28th Nov 2012 07:00
United Utilities Group PLC
28 November 2012
HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2012
£m Six months ended (Continuing operations) 30 September 2012 30 September 2011
Underlying operating profit* 315.7 324.2
Underlying profit before 189.7 184.9 taxation* Underlying profit after 142.2 135.9 taxation*
Underlying earnings per share*, 20.9 19.9
**(pence) Revenue 822.9 792.7 Operating profit 315.1 322.6 Profit before taxation 135.6 124.4 Profit after taxation 153.9 140.8 Basic earnings per share** 22.6 20.7 (pence) Interim dividend per ordinary 11.44 10.67 share (pence) *Underlying profit measures have been provided to give a more representativeview of business performance and are defined in the underlying profit measuretables
**Earnings per share and underlying earnings per share are explained in the earnings per share section
***Infrastructure renewals expenditure
* Continued progress on customer service: further improvement in Ofwat SIM scores
* Strong operational performance on Ofwat's overall KPIs assessment
* On track to meet regulatory outperformance targets
* Effective delivery of capex programme: up 29% at £354m; expect to invest around £750m in 2012/13
* Underlying operating profit down £8m to £316m, reflecting higher IRE*** and depreciation
* Underlying profit before tax up £5m to £190m, benefiting from lower underlying net finance expense
* Robust financial position: RCV gearing in the middle of Ofwat's range and pension surplus
* Interim dividend of 11.44 pence per share, in line with policy
Steve Mogford, Chief Executive Officer, said:
"We have continued to deliver a better service to our customers and investsubstantially in our network. Our sustained focus on operational performanceacross a broad front has seen us make a further improvement on Ofwat's serviceincentive mechanism, building on a marked improvement last year, coupled with astrong performance on Ofwat's overall KPIs assessment. Furthermore, we seeplenty of scope to deliver additional improvements for customers."We are continuing to invest in our network for the benefit of our customers,the environment and the local economy. Since the start of the regulatory periodin 2010, we have invested over £1.6 billion as we have sought to deliver asmoother and more effective investment profile. In the first half of this year,we have invested £354 million and now expect to invest around £750 million forthe full year. In addition, we are on track to meet our regulatory leakagetarget for the seventh consecutive year."United Utilities is committed to continued positive engagement to support theprogressive evolution of regulation in the water industry and we have submittedproposals to Ofwat in respect of its recent licence modifications consultation.We support the progression of retail competition for business customers andhave already assembled a strong team. We have won our first customer out of ourregion and intend to pursue further opportunities as the market evolves.
"The recent progress we have made reinforces our confidence in delivering our 2010-15 regulatory outperformance targets. Alongside our operational and customer service improvements, we have delivered another good financial performance despite a tough economic environment."
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 Ed Orlebar / Michelle Clarke - Tulchan Communications +44 (0) 20 7353 4200
A presentation to investors and analysts starts at 9.00 am on Wednesday 28 November 2012, at the Auditorium, Deutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB. The presentation can be accessed via a live listen in conference call facility by dialling: +44 (0) 20 7162 0025, access code 925146. A recording of the call will be available for seven days following Wednesday 28 November 2012 on +44 (0) 20 7031 4064, access code 925146.
This results announcement and the associated presentation will be available on the day at: http://corporate.unitedutilities.com/investors.aspx
BUSINESS REVIEW
KEY OPERATIONAL PROGRESS
Operational performance and customer service are top priorities for United Utilities (UU) and the company aims to deliver significant improvements in these areas and outperform its regulatory contract. Our strong focus on operational performance since the start of the 2010-15 regulatory period is continuing to deliver a range of improvements, as outlined below:
* Significant improvements in customer service - UU achieved the bestimprovement in the industry on Ofwat's combined service incentive mechanism(SIM) score in 2011/12, moving up five places to 16th position out of the 21water companies. We are building on this improvement and have improved furtherin the first half of 2012/13, moving up to joint 13th position on Ofwat'squalitative SIM measure. Customer complaints to the Consumer Council for Water(CCW) have continued to fall with zero complaints warranting investigation bythe CCW in the six months to 30 September 2012.* Strong operational performance rating - UU has performed well in Ofwat's"Companies' key performance indicators 2011-12" report. Of the fifteenassessments, UU was rated `Green' for eleven and `Amber' on four, with no areasassessed as `Red' on the traffic light reporting matrix. This balance ofratings would indicate a performance level above average, in respect of the tenwater and sewerage companies.* Capital delivery - We continue to drive more effective and efficient deliveryof our capital programme. This is reflected in an improvement in our Time:Cost: Quality index (TCQi) score from around 50% 18 months ago to consistentlyover 80%. UU has now invested over £1.6 billion in the first half of the2010-15 regulatory period. This represents good progress at the mid-point ofthe five year period, as management has sought to deliver a smoother investmentprofile to support efficient delivery of outputs and reduce risk.
