Half-yearly Report

United Utilities Group PLC 27 November 2013 HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2013 Continuing operations Six months ended 30 September 2013 30 September 2012 (Restated*) Revenue £853.3m £822.9m Underlying operating profit** £343.2m £314.7m Operating profit £341.7m £314.1m Interim dividend per ordinary 12.01p 11.44pshare (pence) Regulatory capitalexpenditure*** £407m £354m RCV gearing**** 59% 60% * In accordance with the revised accounting standard IAS 19 'Employee benefits'which applies retrospectively, the prior half year has been restated ** Underlying profit measures have been provided to give a more representativeview of business performance and are defined in the underlying profit measuretables *** Regulatory capex represents fixed asset additions and infrastructurerenewals expenditure using regulatory accounting guidelines; there is noequivalent GAAP measure **** Regulatory capital value or RCV gearing calculated as group net debt/United Utilities Water's RCV adjusted for actual capex (outturn prices) * Operational improvement delivering further benefits for customers - continued improvements in customer satisfaction, with further progress onOfwat's SIM scores - strong operational performance on Ofwat's overall KPIs assessment - effective delivery of capital investment programme; Time: Cost: Quality index(TCQi) over 90% - expect to invest at least £800m in 2013/14 * Outperformance continues to benefit customers and shareholders - reinvesting c£240m of capex & financing outperformance for customer &environmental benefits - revised tax treatment agreed with HMRC; c£75m net cash benefit to be used asfollows: - c£20m special customer discount; offsetting allowed real price increase for2014/15 - c£17m of further support for customers struggling to pay - c£38m balance to be used for future sharing with customers * Good financial performance - underlying operating profit up £29m to £343m, benefiting from tight costcontrol - interim dividend of 12.01 pence per share, in line with policy * Business plan submission proposes below inflation bills for households - reflects extensive customer consultation, coupled with significant costsaving initiatives - substantial capex programme to maintain & improve services & meetenvironmental obligations - below inflation average household bills for the ten-year period 2010-20 Steve Mogford, Chief Executive Officer, said: "Customer satisfaction with our service has continued to improve, underpinnedby strong operational and environmental performance, and we remain focused ondelivering further improvements. We are on track to invest at least £800million this year in our network, maintaining and improving services, providingenvironmental benefits and supporting the local economy. "We are discounting prices next year so that customers do not pay the fullallowed price increase, meaning that, on average, bills will go up by no morethan inflation. We are also committing to further support for customersstruggling to pay. This is in addition to the previously announced reinvestmentof £240 million of outperformance for the benefit of our customers and theenvironment. "Our business plan for the next five-year period means that customers wouldbenefit from below inflation average household bills for the decade to 2020. Wehave sought the views of over 27,000 customers, as well as consulting with ourregulators, to deliver a plan which we believe strikes the right balance forall our stakeholders. This includes a substantial capital investment programmeto meet our environmental obligations and deliver further customer and economicbenefits." For further information on the day, please contact: Gaynor Kenyon - Corporate Affairs Director +44 (0) 7753 622282 Darren Jameson - Head of Investor Relations +44 (0) 7733 127707 Peter Hewer / Michelle Clarke - Tulchan Communications +44 (0) 20 7353 4200 A presentation to investors and analysts starts at 9.00 am on Wednesday 27November 2013, at the Auditorium, Deutsche Bank, Winchester House, 1 GreatWinchester Street, London, EC2N 2DB. The presentation can be accessed via alive listen in conference call facility by dialling: +44 (0) 20 7162 0025,access code 938555. A recording of the call will be available for seven daysfollowing Wednesday 27 November 2013 on +44 (0) 20 7031 4064, access code938555. This results announcement and the associated presentation will be available onthe day at: http://corporate.unitedutilities.com/investors.aspx BUSINESS REVIEW KEY OPERATIONAL PROGRESS Improving operational performance and delivering benefits for customers and theenvironment remain top priorities for United Utilities (UU). Alongside this, weare on track to outperform our regulatory contract. We have made significantprogress since the start of the 2010-15 regulatory period, as outlined below: * Significant improvements in customer service - Since 2010, every year we havecontinued to improve the customer experience, as demonstrated through Ofwat'scustomer service measure the service incentive mechanism (SIM). Over the twoyears to 2012/13, we have moved up from last position to joint fifth, among theten water and sewerage companies, on Ofwat's combined SIM assessment. In thefirst half of 2013/14, we continued our progress and have improved our score onOfwat's qualitative SIM measure, as we narrow the gap further to the leadingperformers, although recognise that we still have more to do. Following a 40%reduction in written complaints in 2012/13 (best improvement in sector),complaints have continued to fall and we are pleased to again have zerocomplaints warranting investigation by the Consumer Council for Water in thefirst half of 2013/14. * Strong operational performance - We performed well again across a broad front,as measured in Ofwat's latest (2012/13) key performance indicators report. Thebalance of ratings across the fourteen assessments indicates that UU is againan above average performer, in respect of the ten water and sewerage companies.This performance has helped provide benefits for customers, for example interms of better customer service and very high levels of reliability andavailability of water supply and wastewater services, alongside a range ofenvironmental benefits. * Effective capital delivery drives customer and environmental benefits - Wecontinue to drive more effective and efficient delivery of our capitalprogramme. This is reflected in a significant improvement in our Time: Cost:Quality index (TCQi) score from around 50% in 2010/11 to over 90% for the firsthalf of 2013/14. We met our water and wastewater asset serviceability standardsin 2012/13 and have confidence that our performance in respect of meeting our2010-15 regulatory commitments will be much improved, compared with the 2005-10period. We have now invested just over £2.4 billion across the first three anda half years of this regulatory period, as we have sought to deliver a smootherinvestment profile to support efficient delivery of outputs and reduce risk. * Leakage target - We have met or outperformed our regulatory leakage targetfor seven consecutive years and our aim is to meet the target each year. * Regulatory outperformance on track- We have set clear targets for the 2010-15period and remain on track or ahead of schedule in delivering these targets. Asoutlined previously, we expect to reinvest around £240 million of capex andfinancing outperformance, over 2010-15, for the benefit of our customers andthe environment. * Corporate responsibility - We retained a `World Class' rating in the DowJones Sustainability Index for the sixth consecutive year. We also have thehighest `Platinum Big Tick' ranking in Business in the Community's CorporateResponsibility Index. We are one of only seven FTSE 100 companies to hold bothaccolades. * Extending our presence in the retail water marketfor business customers - Wehave been building our capability over the last two years to help ensure we arein a strong position as the competitive business retail market evolves and arevery active in this expanding market. After attaining a Scottish water supplylicence in 2012 we have already won over 50 customers, covering over 1,500sites and representing future annual revenue of around £6 million. We are nowthe second largest water retailer in Scotland. We also have a significantpipeline of opportunities and are continuing to develop our range ofvalue-added services. Financial overview The group has delivered another good set of financial results for the sixmonths ended 30 September 2013. * Revenue - up by £30 million to £853 million, principally as a result of theimpact of the regulated price increase for 2013/14 of 4.0% nominal (1.0% realprice increase, plus 3.0% RPI inflation). This follows on from real pricedecreases of 4.3% in 2010/11 and 0.2% in 2011/12, with an allowed real priceincrease of 0.6% in 2012/13. * Underlying operating profit - increased by £29 million to £343 million as thecompany tightly managed its cost base, keeping total cost increases below 1%. * Capex - total regulatory capital investment in the half year, including £78million of infrastructure renewals expenditure, was £407 million, representingan increase of 15% compared with the first half of last year, reflectingcontinued good progress on the capital investment programme. * Underlying profit before taxation - up £27 million, at £216 million,marginally below the increase in underlying operating profit as net financeexpense increased slightly, mainly due to higher levels of index-linked debt. * Reported profit after taxation - this benefited from a £159 million deferredtaxation credit, which follows the UK Government's announced staged 3%reduction in the mainstream taxation rate down to 20% by 2015/16. A similarcredit of £53 million, reflecting a 1% reduction in the mainstream taxationrate, was recognised in the first half of 2012/13. Reported profit