrowings 619.1 512.3 Current income tax liabilities 112.8 96.0 Provisions 36.5 18.4 Derivative financial instruments 76.4 - ----- ----- Total current liabilities 1,699.9 1,576.7 ----- ----- Total liabilities 8,665.5 8,004.9 ----- ----- Net assets 2,630.9 2,144.4 ----- ----- Equity Share capital 875.4 716.2 Share premium account 1,407.8 1,038.7 Revaluation reserve 158.8 158.8 Treasury shares (0.3) (0.3) Cumulative exchange reserve 2.2 3.7 Retained earnings 185.3 226.0 ----- ----- Total equity shareholders' funds 2,629.2 2,143.1 Equity minority interest 1.7 1.3 ----- ----- Total equity 2,630.9 2,144.4 ----- -----Consolidated cash flow statement Year ended 31 March 31 March 2006 2005 Continuing operations ‚£m ‚£m Operating activities Cash generated by operations 1,004.5 732.2 Interest paid (344.1) (342.0) Interest received and similar 66.2 67.0income Taxation paid (3.2) (1.7) ----- ----- Net cash generated from operating 723.4 455.5activities (continuing operations) Net cash used in operating (12.0) (15.9)activities (discontinued operation) ----- ----- 711.4 439.6 Investing activities Acquisition of subsidiaries (net of (102.4) (48.2)cash and cash equivalents acquired) Disposal of subsidiaries - 64.8 Purchase of investments (85.3) - Purchase of property, plant and (598.2) (862.0)equipment Purchase of intangible assets (31.6) - Proceeds from sale of property, 34.1 14.2plant and equipment Financial restructuring of joint 13.2 (8.3)ventures ----- ----- Net cash used in investing (770.2) (839.5)activities (continuing operations) Net cash used in investing (9.0) (12.6)activities (discontinued operation) ----- ----- (779.2) (852.1) Financing activities Proceeds from issue of ordinary 528.3 20.0shares Proceeds from borrowings 943.8 597.4 Repayment of borrowings (473.3) (62.6) Dividends paid to equity holders of (344.7) (317.5)the company ----- ----- Net cash generated from financing 654.1 237.3activities Effects of exchange rate changes (8.0) 0.9 ----- ----- Net increase/(decrease) in cash and 599.3 (145.8)cash equivalents - continuing operations Net decrease in cash and cash (21.0) (28.5)equivalents - discontinued operation ----- ----- 578.3 (174.3) ----- ----- Cash and cash equivalents at 865.6 1,039.9beginning of the year ----- ----- Cash and cash equivalents at end of 1,433.9 865.6the year ----- ----- Consolidated statement of recognised income and expense 31 March 31 March 2006 2005 ‚£m Actuarial gains/(losses) on defined benefit 119.2 (10.1)schemes Revaluation of investments 14.6 - Fair value loss on cash flow hedges (0.9) - Foreign exchange adjustments (1.4) 3.7 Tax on items taken directly to equity (35.6) 3.0 ----- ----- Net income/(expense) recognised directly in 95.9 (3.4)equity Profit for the year 208.2 262.1 ----- ----- Total recognised income and expense for the 304.1 258.7year ----- ----- Attributable to: Equity shareholders 303.8 256.9 Minority interests 0.3 1.8 ----- ----- 304.1 258.7 ----- -----Cash generated from continuing operations Year ended 31 March 31 March 2006 2005 ‚£m ‚£m Profit before taxation 439.3 367.6 Investment income and finance expense 300.7 283.8 ----- ----- Operating profit 740.0 651.4 Adjustments for: Restructuring costs within operating 25.5 29.7profit Depreciation of property, plant and 265.0 268.3equipment Amortisation of intangible assets 55.3 62.4 Profit on disposal of property, plant (4.8) (4.4)and equipment Decrease/(increase) in inventories 8.7 (3.2) (Increase)/decrease in trade and (153.2) 25.2other receivables Increase/(decrease) in provisions and 81.7 (268.8)payables Outflow related to restructuring (13.7) (28.4)costs ----- ----- Cash generated from continuing 1,004.5 732.2operations ----- -----Segmental analysis by class of business Year ended Continuing operations 31 March 31 March 2006 2005 Revenue ‚£m ‚£m Licensed multi-utility operations 1,502.9 1,384.7 Infrastructure management 692.3 512.2 Business process outsourcing 404.7 396.4 ----- ----- 2,599.9 2,293.3 Intra group eliminations Licensed multi-utility operations (7.3) (6.6) Infrastructure management (90.1) (80.2) Business process outsourcing (103.9) (88.5) Discontinued operation (11.8) (14.3) ----- ----- (213.1) (189.6) ----- ----- 2,386.8 2,103.7 ----- ----- Before pension settlements, Before Amortisation intangibles intangibles of certain Continuing operations and Pension and restruct intangible Before restructuring settlements -uring assets restructuring Restructuring