* Leakage - We are on track to meet or outperform our regulatory leakage target for the seventh consecutive year.
* Regulatory outperformance - We have set clear targets for the 2010-15 periodand remain on track to deliver these targets: £300 million of financingoutperformance, which is already secured, at least £50 million of operatingexpenditure outperformance and we expect to meet Ofwat's capital expenditureallowance. We are on course to deliver cumulative operating expenditureoutperformance of at least £30 million by the end of 2012/13.* Corporate responsibility - UU has retained its `World Class' rating in theDow Jones Sustainability Index for the fifth consecutive year, attaining itshighest ever score. UU also has the highest platinum plus ranking in Businessin the Community's Corporate Responsibility Index. In addition, UU has beenawarded membership of the FTSE 350 Carbon Disclosure Leadership Index and isthe top UK utility company in this index by some distance. UU is one of onlyfour FTSE 100 companies to hold all three awards.* Retail competition for business customers - We are building our capability tohelp ensure we are in a strong position as the industrial and commercialcompetitive retail market evolves. We appointed Sue Amies-King from Aviva, inthe newly created role of Retail Director in June 2012, and recently recruitedTony McHardy from Business Stream as Sales Director. We have now secured aScottish water supply licence and last month won our first business customer inScotland. We are actively pursuing further opportunities and are alsodeveloping value-added services for business customers.
Financial overview
The group has delivered a good set of financial results for the six monthsended 30 September 2012. Revenue was up by £30 million to £823 million,principally as a result of the impact of the regulated price increase for 2012/13 of 5.8% nominal (0.6% real price increase plus 5.2% RPI inflation) partiallyoffset by reduced commercial volumes, alongside lower property sales(associated with the water business).Infrastructure renewals expenditure was up £12 million, reflecting continuedprogress on the capital investment programme and the impact of the transfer ofprivate sewers. This spend, alongside an expected increase in depreciation,plus operating expenditure relating to private sewers, resulted in underlyingoperating profit decreasing by £8 million to £316 million.Total regulatory capital investment in the half year, including £79 million ofinfrastructure renewals expenditure, was £354 million, representing an increaseof 29% compared with the first half of last year.
Underlying profit before taxation was up 3%, at £190 million. This was as a result of a lower underlying net finance expense, reflecting lower RPI inflation, which more than offset the reduction in underlying operating profit.
Underlying profit after taxation was 5% higher than the first half of lastyear, at £142 million, reflecting the reduction in the mainstream UKcorporation taxation rate. Reported profit after taxation benefited from a £53million deferred taxation credit, which follows the UK government's changes toreduce the mainstream corporation taxation rate. A similar credit of £50million was recognised in the first half of 2011/12.UU has a robust capital structure and gearing (measured as group net debt toregulatory capital value) as at 30 September 2012 was 60%, comfortably withinOfwat's assumed range of 55% to 65%, supporting a solid investment grade creditrating. United Utilities Water PLC (UUW) has a long-term credit rating of A3from Moody's Investors Service with a stable outlook.The group benefits from headroom to cover its projected financing needs into2014. This provides good flexibility in terms of when and how further debtfinance is raised to help fund the regulated capital expenditure programme.Reflecting this robust financing position, in the first half of 2012/13, UUaccelerated approximately £65 million of previously agreed pension deficitrepair payments, providing a higher return for the group than could have beenachieved through short-term deposits. This completes early all previouslyagreed pension deficit repair payments covering the 2010-15 regulatory period.
In line with its policy, the board has declared an interim dividend of 11.44 pence per ordinary share.
OutlookOur sustained focus on operational performance and customer service isdelivering results. We have improved further on Ofwat's service incentivemechanism and have delivered a strong operational performance, as measured byOfwat's overall KPIs assessment. We are encouraged by the progress we have madeand believe there is plenty of scope for further improvement. In addition, weare on track to meet our regulatory outperformance targets, with substantialfinancing outperformance already secured. We have a robust capital structureand intend to continue with our dividend policy of targeting 2% per annumgrowth above the rate of RPI inflation through to at least 2015. We arecommitted to continued positive engagement with government and regulators tosupport the progressive evolution of the water industry, as we aim to achievethe optimal outcome for all our stakeholders.
OPERATIONAL PERFORMANCE
UU aims to deliver long-term shareholder value by providing:
* The best service to customers
* At the lowest sustainable cost
* In a responsible mannerBest service to customersWe delivered further improvements in our performance on Ofwat's serviceincentive mechanism (SIM), reflecting our continuing strong focus on dealingwith customer enquiries. The number of customer complaints made to the ConsumerCouncil for Water (CCW) in the first half of 2012/13 has reduced by a further12%, compared with the first half of 2011/12. We are pleased to report that thetotal number of escalated complaints assessed by the CCW was zero in the sixmonths to 30 September 2012. This is the first time UU has achieved this sincethe SIM measure was introduced. This has helped UU improve its SIM performancefurther, as detailed in the KPIs section below. Our strong overall operationalperformance, as measured by Ofwat's 2011/12 KPIs report, has also contributedto improving customer satisfaction.