aftertaxation also benefitted from a current taxation credit of £122 million and adeferred taxation credit of £3 million, both relating to recently agreedmatters with Her Majesty's Revenue and Customs (HMRC) in relation to prioryears, covering a period of over ten years in total. * Agreement with HMRC - this agreement principally relates to revised taxationtreatment with regard to capital expenditure, particularly in respect of theabolition of industrial buildings allowances in 2008. The total taxation creditto the income statement of £125 million includes deferred taxation and therelease of an accounting accrual, which are non-cash items. We expect toreceive a cash taxation benefit of around £90 million over the next two yearsrelating to the revised capex taxation treatment, of which a £15 million costwas borne by shareholders in the latter part of the previous regulatory period.We are proposing to share the £75 million net cash benefit with customers. Weare proposing a special customer discount of c£20 million to offset the allowedreal price increase for 2014/15 and we are committing to further support of £17million, through additional contributions to our trust fund, for customers whoare struggling to pay. We intend to use the balance of c£38 million for futuresharing with customers. In addition, we estimate that there will be taxationsavings of around £90 million in the 2015-20 period, all of which will flowthrough to customers. * Capital structure - the group has a robust capital structure and gearing(measured as group net debt to regulatory capital value) as at 30 September2013 was 59%, comfortably within Ofwat's assumed range of 55% to 65%,supporting a solid investment grade credit rating. United Utilities Water PLC(UUW) has a long-term credit rating of A3 from Moody's with a stable outlook. * Financing headroom - the group benefits from headroom to cover its projectedfinancing needs into 2015, with substantially all term debt due in the 2010-15period already repaid. This provides good flexibility in terms of when and howfurther debt finance is raised to help refinance maturing debt and fund theregulated capital investment programme. * Dividend - in line with its policy, the board has declared an interimdividend of 12.01 pence per ordinary share. PRICE REVIEW 2014 - BUSINESS PLAN On 2 December 2013, we will submit our business plans, covering the 2015-20period, to Ofwat. Following a period of extensive consultation with around27,000 customers and other key stakeholders, we believe our plans strike theright balance for all parties. Supported by customer research and significantcost saving initiatives, we are proposing below inflation average householdbills across 2015-20. This would mean that our customers would benefit frombelow inflation average household bills for the decade to 2020. Our plan willinclude a substantial capital investment programme to help us meet ourenvironmental obligations, alongside maintaining and improving services forcustomers. OUTLOOK Our sustained focus on operational performance, combined with continuedsubstantial investment in our assets, will deliver further benefits for ourcustomers and the environment. We are encouraged by our progress on Ofwat'sservice incentive mechanism and our strong operational performance and believewe can improve further. We remain confident of delivering our 2010-15regulatory outperformance targets, where we are ahead of schedule. We intend tocontinue with our dividend policy of targeting 2% per annum growth above therate of RPI inflation through to at least 2015, underpinned by a robust capitalstructure. We are submitting our 2015-20 business plan to Ofwat, which webelieve strikes the right balance for all our stakeholders, and will continueto actively engage with our regulators as we look forward to the draft andfinal determinations from Ofwat next year. OPERATIONAL PERFORMANCE United Utilities aims to deliver long-term shareholder value by providing: * The best service to customers * At the lowest sustainable cost * In a responsible manner Best service to customers Our continuing strong focus on dealing effectively with customer enquiries hashelped us deliver further improvements in our performance on Ofwat's serviceincentive mechanism (SIM). Following on from a 40% reduction in writtencomplaints in 2012/13 (the biggest improvement in the water sector), complaintshave continued to fall in the first half of 2013/14. In addition, the number ofcustomer complaints made to the Consumer Council for Water (CCW) in the firsthalf of 2013/14 has reduced by a further 12%, compared with the first half of2012/13. We are pleased to report that the total number of escalated complaintsassessed by the CCW was again zero in the first half of 2013/14. This hashelped us improve our SIM performance further, as detailed in the KPIs sectionbelow. This places us in a good position as we aim to avoid a SIM penalty. Ourstrong overall operational performance, as measured by Ofwat's latest (2012/13)KPIs report, has also contributed to improving customer satisfaction. Our customers continue to benefit from our robust water supply and demandbalance and high levels of water supply reliability. In addition, we continueto supply a high level of water quality, with mean zonal compliance continuingto be over 99.9%. We have continued to invest heavily in schemes designed to mitigate the risk offlooding of our customers' homes, including incidence based targeting on areasmore likely to experience flooding and defect identification through CCTV sewersurveys. Our wastewater network will continue to benefit from significantinvestment going forward as we adapt to weather patterns likely to result fromclimate change. We have a range of actions to help support the serviceability of our assets. Weare improving the robustness of our water treatment processes, refurbishingservice reservoir assets, continuing with our comprehensive mains cleaningprogramme and optimising water treatment to reduce discoloured water events. Improving customer service remains a significant area of continued managementfocus and we see plenty of opportunity to deliver further benefits for ourcustomers. Key performance indicators: * Serviceability - Long-term stewardship of assets is critical and Ofwatmeasures this through its serviceability assessment (Ofwat definesserviceability as the capability of a system of assets to deliver a referencelevel of service to customers and to the environment now and in the future). Weare currently assessed as 'improving' for our wastewater non-infrastructureassets and 'stable' for our water infrastructure, water non-infrastructure andwastewater infrastructure assets. The aim is to continue to hold at least a`stable' rating for all four asset classes, which aligns with Ofwat's target. * Service incentive mechanism (SIM) - UU continued its progress on Ofwat'scombined SIM assessment for 2012/13, moving up a further three places to joint13th of the 21 water companies, compared with 2011/12. This represents jointfifth position among the ten water and sewerage companies. Progress hascontinued in the first six months of 2013/14, with a further improvement in thequantitative SIM score, compared with the first half of 2012/13. On thequalitative measure, UU has improved its 2013/14 average score by 0.10 pointsto 4.53 points which represents an above average score and narrows the gap tothe leading performers. From 2013/14, Ofwat assesses SIM out of 19 watercompanies and UU's qualitative SIM improvement moves it to 10th position. Ourcontinued progress is encouraging, as we aim to move to the first quartile inthe medium-term. Lowest sustainable cost Our asset optimisation programme continues to provide the benefits of increasedand more effective use of operational site management to optimise power andchemical use and the development of more combined heat and power assets togenerate renewable energy. We are implementing a more proactive approach to asset and network management,with the aim of improving our modelling and forecasting to enable us to addressmore asset and network problems before they affect customers, thereby reducingthe level of reactive work and improving efficiency. We have substantially locked in the cost of our power requirements through to2015, via hedging, securing outperformance across the 2010-15 period. We are continuing to enhance our proactive approach to debt collection and areimplementing a detailed action plan. We recognise the financial difficultiesfacing many of our customers and provide a range of options to help those whoare struggling to pay their bills and we have helped many customers back ontomanageable payment plans. We have again delivered a good performance and havesustained bad debts at 2.2% of regulated revenue for the first half of 2013/14,consistent with the 2012/13 full year position. UU placed its pension provision on a more sustainable footing in 2010 and hassubsequently taken additional steps to de-risk the pension scheme further.Further details on the group's pension provision are provided in the pensionssection. The business is strongly focused on delivering its commitments efficiently andon time and has a robust commercial capital delivery framework in place for the2010-15 period. Regulatory capital investment in the half year, including £78million of infrastructure renewals expenditure, was £407 million and we expectto deliver at least £800 million in 2013/14. We improved our internal Time:Cost: Quality index (TCQi) score from around 50% in 2010/11 to approximately90% in 2012/13 and have delivered over 90% in the first half of 2013/14. Wereceived a shortfalling revenue penalty of over £80 million at the last pricereview in 2009 but, with our improved TCQi performance, we aim to avoid, or atleast minimise, any revenue penalties at the 2014 price review. We remain ontrack to deliver the five-year programme