Total ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Operating profit Year ended 31 March 2006 Licensed multi-utility 652.3 - 652.3 - 652.3 (0.1) 652.2operations Infrastructure 95.5 - 95.5 (1.1) 94.4 (4.7) 89.7management Business process 10.2 10.6 20.8 (8.7) 12.1 (20.7) (8.6)outsourcing Unallocated 6.7 - 6.7 - 6.7 - 6.7 ----- ----- ----- ----- ----- ----- ----- 764.7 10.6 775.3 (9.8) 765.5 (25.5) 740.0 ----- ----- ----- ----- ----- ----- ----- Operating profit Year ended 31 March 2005 Licensed multi-utility 564.6 - 564.6 - 564.6 (22.9) 541.7operations Infrastructure 82.2 7.8 90.0 0.6 90.6 (1.5) 89.1management Business process 24.3 - 24.3 (3.2) 21.1 (4.9) 16.2outsourcing Unallocated 4.8 - 4.8 - 4.8 (0.4) 4.4 ----- ----- ----- ----- ----- ----- ----- 675.9 7.8 683.7 (2.6) 681.1 (29.7) 651.4 ----- ----- ----- ----- ----- ----- -----`Amortisation of certain intangible assets' relates to amortisation charged tothe income statement during the year in respect of intangible assets arising onacquisitions undertaken since the date of transition to IFRS 3 `BusinessCombinations' (1 April 1999). Prior to the adoption of IFRS, the value of suchintangible assets would have been reflected within goodwill.Pension settlements arise in the normal course of business at the commencementof and exit from long-term contracts in the business process outsourcing andinfrastructure management segments of the group.Restructuring costs principally relate to severance and programme costs in thebusiness process outsourcing segment and are disclosed separately as thedirectors consider that they are material and this provides for a morerepresentative view of underlying segmental business performance.NOTES1. Basis of preparationInternational Financial Reporting StandardsThe consolidated financial statements of United Utilities PLC, for the yearended 31 March 2006 have been prepared for the first time in accordance withInternational Financial Reporting Standards (IFRS) as adopted for use in theEuropean Union (EU), including International Accounting Standards (IAS) andInterpretations issued by the International Financial Reporting InterpretationsCommittee (IFRIC). Results for the comparative periods have been restated underIFRS as adopted for use in the EU.Practice is continuing to evolve on the application and interpretation of IFRS.Further standards may be issued by the International Accounting Standards Board(IASB) and standards currently in issue and endorsed by the EU may be subjectto interpretations issued by the IFRIC.The principal IFRS accounting policies of the group can be found on the group'sweb site www.unitedutilities.com. The disclosures required by IFRS 1 concerningthe transition from UK GAAP (United Kingdom generally accepted accountingpractice) to IFRS are given in note 11.The financial information set out in this statement relating to the year ended31 March 2006 does not constitute statutory accounts for that period. Statutoryaccounts for 2006, in accordance with IFRS, will be delivered to the Registrarof Companies following the company's annual general meeting. The auditors havereported on those accounts; their report is unqualified and did not contain astatement under section 237(2) or (3) of the Companies Act 1985.The financial information set out in this statement relating to the year ended31 March 2005 does not constitute statutory accounts for that period. Fullstatutory accounts of United Utilities PLC in respect of that financial periodin accordance with UK GAAP, which received an unqualified audit opinion and didnot contain a statement under either section 237(2) or (3) of the Companies Act1985, have been delivered to the Registrar of Companies.Implementation of IAS 32 and IAS 39The group adopted IAS 32 Financial Instruments: Disclosure and Presentation andIAS 39 Financial Instruments: Recognition and Measurement as adopted for use inthe EU prospectively from 1 April 2005, as permissible under IFRS 1 First timeadoption of International Financial Reporting Standards. As a consequence, thegroup recognised an increase in borrowings of ‚£65.8 million and a reduction inshareholders' equity of ‚£3.5 million as at 1 April 2005, as follows: ‚£m Fair value of derivatives (44.2) Fair value of debt 65.8 Financial liabilities reinstated as not legally extinguished (26.2) Tax effect 1.1 ----- Reduction in shareholders' equity (3.5) -----Interest rate swap agreements and financial futures are used to manage interestrate exposure, while the group enters into currency swaps to manage itsexposure to fluctuations in currency rates. In accordance with IAS 39, allfinancial derivatives are recognised in the balance sheet at fair value.Changes in the fair value of all derivative financial instruments arerecognised in the income statement within finance expense as they arise, exceptfor derivatives that are designated and effective in terms of cash flow hedgingrelationships, in which case the gains and losses are deferred in equity.For an effective hedge of an exposure to changes in the fair value, the hedgeditem is adjusted for changes in fair value attributable to the risk beinghedged with the corresponding entry in profit or loss.Where changes in the fair value of a derivative differ to changes in the fairvalue of the hedged item, attributable to the risks being hedged, the hedgeineffectiveness is recorded in the income statement within finance costs.Where hedge accounting has not been applied, the group may elect to designate afinancial liability at inception as at fair value through profit or lossprovided the financial liability meets the conditions specified in IAS 39 asadopted for use in the EU.2. Profit from continuing operations before tax, restructuring costs and theimpact of IAS 39Profit from continuing operations before tax is reconciled to profit fromcontinuing operations before tax, restructuring costs and the impact of IAS 39as follows: Year ended Year ended 31 March 2006 31 March 2005 ‚£m ‚£m Continuing operations Profit before tax 439.3 367.6 Restructuring costs 25.5 29.7 Fair value loss on debt and 15.7 -derivative instruments ----- ----- 41.2 29.7 ----- ----- Profit before tax, restructuring 480.5 397.3costs and the impact of IAS 39 ----- -----3. Taxation Year ended Year ended 31 March 2006 31 March 2005 ‚£m ‚£m Current tax: UK corporation tax (charge)/ (57.4) 0.5credit Foreign tax (3.4) (1.7) Prior year 13.1 31.2 ----- ----- (47.7) 30.0 Deferred tax: Current year (64.6) (102.5) Prior year (8.0) (23.6) ----- ----- (72.6) (126.1) ----- ----- (120.3) (96.1) ----- -----4. Earnings per shareBasic earnings per share and diluted earnings per share are calculated bydividing profit for the year by the following weighted average number of sharesin issue: Basic Diluted (i) Year ended 31 March 2006 853.9 858.4 million million (ii) Year ended 31 March 2005 (restated) 781.0 865.2 million millionThe five for nine rights issue, structured so that the proceeds were receivedin two stages, was approved at the Extraordinary General Meeting (EGM) ofshareholders on 26 August 2003. The first tranche of the proceeds, receivedduring September 2003, raised ‚£501.2 million (net of costs) from the issuing of309,286,997 A shares. The second tranche of proceeds received in June 2005raised ‚£508.1 million (net of costs), reflecting the subscription of309,286,997 further A shares. In July 2005, all A shares were then consolidatedand reclassified as ordinary shares on the basis of one ordinary share for twoA shares.For the purposes of calculating the weighted average number of shares used inthe earnings per share calculations, the A shares have been treated as partpaid ordinary shares, two A shares being equivalent to one ordinary share, forthe period prior to their consolidation as ordinary shares in July 2005.The difference between the weighted average number of shares used in the basicand the diluted earnings per share calculations represents those ordinaryshares deemed to have been issued for no consideration on the conversion of allpotential dilutive ordinary shares in accordance with IAS 33 Earnings perShare.The basic and diluted weighted average number of shares have been re-presentedfor all periods prior to the second stage of the rights issue to reflect thebonus element of the rights issue as required by IAS 33. The adjustment factor,based on the consideration received from the second stage of the rights issueis 1.0962, calculated using 653.5 pence per ordinary share, being the closingprice on 27 June 2005, the last day on which A shares were traded with therights.The basic and diluted earnings per share for the year are as follows: Year ended Year ended 31 March 2006 31 March 2005 From continuing and discontinued operations - Basic 24.3p 33.3p - Diluted 24.2p 30.1p From continuing operations - Basic 37.3p 34.5p - Diluted 37.1p 31.2p 5. Adjusted basic and adjusted