within the regulatory allowance ofaround £3.5 billion (excluding costs associated with private sewers andtransitional investment) and we are reinvesting any capex outperformance todeliver further customer benefits. The transfer of private sewers around two years ago has gone well and is nowfully embedded within our 'business as usual' activities. In the first half of2013/14, private sewers opex was £5 million and capex was £16 million, of which£9 million was IRE. This level of spend is broadly in line with ourexpectations and there is no change to our 2011-15 total cost estimate of £160million. Key performance indicators: *Financing outperformance - UU has secured over £300 million of financingoutperformance across the 2010-15 period, when compared with Ofwat's allowedcost of debt of 3.6% real, based on an average RPI inflation rate of 2.5% perannum. As outlined previously, we expect to reinvest around £40 million of ourfinancing outperformance in unfunded private sewers costs. * Operating expenditure outperformance - The business is targeting totaloperating expenditure outperformance over the 2010-15 period of at least £50million, or approximately 2%, compared with the regulatory allowance. This isin addition to the base operating expenditure efficiency targets set by Ofwat,which equate to a total of approximately £150 million over the five years. Wehave now delivered cumulative operating expenditure outperformance of over £50million in the first three and a half years of the regulatory period and areahead of schedule. * Capital expenditure outperformance - UU is continuing to deliver significantefficiencies in the area of capital expenditure and expects to meet Ofwat'sallowance after adjusting, through the regulatory methodology, for the impactof lower construction output prices. As outlined previously, we expect toreinvest around £200 million of capital expenditure outperformance for thebenefit of our customers and the environment. Responsible manner Acting responsibly is fundamental to the manner in which we undertake ourbusiness and the group has for many years included corporate responsibilityfactors in its strategic decision making. Our environmental and sustainabilityperformance across a broad front has received external recognition. UUcontinues to be rated 'World Class' in the Dow Jones Sustainability Index andhas retained the highest ranking, 'Platinum Big Tick', in Business in theCommunity's Corporate Responsibility Index. UU is one of only seven FTSE 100companies (and the only water company) to hold both accolades. Our strong, year round, operational focus on leakage and the implementation ofa range of initiatives, such as active pressure management, enabled us to againbeat our leakage target for 2012/13. Our aim is meet our leakage target eachyear. Environmental performance is a high priority for UU and we are pleased to againdeliver a strong performance as assessed through Ofwat's published KPIs for2012/13. Across Ofwat's five 'Environmental Impact' KPIs, UU's performance wasabove average, with three areas assessed as 'Green', two as 'Amber' and noareas assessed as 'Red', on the traffic light reporting matrix. Our £100 million+ project in Preston, which is designed to improve river andbathing quality, is nearing completion. The project involved building a 3.5kilometre storm water storage tunnel and the construction of shafts to divertstorm water flows, which will be retained in the new storage tunnel. It willreduce the number of spills to the River Ribble from combined sewers and shoulddeliver significant improvements to the Fylde Coast bathing waters and theRibble Estuary. We are committed to reducing our carbon footprint and increasing our generationof renewable energy. We remain on track to meet our plan target of a 21%reduction in carbon emissions by 2015 (measured from a 2005/06 baseline). Wehave consistently generated around 100 GWh of renewable electricity annuallyfor the past four years, principally from sludge processing, and expect this toincrease with the completion of our £100 million+ recycling and energy plant atour Davyhulme wastewater site in 2014. We continue to be successful in attracting and retaining people and havecontinued to expand our apprentice and graduate programmes, having recruited afurther 24 graduates and 32 apprentices in 2013/14. We remain firmly focussedon our health and safety improvement programme, as we strive for continuousimprovement. Key performance indicators: * Leakage - UU met its economic level of leakage rolling target for the seventhconsecutive year in 2012/13. The aim is to meet our regulatory leakage targeteach year. * Environmental performance - The Environment Agency's 2012/13 assessment,covering a broad range of operational metrics, is due to be published shortly.UU's good performance on Ofwat's KPIs, within the `Environmental Impact'category, should positively impact the EA's overall assessment. For the EA's2011/12 assessment, based on the balance of 'Green', 'Amber' and 'Red'categories, UU would rank third out of the ten water and sewerage companies.The medium-term goal is to be a first quartile company on a consistent basis. * Corporate responsibility - UU has a strong focus on corporate responsibilityand is the only UK water company to have a 'World Class' rating as measured bythe Dow Jones Sustainability Index. The group recently retained its 'WorldClass' rating and aims to retain this rating each year. FINANCIAL PERFORMANCE Revenue UU has delivered a good set of financial results for the six months ended 30September 2013. Revenue increased by £30 million to £853 million, principallyreflecting a 4.0% nominal (1.0% real price increase plus 3.0% RPI inflation)allowed regulated price increase. Operating profit Underlying operating profit increased by 9% to £343 million, primarily as aresult of an increase in revenue and benefiting from tight cost control withtotal operating expenses up £3 million, representing an increase of less than1%. Reported operating profit increased by 9% to £342 million. Investment income and finance expense The underlying net finance expense of £128 million was £2 million higher thanthe first half of last year, reflecting an increase in index-linked debt. Theindexation of the principal on index-linked debt amounted to a net charge inthe income statement of £45 million, compared with a net charge of £43 millionin the first half of last year. The group had approximately £2.9 billion ofindex-linked debt as at 30 September 2013. The group's average underlyinginterest rate of 4.8% was slightly lower than the rate of 5.0% for thecorresponding prior year period, mainly reflecting a reduction in cash. Reported investment income and finance expense of £7 million was significantlylower than the £175 million expense in the first half of 2012/13. This £168million reduction principally reflects a change in the fair value gains andlosses on debt and derivative instruments, from a £49 million loss in the firsthalf of last year to a £100 million gain in the first half of 2013/14. The £100million fair value gain in the half year is largely due to gains on theregulatory swap portfolio, resulting from a significant increase in sterlinginterest rates during the period. The group uses these swaps to fix interestrates on a substantial proportion of its debt to better match the financingcash flows allowed by the regulator at each price review. The group fixed themajority of its non index-linked debt for the 2010-15 financial period,providing a net effective nominal interest rate of approximately 5%. Profit before taxation Underlying profit before taxation was £216 million, £27 million higher than thecorresponding period last year, due to the £29 million increase in underlyingoperating profit slightly offset by the £2 million increase in underlying netfinance expense. This underlying measure adjusts for the impact of one-offitems, principally from restructuring and reorganisation within the business,and fair value movements in respect of debt and derivative instruments.Reported profit before taxation increased by £196 million to £335 million. Taxation The current taxation charge is £49 million in the half year, compared with £33million in the corresponding period last year. In addition, there was a currenttaxation credit of £122 million relating to recently agreed matters with HMRCin relation to prior years. We expect this to result in a one-off cash taxationinflow of around £75 million to be received in this or the next financial year. The group has a deferred taxation charge of £23 million in the first half of2013/14, compared with a charge of £3 million in the first half of 2012/13. Thegroup has recognised a deferred taxation credit of £159 million in the firsthalf of 2013/14 which relates to the 3% staged reduction in the mainstream rateof corporation taxation, substantively enacted on 2 July 2013, to reducetaxation to 20% by 2015/16. A deferred taxation credit of £53m relating to asimilar 1% reduction in the mainstream rate of corporation taxation wasincluded in the first half of 2012/13. The group also recognised a deferredtaxation credit of £3 million relating to recently agreed matters in relationto prior years. An overall taxation credit of £212 million has been recognised for the sixmonths ended 30 September 2013. Excluding the deferred taxation impact of thefuture reduction in the corporation taxation rate and the adjustments relatingto recently agreed matters in relation to prior years, the total taxationcharge would have been £72 million or 21% compared with a £35 million charge or25% in the first half of last year. This reduction in total taxation rate isdue to the decrease in the mainstream rate of corporation taxation from 24% for2012/13 to the current rate of 23%, together with the period-on-period movementin taxation disallowable items. The group made cash taxation payments during the half year of £27 million. Thiswas higher than the group's net taxation payment of £17 million in the firsthalf of last year, primarily due to the high levels of pension contributionsrelating to the previous year. Profit after taxation Underlying profit after taxation of £168 million was £27 million higher thanthe first half of last year, principally reflecting the increase in underlyingprofit before taxation. Reported profit after taxation was £547 million,compared with £157 million in the first half of last year, impacted by the £149million improvement in fair value gains on debt and derivative instruments andthe £194 million increase in the net taxation credit between the two periods. Earnings per share Underlying earnings per share increased from 20.8 pence to 24.7 pence. Thisunderlying measure is derived from underlying profit after taxation. Thisincludes the adjustments for the deferred taxation credits in both the firsthalf of 2013/14 and 2012/13, associated with the reductions in the corporationtaxation rate and an adjustment for the taxation credit arising from agreementof prior years' taxation matters in the first half of 2013/14. Basic earningsper share increased from 23.0 pence to 80.2 pence. Dividend per share The board has declared an interim dividend of 12.01 pence per ordinary share inrespect of the six months ended 30 September 2013. This is an increase of 5.0%,compared with the dividend relating to the first half of last year, in linewith group's dividend policy of targeting a growth rate of RPI+2% per annumthrough to at least 2015. The inflationary increase of 3.0% is based on the RPIelement included within the allowed regulated price increase for the 2013/14financial year (i.e. the movement in RPI between November 2011 and November2012). The interim dividend is expected to be paid on 3 February 2014 to shareholderson the register at the close of business on 20 December 2013. The ex-dividenddate is 18 December 2013. Cash flow Net cash generated from continuing operating activities for the six monthsended 30 September 2013 was £383 million, compared with £265 million in thefirst half of last year. This mainly reflected an improvement in workingcapital cash flows, impacted by the reduction in the total pension contributionpayments between the two periods, as well as an increase in operating profit.The group's net capital expenditure was £335 million, principally in theregulated water and wastewater investment programmes. This excludesinfrastructure renewals expenditure which is treated as an operating cost underInternational Financial Reporting Standards (IFRS). Net debt including derivatives at 30 September 2013 was £5,485 million,compared with £5,451 million at 31 March 2013. This slight increase reflectsexpenditure on the regulatory capital expenditure programmes and payments ofdividends, interest and taxation, alongside an increase in the principal of ourindex-linked debt, largely offset by operating cash flows and fair value gainson our debt and derivative instruments. Debt financing and interest rate management Gearing (measured as group net debt divided by UUW's regulatory capital valueadjusted for actual capital expenditure) decreased marginally to 59% at 30September 2013, compared with 60% at 31 March 2013, remaining comfortablywithin Ofwat's 55% to 65% assumed gearing range. The group's pension accountingposition has moved to a deficit of £184 million at 30 September 2013, on anIFRS basis, compared with a small pension surplus of £15 million as at 31 March2013. Taking account of the group's pension deficit, and treating it as debt,gearing would be 61%. At 30 September 2013, UUW had long-term credit ratings of A3/BBB+ and UnitedUtilities PLC had long-term credit ratings of Baa1/BBB- from Moody's InvestorsService and Standard & Poor's Ratings Services respectively. The split ratingreflects differing methodologies used by the credit rating agencies. Standard &Poor's currently have both the group's ratings on positive outlook, citingimproving financial metrics and operational performance. Cash and short-term deposits at 30 September 2013 amounted to £53 million and,taken together with medium-term committed bank facilities, the group hasheadroom to cover its projected financing needs into 2015. The group has access to the international debt capital markets through its €7billion euro medium-term note programme which provides for the periodicissuance by United Utilities PLC and UUW of debt instruments on terms andconditions determined at the time the instruments are issued. The programmedoes not represent a funding commitment, with funding dependent on thesuccessful 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 subjectto regulatory price reviews every five years. Long-term sterling inflation index-linked debt provides a natural hedge toassets and earnings. At 30 September 2013, approximately 53% of the group's netdebt was in index-linked form, representing around 31% of UUW's regulatorycapital value, with an average real interest rate of 1.7%. The long-term natureof this funding also provides a good match to the company's long-lifeinfrastructure assets and is a key contributor to the group's average term debtmaturity which is approximately 25 years. Where nominal debt is raised in a currency other than sterling and/or with afixed interest rate, to manage exposure to long-term interest rates, the debtis generally swapped to create a floating rate sterling liability for the termof the liability. To manage exposure to medium-term interest rates, the groupfixed interest costs for a substantial proportion of the group's debt for theduration of the 2010-15 regulatory period at around the time of the 2009 pricereview. Following the 2009 price review, the group reassessed its interest rate hedgingpolicy with a view to further reducing regulatory risk. To help address theuncertainty as to how Ofwat may approach the setting of the cost of debtallowance at the next price review in 2014, UU revised its interest ratemanagement strategy to extend its fixed interest rate hedge out to a ten-yearmaturity on a reducing balance basis. The intention is that the effectiveinterest rate, on the group's nominal debt, in any given year will, over time,be a ten-year rolling average interest rate. UU believes that this revisedinterest rate hedging policy, which provides for a longer fixing of interestrates, will help mitigate the risk of the group being materially misalignedwith whatever approach Ofwat adopts to the industry cost of debt in future. Liquidity Short-term liquidity requirements are met from the group's normal operatingcash flow and its short-term bank deposits and supported by committed butundrawn credit facilities. In addition to its €7 billion euro medium-term noteprogramme, the group has a €2 billion euro-commercial paper programme, both ofwhich do not represent funding commitments. In line with the board's treasury policy, UU aims to maintain a robust headroomposition. Available headroom at 30 September 2013 was £273 million based oncash, short-term deposits and medium-term committed bank facilities, net ofshort-term debt. UU believes that it operates a prudent approach to managing bankingcounterparty risk. Counterparty risk, in relation to both cash deposits andderivatives, is controlled through the use of counterparty credit limits. UU'scash is held in the form of short-term (generally no longer than three months)money market deposits with either prime commercial banks or with triple A ratedmoney market funds. UU operates a bilateral, rather than a syndicated, approach to its corerelationship banking facilities. This approach spreads maturities more evenlyover a longer time period, thereby reducing refinancing risk and providing thebenefit of several renewal points rather than a large single refinancingrequirement. Pensions As at 30 September 2013, the group had an IAS 19 net retirement benefit, orpension, deficit of £184 million, compared with a net pension surplus of £15million at 31 March 2013. This £199 million adverse movement principallyreflects the movement of market rates during the period, particularlyinfluenced by the significant reduction in corporate credit spreads. Incontrast, the scheme specific funding basis does not suffer from volatility dueto credit spread movements as it uses a conservative, fixed credit spreadassumption. Therefore, the recent credit spread movements have not had amaterial impact on the scheme specific funding and the level of deficit repaircontributions. The triennial actuarial valuations of the group's defined benefit pensionschemes were carried out as at 31 March 2013 and the overall funding positionhas improved since March 2010. Following the de-risking measures we haveimplemented over recent years, our pension funding position remains well placedand in line with our expectations. There has been no material change to thescheduled cash contributions as assessed at the previous valuations in 2010.The group has already completed early all scheduled deficit repair paymentsthrough to March 2015. Further detail is provided in note 9 ("Retirement benefit (obligations)/surplus") of these condensed consolidated financial statements. Underlying profit In considering the underlying results for the period, the directors haveadjusted for the items outlined in the table below to provide a morerepresentative view of business performance. Reported operating profit andprofit before taxation from continuing operations are reconciled to underlyingoperating profit, underlying profit before taxation and underlying profit aftertaxation (non-GAAP measures) as follows: Continuing operations Restated*Operating profit Six months ended Six months ended 30 September 30 September 2013 2012 £m £m Operating profit per published results 341.7 314.1 One-off items** 1.5 0.6 ----- ----- Underlying operating profit 343.2 314.7 ----- ----- Net