diluted earnings per shareAdjusted basic and adjusted diluted earnings per share have been calculated bydividing adjusted profit for the year (see below) by the weighted averagenumber of shares in issue, and shares in issue including dilutive shares,respectively.The adjusted profit for the year is calculated as follows: Year ended Year ended 31 March 2006 31 March 2005 ‚£m ‚£m Profit for the year 207.9 260.3 Restructuring costs 25.5 29.7 Loss for the period/year from discontinued 110.8 9.4operation Deferred taxation charge 72.6 126.1 Fair value loss on debt and derivative 14.7 instruments (net of current tax credit) ----- ----- Adjusted profit for the year 431.5 425.5 ----- -----Adjusted basic and diluted adjusted earnings per share for the year are asfollows: Year ended Year ended 31 March 2006 31 March 2005 ‚£m ‚£m Adjusted basic earnings per share 50.5p 54.5p Adjusted diluted earnings per 50.3p 49.2pshare 6. Discontinued operationOn 26 February 2006 the group sold the Your Communications business as part ofthe declared strategy of a progressive exit from the telecoms market. Thepurchaser was THUS Group plc and the consideration comprised initialconsideration of 391,532,832 ordinary shares with a market value of 15.5 penceeach (in aggregate ‚£60.7 million), together with the option to acquire up to afurther 4.8 per cent of shares in THUS Group plc dependent upon the futureshare price of THUS Group plc. This investment, in listed securities, presentsthe group with the opportunity for return through dividend income and tradinggains.The results of Your Communications, the discontinued operation, which have beendisclosed separately in the consolidated income statement as required by IFRS 5`Non current assets held for sale and discontinued operations, are as follows: Period ended Year ended 26 February 2006 31 March 2005 ‚£m ‚£m Revenue 175.4 233.7 Operating expenses (193.0) (245.2) ----- ----- Loss before taxation (17.6) (11.5) Taxation on loss 8.6 2.1 ----- ----- Loss for the period/year from (9.0) (9.4)discontinued operation Adjustment to value before taxation (147.7) - Taxation on adjustment to value 31.6 - Loss on disposal of discontinued (9.1) -operation Taxation on loss on disposal of 23.4 -discontinued operation ----- ----- Total loss for the period/year from (110.8) (9.4)discontinued operation ----- -----7. Interest coverInterest cover is calculated as the number of times the net finance expense forthe year (excluding the impact of IAS 39) is covered by operating profit fromcontinuing operations before restructuring costs.8. Dividend coverDividend cover is calculated by dividing profit for the year from continuingoperations before restructuring costs and the post-tax impact of IAS 39 by thedividends relating to the year.9. Dividend cover (pre deferred tax)Dividend cover (pre deferred tax) is calculated by dividing profit for the yearfrom continuing operations before restructuring costs, the post-tax impact ofIAS 39 and deferred tax by the dividends relating to the year.10. Dividends Year ended Year ended 31 March 2006 31 March 2005 ‚£m ‚£m Dividends relating to the year comprise: Interim dividend 124.8 105.3 Final dividend 259.0 219.4 ----- ----- 383.8 324.7 ----- -----Prior year dividends per ordinary share have been re-presented for comparativepurposes to take account of the bonus element of the second stage of the rightsissue. The factor applied to the prior year dividends is 0.9342, which whencombined to the factor applied for the first stage of the rights issue of0.9072 gives an overall factor of 0.8475. This overall factor is calculatedusing 576.0 pence per ordinary share, being the closing price on 25 July 2003,the last business day prior to the announcement of the rights issue.The final dividend of 29.58 pence per ordinary share will be paid on 25 August2006 to shareholders on the register at the close of business on 30 June 2006.The ex-dividend date for the final dividend is 28 June 2006.11. Reconciliations between IFRS and UK GAAPFrom 1 January 2005, all European Union listed companies are required toprepare consolidated financial statements under International FinancialReporting Standards (IFRS), issued by the International Accounting StandardsBoard (IASB) and endorsed by the European Union. Accordingly, the results forthe year ended 31 March 2006 have been prepared in accordance with IFRSaccounting policies. The group's previously reported results for