finance expense £m £m Finance expense (7.9) (176.0) Investment income 1.2 1.3 ----- ----- Net finance expense per published results (6.7) (174.7) Net fair value (gains)/losses on debt and (100.0) 49.4derivative instruments Adjustment for interest on swaps and debt 4.5 3.0under fair value option Adjustment for net pension interest (income)/ (0.5) 1.7expense Adjustment for capitalised borrowing costs (11.5) (5.4) Adjustment for release of tax interest accrual (13.3) - ----- ----- Underlying net finance expense (127.5) (126.0) ----- ----- Profit before taxation £m £m Profit before taxation per published results 335.0 139.4 One-off items** 1.5 0.6 Net fair value (gains)/losses on debt and (100.0) 49.4derivative instruments Adjustment for interest on swaps and debt 4.5 3.0under fair value option Adjustment for net pension interest (income)/ (0.5) 1.7expense Adjustment for capitalised borrowing costs (11.5) (5.4) Adjustment for release of tax interest accrual (13.3) - ----- ----- Underlying profit before taxation 215.7 188.7 ----- ----- Profit after taxation £m £m Underlying profit before taxation 215.7 188.7 Reported taxation 211.8 17.4 Deferred taxation credit - change in taxation (158.6) (52.8)rate Agreement of prior years' UK taxation matters (125.0) - Taxation in respect of adjustments to 24.4 (11.8)underlying profit before taxation ----- ----- Underlying profit after taxation 168.3 141.5 ----- ----- Earnings per share £m £m Profit after taxation per published 546.8 156.8results (a) Underlying profit after taxation (b) 168.3 141.5 Weighted average number of shares in issue, in 681.9m 681.8mmillions (c) Earnings per share per published results, in 80.2p 23.0ppence (a/c) Underlying earnings per share, in pence (b/c) 24.7p 20.8p * In accordance with the revised accounting standard IAS 19 'Employee benefits'which applies retrospectively, the first half of 2012/13 has been restated ** Principally relates to restructuring costs within the business PRINCIPAL RISKS AND UNCERTAINTIES We manage risk through line management supported by our corporate riskmanagement framework which aims for continuous improvement. With an overarchingmandate from and commitment by the group board, the framework consists of fourkey areas: governance; approach; guidance; and process. The application of our framework involves regular review of internal andexternal risk environments, the assessment of factors that will limit orprevent the achievement of the group's objectives and the prioritisedimplementation of controls and mitigation to manage the exposure and buildresilience. The audit committee regularly reviews the framework's effectiveness and ourcompliance with it. There is also twice yearly formal reporting of the mostsignificant risks and profile summary to the executive and the group board.These activities facilitate the determination of the nature and extent of thoserisks we are willing to take in pursuing our objectives and accord with goodcorporate governance practice. The group's anticipated principal risks and uncertainties over the second halfof the financial year and beyond remain as stated in its 2013 Annual Report andFinancial Statements, with the additional development of elevated political andpublic focus in relation to the cost of utility bills to household customers asexplained in the paragraph below. The principal risks and uncertainties wereset out in full on pages 32-37 of the 2013 Annual Report and FinancialStatements, namely (a) government market reform agenda; (b) future price limitsand the price control review 2014; (c) failure to comply with applicable law orregulations; (d) material litigation; (e) pension deficit risk; (f)counterparty risk; (g) customer service risk; (h) bad debt risk; (i)operational service risk; (j) capital delivery risk; (k) secure supply of safeclean drinking water risk; and (l) significant and catastrophic events. There is currently an elevated political and public focus on the cost tohouseholds of bills, especially in relation to certain utilities including theregulated water industry. The Secretary of State for Environment, Food andRural Affairs has recently written to industry CEOs supporting the work beingdone by Ofwat and the industry to ensure a fair deal for customers andstressing the need to keep bills for customers as low as possible, whileensuring that low-cost investment in the sector continues. It is unclearwhether the broader political and public focus on utilities will ultimatelyimpact Government policy, legislation or regulatory outcomes affecting thesector. There has been no change to the nature of related party transactions in thefirst six months of the financial year which has materially affected thefinancial position or performance of UU. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This financial report contains certain forward-looking statements with respectto the operations, performance and financial condition of the group. By theirnature, these statements involve uncertainty since future events andcircumstances can cause results and developments to differ materially fromthose anticipated. The forward-looking statements reflect knowledge andinformation available at the date of preparation of this financial report andthe company undertakes no obligation to update these forward-lookingstatements. Nothing in this financial report should be construed as a profitforecast. Certain regulatory performance data contained in this financial report issubject to regulatory audit. Consolidated income statement Restated* Restated* Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m Continuing operations ----- ----- ----- Revenue 853.3 822.9 1,636.0 ----- ----- ----- Employee benefits expense: - excluding restructuring costs (65.9) (70.7) (130.4) - restructuring costs (1.5) (0.6) (2.6) ----- ----- ----- Total employee benefits expense (67.4) (71.3) (133.0) Other operating costs (204.4) (199.8) (414.1) Other income 1.5 1.3 3.1 Depreciation and amortisation expense (163.3) (160.2) (329.2) Infrastructure renewals expenditure (78.0) (78.8) (161.2) ----- ----- ----- Total operating expenses (511.6) (508.8) (1,034.4) ----- ----- ----- Operating profit 341.7 314.1 601.6 Investment income (note 3) 1.2 1.3 2.3 Finance expense (note 4) (7.9) (176.0) (292.1) ----- ----- ----- Investment income and finance expense (6.7) (174.7) (289.8) ----- ----- ----- Profit before taxation 335.0 139.4 311.8 Current taxation charge (48.7) (32.6) (80.7) Current taxation credit - prior years' 122.0 - 6.5adjustments Deferred taxation (charge)/credit (23.1) (2.8) 3.0 Deferred taxation credit/(charge) - 3.0 - (5.8)prior years' adjustments Deferred taxation credit - change in 158.6 52.8 53.0taxation rate ----- ----- ----- Taxation (note 5) 211.8 17.4 (24.0) ----- ----- ----- Profit after taxation from continuing 546.8 156.8 287.8operations Discontinued operations Profit after taxation from discontinued 0.5 3.0 14.6operations (note 6) ----- ----- ----- Profit after taxation 547.3 159.8 302.4 ----- ----- ----- Earnings per sharefrom continuing and discontinuedoperations (note 7) Basic 80.3p 23.4p 44.3p Diluted 80.1p 23.4p 44.3p Earnings per sharefrom continuing operations (note 7) Basic 80.2p 23.0p 42.2p Diluted 80.1p 23.0p 42.2p Dividend per ordinary share (note 8) 12.01p 11.44p 34.32p * The comparatives have been restated to reflect the requirements of IAS 19(Revised) 'Employee Benefits'. See note 1 for details. Consolidated statement of comprehensive income Restated* Restated* Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m Profit after taxation 547.3 159.8 302.4 Other comprehensive income Actuarial (losses)/gains on defined (207.5) 58.4 35.0benefit pension schemes (note 9) Taxation on items taken directly to 42.1 (14.2) (8.4)equity (note 5) Foreign exchange adjustments (0.6) (1.7) 0.6 ----- ----- ----- Total comprehensive income 381.3 202.3 329.6 ----- ----- ----- * The comparatives have been restated to reflect the requirements of IAS 19(Revised) 'Employee Benefits'. See note 1 for details. Consolidated statement of financial position 30 September 30 September 31 March 2013 2012 2013 £m £m £m ASSETS Non-current assets Property, plant and equipment 9,176.0 8,785.4 8,990.7 Goodwill 4.9 4.7 5.0 Other intangible assets 110.9 90.9 99.9 Investments 6.7 4.5 5.7 Trade and other receivables 1.1 1.2 2.2 Retirement benefit surplus (note 9) - 39.3 15.1 Derivative financial instruments 525.7 612.8 659.2 ----- ----- ----- 9,825.3 9,538.8 9,777.8 ----- ----- ----- Current assets Inventories 42.1 47.7 39.6 Trade and other receivables 358.8 360.8 326.9 Current income taxation assets 30.2 - - 53.0 152.5 201.7Cash and short-term deposits Derivative financial instruments 54.5 99.7 62.0 ----- ----- ----- 538.6 660.7 630.2 ----- ----- ----- Total assets 10,363.9 10,199.5 10,408.0 ----- ----- ----- LIABILITIES Non-current liabilities Trade and other payables (434.0) (397.0) (419.8) Borrowings (5,861.3) (5,821.2) (6,007.4) Retirement benefit obligations (note 9) (183.9) - - Deferred taxation liabilities (1,040.3) (1,211.5) (1,219.0) Provisions (3.4) (2.5) (3.4) Derivative financial instruments (125.0) (207.2) (196.2) ----- ----- ----- (7,647.9) (7,639.4) (7,845.8) ----- ----- ----- Current liabilities Trade and other payables (482.5) (481.2) (440.1) Borrowings (129.9) (158.1) (166.1) Current income taxation liabilities - (91.5) (71.5) Provisions (3.5) (6.4) (8.8) Derivative financial instruments (1.5) (1.3) (3.8) ----- ----- ----- (617.4) (738.5) (690.3) ----- ----- ----- Total liabilities (8,265.3) (8,377.9) (8,536.1) ----- ----- ----- Total net assets 2,098.6 1,821.6 1,871.9 ----- ----- ----- EQUITY Share capital 499.8 499.8 499.8 Share premium account 2.9 2.9 2.9 Revaluation reserve 158.8 158.8 158.8 Cumulative exchange reserve (5.0) (6.7) (4.4) Merger reserve 329.7 329.7 329.7 Retained earnings 1,112.4 837.1 885.1 ----- ----- ----- Shareholders' equity 2,098.6 1,821.6 1,871.9 ----- ----- ----- Consolidated statement of changes in equity Six months ended 30 September 2013 Share Share Revaluation Cumulative Merger Retained Total capital premium reserve exchange reserve earnings account reserve £m £m £m £m £m £m £m At 1 April 2013 499.8 2.9 158.8 (4.4) 329.7 885.1 1,871.9 Profit after - - - - - 547.3 547.3taxation Other comprehensiveincome Actuarial losses on - - - - - (207.5) (207.5)defined benefitpension schemes(note 9) Taxation on items - - - - - 42.1 42.1taken directly toequity (note 5) Foreign exchange - - - (0.6) - - (0.6)adjustments ----- ----- ----- ----- ----- ----- ----- Total comprehensive - - - (0.6) - 381.9 381.3(expense)/income ----- ----- ----- ----- ----- ----- ----- Transactions withowners Dividends (note 8) - - - - - (156.0) (156.0) Equity-settled - - - - - 2.2 2.2share-based payments Exercise of share - - - - - (0.8) (0.8)options - purchaseof shares ----- ----- ----- ----- ----- ----- ----- At 30 September 2013 499.8 2.9 158.8 (5.0) 329.7 1,112.4 2,098.6 ----- ----- ----- ----- ----- ----- ----- Six months ended 30 September 2012 (Restated*) Share Share Revaluation Cumulative Merger Retained Total capital premium reserve exchange reserve earnings account reserve £m £m £m £m £m £m £m At 1 April 2012 499.8 2.4 158.8 (5.0) 329.7 778.9 1,764.6 Profit after taxation - - - - - 159.8 159.8 Other comprehensiveincome Actuarial gains on - - - - - 58.4 58.4defined benefitpension schemes (note9) Taxation on items - - - - - (14.2) (14.2)taken directly toequity (note 5) Foreign exchange - - - (1.7) - - (1.7)adjustments ----- ----- ----- ----- ----- ----- ----- Total comprehensive - - - (1.7) - 204.0 202.3(expense)/income ----- ----- ----- ----- ----- ----- ----- Transactions withowners Dividends (note 8) - - - - - (145.5) (145.5) New share capital - 0.5 - - - - 0.5issued Equity-settled - - - - - 0.7 0.7share-based payments Exercise of share - - - - - (1.0) (1.0)options - purchase ofshares ----- ----- ----- ----- ----- ----- ----- At 30 September 2012 499.8 2.9 158.8 (6.7) 329.7 837.1 1,821.6 ----- ----- ----- ----- ----- ----- ----- * The comparatives have been restated to reflect the requirements of IAS 19(Revised) 'Employee Benefits'. See note 1 for details. Consolidated statement of changes in equity Year ended 31 March 2013 (Restated*) Share Share Revaluation Cumulative Merger Retained Total capital premium reserve exchange reserve earnings account reserve £m £m £m £m £m £m £m At 1 April 2012 499.8 2.4 158.8 (5.0) 329.7 778.9 1,764.6 Profit after taxation - - - - - 302.4 302.4 Other comprehensiveincome Actuarial gains on - - - - - 35.0 35.0defined benefitpension schemes (note9) Taxation on items - - - - - (8.4) (8.4)taken directly toequity (note 5) Foreign exchange - - - 0.6 - - 0.6adjustments ----- ----- ----- ----- ----- ----- ----- Total comprehensive - - - 0.6 - 329.0 329.6income ----- ----- ----- ----- ----- ----- ----- Transactions withowners Dividends (note 8) - - - - - (223.5) (223.5) New share capital - 0.5 - - - - 0.5issued Equity-settled - - - - - 1.7 1.7share-based payments Exercise of share - - - - - (1.0) (1.0)options - purchase ofshares ----- ----- ----- ----- ----- ----- ----- At 31 March 2013 499.8 2.9 158.8 (4.4) 329.7 885.1 1,871.9 ----- ----- ----- ----- ----- ----- ----- * The comparatives have been restated to reflect the requirements of IAS 19(Revised) 'Employee Benefits'. See note 1 for details. Consolidated statement of cash flows Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m Operating activities Cash generated from continuing 476.7 347.5 852.2operations Interest paid (67.8) (66.6) (168.3) Interest received and similar income 0.7 1.3 2.4 Tax paid (26.5) (17.1) (55.2) ----- ----- ----- Net cash generated from operatingactivities (continuing operations) 383.1 265.1 631.1 ----- ----- ----- Net cash used in operating activities(discontinued operations) (0.8) - (1.4) ----- ----- ----- Investing activities Purchase of property, plant and (321.4) (285.4) (625.6)equipment Purchase of other intangible assets (21.7) (14.8) (35.3) Proceeds from sale of property, plant 1.4 0.7 2.9and equipment Grants and contributions received 6.5 5.6 16.3 Purchase of investments (1.4) (1.1) (3.0) Proceeds from sale of investments - - 0.9 ----- ----- ----- Net cash used in investing activities (336.6) (295.0) (643.8)(continuing operations) ----- ----- ----- Financing activities Proceeds from issue of ordinary shares - 0.5 0.5 Proceeds from borrowings 45.4 26.3 147.9 Repayment of borrowings (67.6) (31.2) (39.4) Exercise of share options - purchase (0.8) (1.0) (1.0)of shares Dividends paid to equity holders of (156.0) (145.5) (223.5)the company ----- ----- ----- Net cash used in financing activities (179.0) (150.9) (115.5)(continuing operations) ----- ----- ----- Effects of exchange rate changes (0.1) (0.3) -(continuing operations) ----- ----- ----- Net decrease in cash and cash (132.6) (181.1) (128.2)equivalents (continuing operations) ----- ----- ----- Net decrease in cash and cash (0.8) - (1.4)equivalents (discontinued operations) ----- ----- ----- Cash and cash equivalents at beginning 182.5 312.1 312.1of the period ----- ----- ----- Cash and cash equivalents at end of 49.1 131.0 182.5the period ----- ----- ----- Cash generated from continuing operations Restated* Restated* Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m Operating profit 341.7 314.1 601.6 Adjustments for: Depreciation of property, plant and 151.8 148.4 305.9equipment Amortisation of other intangible assets 11.5 11.8 23.3 Loss on disposal of property, plant and 1.8 2.2 6.6equipment Loss on disposal of other intangible - 2.7 3.2assets Amortisation of deferred grants and (3.5) (3.5) (7.1)contributions Equity-settled share-based payments 2.2 0.7 1.7charge Other non-cash movements (1.0) (0.8) (1.9) Changes in working capital: (Increase)/decrease in inventories (2.4) (0.3) 7.8 Increase in trade and other receivables (30.7) (59.8) (26.5) Increase in trade and other payables 18.6 8.0 9.3 (Decrease)/increase in provisions (5.3) (1.4) 1.9 Pension contributions paid less pension (8.0) (74.6) (73.6)expense charged to operating profit ----- ----- ----- Cash generated from continuing 476.7 347.5 852.2operations ----- ----- ----- * The comparatives have been restated to reflect the requirements of IAS 19(Revised) 'Employee Benefits'. See note 1 for details. NOTES 1. Basis of preparation and accounting policies The condensed consolidated financial statements for the six months ended 30September 2013 have been prepared in accordance with the Disclosure andTransparency Rules of the Financial Services Authority and InternationalAccounting Standard 34 'Interim Financial Reporting' (IAS 34). The accounting policies, presentation and methods of computation are consistentwith those set out in the audited consolidated financial statements of UnitedUtilities Group PLC for the year ended 31 March 2013, with the exception of theadoptions detailed below, and are prepared in accordance with InternationalFinancial Reporting Standards (IFRSs) as adopted by the European Union (EU),including International Accounting Standards (IAS) and Interpretations issuedby the International Financial Reporting Interpretations Committee (IFRIC). The adoption of the following standards and interpretations, at 1 April 2013,has had no material impact on the group's financial statements. IAS 19 (Revised) 'Employee Benefits' The impact of the changes in this standard is to replace interest cost andexpected return on plan assets with a net interest amount that is calculated byapplying the discount rate to the net defined benefit (obligations)/surplus. Inaddition, the standard clarifies that administration costs relating to theadministration of benefits should be recognised as an employee benefits expensethrough the income statement, rather than as a deduction from the return onplan assets which was previously recognised through other comprehensive income.The standard's application is retrospective and hence requires the restatementof the comparative periods ended 30 September 2012 and 31 March 2013. The impact in the period to 30 September 2013 has been an increase in employeebenefit expense of £1.2 million (30 September 2012: £1.0 million, 31 March2013: £2.9 million), a decrease in finance expense of £nil million (30September 2012: £4.8 million, 31 March 2013: £10.0 million) and an offsettinggain to actuarial gains and losses within other comprehensive income of £1.2million (30 September 2012: £3.8 million loss, 31 March 2013: £7.1 millionloss). These amendments have had no overall impact on the retirement benefit(obligations)/surplus in the statement of financial position. The impact on taxation in the period to 30 September 2013 has been a deferredtaxation credit of £0.2 million (30 September 2012: £0.9 million charge, 31March 2013: £1.6 million charge) and an offsetting charge to actuarial gainsand losses within other comprehensive income of £0.2 million (30 September2012: £0.9 million credit, 31 March 2013: £1.6 million credit). IFRS 13 'Fair Value Measurement' The standard provides guidance on the measurement of fair value where requiredby existing accounting standards. The standard's application is prospective inline with the transitional provisions of the standard. The impact on the periodto 30 September 2013 has been a £0.3 million credit to finance expense and acorresponding reduction in non-current derivative liabilities, due to theinclusion of the group's own credit risk in measuring the fair value of itsliabilities. The condensed consolidated financial statements do not include all of theinformation and disclosures required for full annual financial statements, donot comprise statutory accounts within the meaning of section 434 of theCompanies Act 2006 and should be read in conjunction with the group's annualreport and financial statements for the year ended 31 March 2013. The comparative figures for the year ended 31 March 2013 do not comprise thegroup's statutory accounts for that financial year. Those accounts have beenreported upon by the group's auditor and delivered to the registrar ofcompanies. The report of the auditor was unqualified and did not include areference to any matters to which the auditor drew attention by way of emphasiswithout qualifying their report and did not contain a statement under section498(2) or (3) of the Companies Act 2006. Going concern The directors have a reasonable expectation that the group has adequateresources available to it to continue in operational existence for theforeseeable future and have therefore continued to adopt the going concernpolicy in preparing the financial statements. This conclusion is based upon,amongst other matters, a review of the group's financial projections togetherwith a review of the cash and committed borrowing facilities available to thegroup as well as consideration of the group's capital adequacy. In addition,the directors also considered the primary legal duty of United Utilities WaterPLC's economic regulator, to ensure that the companies can finance theirfunctions. 