the year ended31 March 2005 have been restated, the date of transition to IFRS being 1 April2004.In accordance with International Financial Reporting Standard 1 `First-TimeAdoption of International Financial Reporting Standards' (IFRS 1), the group'saccounting policies under IFRS have been applied retrospectively at the date oftransition, with the exception of a number of permitted exemptions. These aresummarised below: * The application of IAS 32 `Financial Instruments: Disclosure and Presentation' and IAS 39 `Financial Instruments: Recognition and Measurement' with effect from 1 April 2005; * The establishment of a deemed cost for the opening balance sheet carrying value of the water and wastewater infrastructure non-current assets by reference to fair value at 1 April 2004; * The selection of 1 April 1999 as the date of adoption of IFRS 3 `Business Combinations' and, as a consequence, IAS 38 `Intangible Assets' and IAS 36 `Impairment of Assets'; * The application of IFRS 2 `Share Based Payments' to those share options granted after 7 November 2002 but which had not vested by 1 April 2004; * The setting to zero of all cumulative translation differences at 1 April 2004; and * The recognition, in full, of all actuarial gains and losses relating to pension schemes at 1 April 2004 and, prospectively, through the statement of recognised income and expense. A summary of the adjustments that affected profit after tax and shareholders'equity in the comparative period is presented below: Year ended 31 March 2005 ‚£m Profit after tax under UK GAAP 334.9 Adjustments: Infrastructure accounting (27.0) Defined benefit pension schemes 4.5 Deferred tax discounting (65.6) Business combinations 5.4 Other 2.8 Tax impact of adjustments 7.1 ----- Profit for the period under IFRS 262.1 ----- Year ended 31 March 2005 ‚£m Shareholders' equity under UK GAAP 3,117.4 Adjustments: Infrastructure accounting (net of tax) 145.2 Defined benefit pension schemes (net of tax) (331.6) Deferred tax discounting (952.0) Business combinations (net of tax) 2.9 Dividends 219.4 Other (58.2) ----- Shareholders' equity under IFRS 2,143.1 -----A summary of the adjustments that affected profit for the year ended 31 March2005 and shareholders' equity as at 31 March 2005 was presented in the group's`International Financial Reporting Standards Adoption' announcement dated 19July 2005 which is available on the group's website, www.unitedutilities.com.The major areas of impact of IFRS are summarised below:Infrastructure accounting`IAS 16 Property, plant and equipment'The significant impact of IAS 16 relates to the accounting for water andwastewater infrastructure assets within the group's licensed multi-utilityoperations. Under UK GAAP, these assets were accounted for in accordance withrenewals accounting by which the water and wastewater infrastructure networksare assumed to be single assets and the depreciation charged is the estimatedlevel of annual expenditure required to maintain the operating capability ofthe networks. Actual expenditure is then capitalised as incurred.Under IAS 16 this treatment is not permitted. Therefore, the significant partswithin the infrastructure networks have been identified and, for each, a usefullife and residual value determined so that each segment may be depreciatedindividually. Furthermore, the classification between operating expenditure andcapital expenditure for amounts incurred in maintaining the networks has beenreassessed.In addition, a deemed cost has been established for the opening balance sheetcarrying value of the infrastructure networks by reference to fair value at 1April 2004.The segments recognised within the water and wastewater networks have beenbased upon asset class (for example sewers, water mains and tunnels) since nosingle pipe or section of sewer is significant compared to the total value ofthe networks. This has led to the identification of 14 segments which have beenassigned zero residual values at the end of their useful lives. The livesallocated to these segments range from 15 - 300 years. This treatment resultsin an additional depreciation charge of ‚£27.0 million in the 2005 IFRS reportedresults when compared with UK GAAP. Since the UK GAAP classification ofexpenditure between operating expenses and costs to be capitalised remains themostappropriate treatment under IAS 16, this additional depreciation directlyimpacts profit before tax.The election to record the carrying value of the water and wastewaterinfrastructure networks at fair value, and to use that fair value as the deemedcost in the opening IFRS balance sheet, increases net assets by ‚£145.2 million(net of deferred tax) as at 31 March 2005 compared with UK GAAP.There is no impact of IFRS on the amounts reported under UK GAAP forelectricity infrastructure assets.Interests in joint ventures`IAS 31 Interests in Joint ventures'For the purposes of UK GAAP, FRS 9 `Associates and Joint Ventures' requiresjoint ventures to be accounted for in consolidated financial statements usingthe gross equity method. IAS 31 does not permit gross equity accounting andinstead presents the options of equity accounting or proportionateconsolidation.The group has elected to apply proportionate consolidation on adoption of IAS31.The application of proportionate consolidation results in the group includingits share of each joint venture income statement and balance sheet accountcaption on a line by line basis within the consolidated financial statements.Proportionate consolidation does not affect operating profit, profit before taxor net assets. However, proportionate consolidation does have a material impacton certain individual balance sheet captions: most noticeably at 31 March 2005an increase of ‚£206.0 million in property, plant and equipment and increasedborrowings of ‚£178.9 million, which is typically non-recourse to the group.Defined benefit pension scheme`IAS 19 Employee benefits'The group prepared its 2005 UK GAAP results in accordance with SSAP 24`Accounting for Pension Costs', with FRS 17 `Retirement Benefits' transitionaldisclosures provided in the notes to the accounts. FRS 17 became fullyeffective for accounting periods beginning on or after 1 January 2005. Thegroup has not adopted FRS 17 and has moved directly to IAS 19.Under SSAP 24, any pension scheme surplus or deficit identified at the mostrecent actuarial valuation is recognised gradually through the profit and lossaccount over the average expected future working lifetime of current employees.The net pension cost under SSAP 24 therefore includes both the cost ofproviding an additional year of pension benefits to employees (regular cost)and an element of the surplus / deficit relating to previous years (variation).The difference between employer's contributions paid and the SSAP 24 netpension cost is recognised as a prepayment/accrual, resulting in a balancesheet position that does not necessarily reflect the actuarial position.Interest is calculated on this balance sheet entry and is also included within the net pension cost. In accordance with IAS 19, any legal and constructive obligation for post employment benefit plans must be immediately recognised as an asset or liability on the balance sheet. Where actual experience differs from the assumptions made at the start of a financial year, actuarial gains and losses will be recognised through the statement of recognised income and expense.The adoption of IAS 19 increases the 2005 profit before tax by ‚£4.5 millioncompared with UK GAAP, representing increased operating profits of ‚£4.5million.The derecognition of the UK GAAP SSAP 24 prepayment reduces net assets by ‚£272.4 million (net of deferred tax). The SSAP 24 prepayment reflected the lumpsum payment of ‚£320.0 million (pre-tax) made at 31 March 2005. Net assets arethen further reduced by the recognition of the IAS 19 deficit of ‚£59.2 million(net of deferred tax).Business combinations`IFRS 3 Business combinations'/'IAS 38 Intangible assets'Under IFRS, the recognition test for intangible fixed assets acquired inbusiness combinations is less restrictive than that of UK GAAP, and thereforemore intangible assets will be separately identified from goodwill. FRS 10`Goodwill and Intangible Assets' requires an intangible asset to be controlledby the entity through custody or legal rights and to be capable of disposalseparately from the business. By contrast IAS 38 does not require an intangibleto be separable from the entity if its ownership can be demonstrated throughcontractual or legal rights.Goodwill is not amortised under IFRS, but rather subject to annual impairmentreviews.Intangible assets (other than goodwill) are stated at cost less accumulatedamortisation and are amortised over their useful lives on a straight linebasis.IFRS 3 has a minimal impact on the net assets of the group, with the reductionin