2. Segmental reporting The board of directors of United Utilities Group PLC (the board) is providedwith information on a single segment basis for the purposes of assessingperformance and allocating resources. The board reviews revenue, underlyingoperating profit, operating profit, assets and liabilities, regulatory capitalexpenditure and RCV gearing at a consolidated level. In light of this, thegroup has a single segment for financial reporting purposes and therefore nofurther detailed segmental information is provided in this note. 3. Investment income Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m Continuing operations Interest receivable 0.7 1.3 2.3 Net pension interest income (note 9) 0.5 - - ----- ----- ----- 1.2 1.3 2.3 ----- ----- ----- 4. Finance expense Restated Restated Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £mContinuing operationsInterest payable (107.9) (124.9) (249.1) Net fair value gains/(losses) ondebt and derivative instruments 100.0 (49.4) (41.5) ----- ----- ----- (7.9) (174.3) (290.6) Net pension interest expense (note 9) - (1.7) (1.5) ----- ----- ----- (7.9) (176.0) (292.1) ----- ----- ----- The group has fixed interest costs for a substantial proportion of the group'snet debt for the duration of the regulatory pricing period. Following therevision to its interest rate management strategy in the year ended 31 March2012, the group has continued to extend the fixing of interest rates out to aten year maturity on a reducing balance basis, seeking to lock in a 10-yearrolling average of 10-year interest rates, on the group's nominal liabilities.In addition, the group has hedged currency exposures for the term of eachrelevant debt instrument. The group has hedged its position through the use ofinterest rate and cross currency swap contracts where applicable. The underlying net finance expense for the continuing group of £127.5 million(30 September 2012: £126.0 million, 31 March 2013: £252.8 million) is derivedas shown in the table below. Restated Restated Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £mContinuing operationsFinance expense (7.9) (176.0) (292.1) Investment income 1.2 1.3 2.3 Net fair value (gains)/losses ondebt and derivative instruments (100.0) 49.4 41.5 Interest on swaps and debt under 4.5 3.0 8.3fair value option Adjustment for net pension interest(income)/expense (note 9) (0.5) 1.7 1.5 Adjustment for capitalised borrowing (11.5) (5.4) (14.3)costs Adjustment for release of tax (13.3) - -interest accrual ----- ----- ----- Underlying net finance expense (127.5) (126.0) (252.8) ----- ----- ----- 5. Taxation Restated Restated Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £mContinuing operationsCurrent taxation UK corporation taxation 47.3 31.3 79.4 Foreign taxation 1.4 1.3 1.3 Adjustments in respect of prior (122.0) - (6.5)years ----- ----- ----- Total current taxation (credit)/ (73.3) 32.6 74.2charge for the period ----- ----- ----- Deferred taxation Current period 23.1 2.8 (3.0) Adjustments in respect of prior (3.0) - 5.8years ----- ----- ----- 20.1 2.8 2.8 Change in taxation rate (158.6) (52.8) (53.0) ----- ----- ----- Total deferred taxation credit for (138.5) (50.0) (50.2)the period ----- ----- ----- ----- ----- ----- Total taxation (credit)/charge for (211.8) (17.4) 24.0the period ----- ----- ----- The current taxation charge is £48.7 million for the period ended 30 September2013 representing a current taxation effective rate of 15 per cent comparedwith 23 per cent in the corresponding period last year and 26 per cent for theyear ended 31 March 2013. The reduction is principally due to fair valuemovements which give rise to a corresponding current period deferred taxationcharge. In addition, there is a current taxation credit of £122.0 million, andan associated deferred tax credit of £3.0 million relating to recently agreedmatters in relation to prior years. The deferred taxation credits for the periods ended 30 September 2013, 30September 2012 and 31 March 2013 include a credit of £158.6 million, £52.8million and £53.0 million respectively to reflect the staged reductions in themainstream rate of corporation tax from 24 per cent in the year ended 31 March2013 to 20 per cent effective from 1 April 2015. Taxation on items taken directly to equity The taxation (credit)/charge relating to items taken directly to equity is asfollows: Restated Restated Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £mContinuing operationsCurrent taxation Relating to other pension movements (1.9) (2.1) (15.6) ----- ----- ----- Deferred taxation On actuarial (losses)/gains ondefined benefit pension schemes (41.5) 13.4 8.1 Relating to other pension movements 1.7 2.0 15.0 Change in taxation rate (0.4) 0.9 0.9 ----- ----- ----- (40.2) 16.3 24.0 ----- ----- ----- ----- ----- ----- Total taxation (credit)/charge onitems taken directly to equity (42.1) 14.2 8.4 ----- ----- ----- 6. Discontinued operations Discontinued operations represent the retained obligations in respect ofbusinesses sold in prior years. In accordance with IFRS 5 `Non-current assetsheld for sale and discontinued operations,' the post-tax results ofdiscontinued operations are disclosed separately in the consolidated incomestatement and consolidated statement of cash flows. The profit after taxation from discontinued operations is analysed as follows: Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m Transaction and other costs of 0.5 3.0 14.6disposal ----- ----- ----- Profit after taxation from 0.5 3.0 14.6discontinued operations ----- ----- ----- The profit after taxation from discontinued operations for the period ended 30September 2013 relates primarily to the release of accrued costs of disposal inrespect of certain elements of the group's non-regulated disposal programme. 7. Earnings per share Basic and diluted earnings per share are calculated by dividing profit aftertaxation by the following weighted average number of shares in issue: Basic Diluted million million Six months ended 30 September 2013 681.9 682.9 Six months ended 30 September 2012 681.8 682.6 Year ended 31 March 2013 681.9 682.8 The difference between the weighted average number of shares used in the basicand diluted earnings per share calculations arises due to the group's operationof share-based payment compensation arrangements. The difference representsthose ordinary shares deemed to have been issued for no consideration on theconversion of all potential dilutive ordinary shares in accordance with IAS 33'Earnings per Share'. The basic and diluted earnings per share for the current and prior periods areas follows: Restated Restated Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 From continuing and discontinuedoperations Basic 80.3p 23.4p 44.3p Diluted 80.1p 23.4p 44.3p From continuing operations Basic 80.2p 23.0p 42.2p Diluted 80.1p 23.0p 42.2p 8. Dividends Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m Dividends relating to the periodcomprise: Interim dividend 81.9 78.0 78.0 Final dividend - - 156.0 ----- ----- ----- 81.9 78.0 234.0 ----- ----- ----- Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m Dividends deducted from shareholders' equitycomprise: Interim dividend - - 78.0 Final dividend 156.0 145.5 145.5 ----- ----- ----- 156.0 145.5 223.5 ----- ----- ----- The interim dividends for the six months ended 30 September 2013 and 30September 2012 and the final dividend for the year ended 31 March 2013 have notbeen included as liabilities in the consolidated half yearly financialstatements at 30 September 2013, 30 September 2012 and the consolidatedfinancial statements at 31 March 2013 respectively. The interim dividend of 12.01 pence per ordinary share (2013: interim dividendof 11.44 pence per ordinary share; final dividend of 22.88 pence per ordinaryshare) is expected to be paid on 3 February 2014 to shareholders on theregister at the close of business on 20 December 2013. The ex-dividend date forthe interim dividend is 18 December 2013. 9. Retirement benefit (obligations)/surplus The main financial assumptions used by the company's actuary to calculate thedefined benefit obligations of the United Utilities Pension Scheme (UUPS) andthe United Utilities PLC Group of the Electricity Supply Pension Scheme (ESPS)were as follows: Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 %pa %pa %pa Discount rate 4.40 4.40 4.60 Pensionable salary growth and 3.30 2.85 3.30pension increases Price inflation 3.30 2.85 3.30 The net pension expense before taxation for continuing operations in the incomestatement in respect of the defined benefit schemes is summarised as follows: Restated Restated Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m Continuing operations Current service cost (9.2) (8.0) (15.9) Curtailments/settlements arising on (1.1) - (0.6)reorganisation Administrative expenses (1.2) (1.0) (2.9) ----- ----- ----- Pension expense charged to operating (11.5) (9.0) (19.4)profit ----- ----- ----- Net pension interest income (note 3)/(expense) (note 4) 0.5 (1.7) (1.5) ----- ----- ----- Net pension expense charged before (11.0) (10.7) (20.9)taxation ----- ----- ----- The reconciliation of the opening and closing net pension (obligations)/surplusincluded in the statement of financial position is as follows: Restated Restated Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m At the start of the period 15.1 (92.0) (92.0) Expense recognised in the income (11.0) (10.7) (20.9)statement Contributions paid 19.5 83.6 93.0 Actuarial (losses)/gains gross of (207.5) 58.4 35.0taxation ----- ----- ----- At the end of the period (183.9) 39.3 15.1 ----- ----- ----- Under the prescribed IAS19 basis, pension scheme liabilities are calculatedbased on current accrued benefits. These are then projected forwards andinflated by forecast RPI for the relevant time period based on current membermortality assumptions. These projected cash flows are then discounted by a AAcorporate bond rate which comprises both an underlying interest rate and acredit spread. In de-risking our pension scheme, we have largely hedged: (1) the underlyinginterest rate through external market swaps, the value of which is included inscheme assets; and (2) the forecast RPI through the Inflation Funding Mechanism(IFM), which is treated as an additional schedule of deficit contributions andis not included in the value of scheme assets until contributions are actuallypaid into the pension scheme. As a consequence the reported statement of financial position under IAS19remains volatile due to changes in: (1) credit spread (because hedging creditspreads over long durations is difficult); (2) inflation (because inflation ishedged via the IFM and is treated as a schedule of contributions, not as ascheme asset); and to a lesser extent (3) mortality (it was decided not tohedge this risk due to its lower volatility in the short term). In contrast the scheme specific funding basis (which forms the basis fordeficit repair contributions) is unlikely to suffer from volatility due tocredit spread (as it uses a conservative, fixed credit spread assumption) orinflation (as it includes the value of the IFM). In the IAS19 assessment of financial position at 30 September 2013, althoughthe discount rate has fallen by 0.2% this masks a rise in underlying interestrates offset by a credit spread reduction of 0.4%. This credit spread reductionresults in substantially all of the reported £199.0m deterioration. During thesix months ended 30 September 2013, there has not been any material change inthe scheme specific funding basis and therefore the level of deficit repaircontributions. The closing (obligations)/surplus at each reporting date are analysed asfollows: 30 September 30 September 31 March 2013 2012 2013 £m £m £m Present value of defined benefit (2,499.6) (2,313.3) (2,426.9)obligations Fair value of schemes' assets 2,315.7 2,352.6 2,442.0 ----- ----- ----- Net retirement benefit (obligations) (183.9) 39.3 15.1/surplus ----- ----- ----- 10. Related party transactions Transactions between the company and its subsidiaries, which are relatedparties, have been eliminated on consolidation and are not disclosed in thisnote. The following trading transactions were carried out with the group's jointventures: Six months Six months Year ended ended ended 30 September 30 September 31 March 2013 2012 2013 £m £m £m Sales of services 0.7 0.5 1.3 Purchases of goods and services 0.4 0.4 0.7 ----- ----- ----- Amounts owed by the group's joint ventures are as follows: 30 September 30 September 31 March 2013 2012 2013 £m £m £m Amounts owed by related parties - 1.1 1.0 ----- ----- ----- Sales of services to related parties were on the group's normal trading terms. The amounts outstanding are unsecured and will be settled in accordance withnormal credit terms. The group has issued guarantees of £5.2 million (30September 2012: £5.0 million; 31 March 2013: £5.2 million) in support of itsjoint ventures. No provision has been made for doubtful receivables in respect of the amountsowed by related parties (30 September 2012: £nil; 31 March 2013: £nil). 11. Contingent liabilities The group has entered into performance guarantees as at 30 September 2013 wherea financial limit has been specified of £47.3 million (30 September 2012: £85.3million; 31 March 2013: £72.1 million). 12. Changes in circumstances significantly affecting the fair value offinancial assets and financial liabilities From 1 April 2013 to 30 September 2013 market interest rates have increased,decreasing the fair value of the group's borrowings and derivative assets. The group's borrowings have a carrying amount of £5,991.2 million (31 March2013: £6,173.5 million). The fair value of these borrowings is £6,270.1 million(31 March 2013: £6,470.0 million). The group's derivatives measured at fairvalue are a net asset of £453.7 million (31 March 2013: £521.2 million). 13. Events after the reporting period There were no events arising after the reporting date that required recognitionor disclosure in the financial statements for the six months ended 30 September2013. STATEMENT OF DIRECTORS' RESPONSIBILITIES The half-yearly financial report is the responsibility of, and has beenapproved by, the directors. The directors are responsible for preparing thehalf-yearly financial report in accordance with the DTR of the UK FCA. Responsibilities Statement We confirm that to the best of our knowledge: - the condensed set of financial statements has been prepared in accordancewith IAS 34 Interim Financial Reporting as adopted by the EU - the interim management report includes a fair review of the informationrequired by: * DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication ofimportant events that have occurred during the first six months of thefinancial year and their impact on the condensed set of financial statements;and a description of the principal risks and uncertainties for the remainingsix months of the year; and * DTR 4.2.8R of the Disclosure and Transparency Rules, being related partytransactions that have taken place in the first six months of the currentfinancial year and that have materially affected the financial position orperformance of the entity during that period; and any changes in the relatedparty transactions described in the last annual report that could do so. The directors of United Utilities Group PLC at the date of this announcementare listed below: Dr John McAdam Steve Mogford Dr Catherine Bell CB Mark Clare (appointed 1 November 2013) Russ Houlden Brian May Nick Salmon Sara Weller This responsibility statement was approved by the board and signed on itsbehalf by: ……………………….. ……………………… Steve Mogford Russ Houlden 26 November 2013 26 November 2013 Chief Executive Officer Chief Financial Officer INDEPENDENT REVIEW REPORT TO UNITED UTILITIES GROUP PLC Introduction We have been engaged by the company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 30September 2013 which comprises the consolidated income statement, theconsolidated statement of comprehensive income, the consolidated statement offinancial position, the consolidated statement of changes in equity, heconsolidated statement of cash flows and the related explanatory notes. We haveread the other information contained in the half-yearly financial report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the information in the condensed set of financialstatements. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the Disclosureand Transparency Rules ("the DTR") of the UK's Financial Conduct Authority("the UK FCA"). Our review has been undertaken so that we might state to thecompany those matters we are required to state to it in this report and for noother purpose. To the fullest extent permitted by law, we do not accept orassume responsibility to anyone other than the company for our review work, forthis report, or for the conclusions we have reached. Directors' responsibilities The half-yearly financial report is the responsibility of, and has beenapproved by, the directors. The directors are responsible for preparing thehalf-yearly financial report in accordance with the DTR of the UK FCA. As disclosed in note 1, annual financial statements of the group are preparedin accordance with IFRSs as adopted by the EU. The condensed set of financialstatements included in this half-yearly financial report has been prepared inaccordance with IAS 34 Interim Financial Reporting as adopted by the EU. Our responsibility Our responsibility is to express to the company a conclusion on the condensedset of financial statements in the half-yearly financial report based on ourreview. Scope of review We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity issued by the AuditingPractices Board for use in the UK. A review of interim financial informationconsists of making enquiries, primarily of persons responsible for financialand accounting matters, and applying analytical and other review procedures. Areview is substantially less in scope than an audit conducted in accordancewith International Standards on Auditing (UK and Ireland) and consequently doesnot enable us to obtain assurance that we would become aware of all significantmatters that might be identified in an audit. Accordingly, we do not express anaudit opinion. Conclusion Based on our review, nothing has come to our attention that causes us tobelieve that the condensed set of financial statements in the half-yearlyfinancial report for the six months ended 30 September 2013 is not prepared, inall material respects, in accordance with IAS 34 as adopted by the EU and theDTR of the UK FCA. John LukeFor and on behalf of KPMG LLPChartered AccountantsSt James' SquareManchesterM2 6DS26 November 2013