goodwill broadly offset by the recognition of newly identified intangibleassets from business combinations (mainly relating to customer lists andcontracts). However, IAS 12 `Income Taxes' requires a deferred tax liability tobe created for any transfers from goodwill to intangible fixed assets. Thisdeferred tax liability results in an increase in the goodwill arising on thebusiness combination of ‚£13.8 million as at 31 March 2005.Since goodwill is no longer being amortised, the 2005 amortisation chargereduces by ‚£7.5 million. Profit on sale or termination of operations for 2005is reduced by ‚£2.1 million due to the reversal of goodwill amortisationrelating to businesses disposed of in 2004/05.Deferred tax`IAS 12 Income taxes'The major impact of IAS 12 relates to discounting of deferred tax not beingpermitted. FRS 19 `Deferred Tax' permits, but does not require, a deferred taxasset or liability to be discounted and as a result the group has been able toapply a policy of discounting its deferred tax liability.However, IAS 12 does not permit discounting in any circumstances. This is ofparticular significance to a utility business where any reversal of timingdifferences is likely to be deferred long into the future due to the long assetlives of network assets. The inability to discount results in an increase inthe balance sheet deferred tax liability of ‚£952.0 million at 31 March 2005 andconsequently a reduction in net assets.The deferred tax impacts arising from any other IFRS adjustments are includedin the relevant sections.Dividends`IAS 10 Events after the balance sheet date'IAS 10 and SSAP 17 `Accounting for Post Balance Sheet Events' both distinguish`adjusting events' from `non-adjusting events' with similar definitions andapplications. However, under IAS 10 dividends may not be recognised until theyhave been appropriately authorised and are no longer at the discretion of theentity. Therefore, if this occurs after the balance sheet date, the dividendsare not recognised as a liability at the balance sheet date. However, they aredisclosed in the notes to the accounts in accordance with IAS 1 `Presentationof Financial Statements'.Dividends are no longer recognised within the income statement and are recordeddirectly within reserves. The final dividend of ‚£219.4 million included withthe UK GAAP financial statements for 2004/05 have been reversed at 31 March2005, thereby increasing net assets.Accounting for derivatives`IAS 39 Financial instruments: Recognition and measurement'The group is taking the exemption offered by IFRS 1 to apply IAS 39 with effectfrom 1 April 2005 rather than 1 April 2004 (the date of transition). Thecomparative information for 2004/05 within the 31 March 2006 IFRS financialstatements therefore reflects derivatives accounted for under UK GAAP.Under UK GAAP, debt is carried at its hedged amount and the fair values ofderivatives are not recognised in the balance sheet. Under IAS 39, the defaulttreatment is for debt to be carried at amortised cost, whilst derivatives arerecognised separately on the balance sheet at fair value with movements inthose fair values reflected through the income statement. This has thepotential to introduce considerable volatility to both the income statement andbalance sheet. Therefore, for fair value hedges, IAS 39 allows changes in therecognised value of hedged debt that are attributable to the hedged risk to beadjusted through the income statement. In the case of cashflow hedges,movements in the fair value of derivatives are deferred within reserves untilthey can be recycled through the income statement to offset the future incomestatement effect of changes in the hedged risk. In order to apply thistreatment, it must be demonstrated that the derivative has been and willcontinue to be an effective hedge of the hedged risk within the debt item.Changes in the fair value of all derivatives are recognised in the incomestatement, except for derivatives that are designated and effective in terms ofcash flow hedging relationships, in which case the gains and losses aredeferred in equity.As a result of applying IAS 39, liabilities in respect of derivatives totalling‚£70.4 million are recognised at 1 April 2005. This is offset by a reduction ingross debt to account for the hedged risk of ‚£65.8 million, resulting in areduction to net assets of ‚£4.6 million (pre tax) compared with UK GAAP.Financial statementsENDUNITED UTILITIES PLC