UU continues to benefit from a robust water supply and demand balance and reservoir levels are ahead of typical levels for this time of year. In addition, UU continues to supply a high quality of drinking water, with a mean zonal compliance water quality performance remaining well over 99.9%.
We have a range of actions to help support the serviceability of our assets. We are improving the robustness of our water treatment processes, refurbishing service reservoir assets, continuing with our comprehensive mains cleaning programme and are optimising water treatment to reduce discoloured water events. To help reduce sewer flooding, the actions include incident based targeting to focus on areas more likely to experience flooding, effective intervention in cleaning and rehabilitation or refurbishment of sewers and advising customers about items not suitable for sewer disposal. The plan includes an improved approach to risk assessment to identify and reduce the risk profile of the company's wastewater treatment works.
Improving customer service remains a significant area of continued management focus and we see plenty of opportunity to deliver further improvements.
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 wastewater non-infrastructure assetsand `stable' for water infrastructure and water non-infrastructure assets. UUis currently assessed by the regulator as `marginal' in respect of wastewaterinfrastructure and the company is implementing an action plan to return thisasset class back to a `stable' rating. The aim is to hold at least a `stable'rating for all four asset classes, which is aligned with Ofwat's target.* Service incentive mechanism (SIM) - UU made significant progress on Ofwat'scombined SIM assessment for 2011/12, moving up five places to 16th of the 21water companies, compared with 2010/11. This represented the largest overallSIM score improvement in the industry. Further progress has been made in thefirst six months of 2012/13, with a half year quantitative score of 111 points,representing a further 27% improvement compared with the first half of 2011/12.On the qualitative measure, UU has improved its average 2011/12 score by 0.22points to 4.40 points for the first six months of the year, moving up threeplaces to joint 13th. Our progress is encouraging, as we aim to move to thefirst quartile in the medium-term.
Lowest sustainable cost
Our asset optimisation programme continues to progress well, providing thebenefits of increased and more effective use of operational site management tooptimise power and chemical use and the development of more combined heat andpower assets to improve energy efficiency.We are continuing to introduce a more proactive approach to asset and networkmanagement, with the aim of improving our modelling and forecasting to enableus to address more asset and network problems before they affect customers,thereby reducing the level of reactive work and improving efficiency.UU has substantially locked in the cost of its power requirements through to2014/15, via hedging, securing outperformance. Although power unit costs for2012/13 onwards have been secured at higher levels than those for 2011/12, thisstill delivers additional outperformance versus the regulatory contract.We are continuing to enhance our proactive approach to debt collection and areimplementing a detailed action plan. The North West faces a particularly tougheconomic environment, with unemployment having increased at a faster rate thanany other UK region in 2011/12 resulting in an adverse impact on ability to paythis year. Despite this, we have again delivered a good performance andsustained bad debts at 2.2% of regulated revenue for the first half of 2012/13,consistent with the 2011/12 full year position.The group placed its pension provision on a more sustainable footing in 2010and has subsequently taken additional steps to de-risk the pension schemefurther, with UU now benefiting from a small pension surplus. Further detailson the group's pension provision are provided in the pensions section.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 £79million of infrastructure renewals expenditure, was £354 million, an increaseof 29% compared with the first half of last year. Our Time: Cost: Quality index(TCQi) score has been maintained at over 80% through the first half of theyear, consistent with 2011/12, despite the increased activity. The company'slong-term goal is to achieve over 90%. Following our good progress in the firsthalf of the year, we expect to deliver around £750 million of capitalinvestment in 2012/13.The ownership of and responsibility for private sewers was transferred to thewastewater companies in England and Wales from 1 October 2011. In the firsthalf of 2012/13, activity levels and expenditure have been a little belowexpectations and the mix of work has been weighted more towards capitalenhancement rather than opex. As a result, opex in the first half of the yearwas £3 million and capex was £14 million, of which £6 million was IRE. There isno change to UU's 2011-15 total cost estimate of £160 million at this stage,but we will continue to review these cost estimates based on the levels andtype of workload and activity experienced and provide updated forecasts asappropriate.
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. Should average RPI inflation outturn at 3.5% per annum across thefive-year period, this would increase financing outperformance to around £400million, net of the impact of the pensions inflation funding mechanism.* 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. UUdelivered cumulative operating expenditure outperformance of over £20 millionin the first two years of the regulatory period and is on track to increasethis to over £30 million across the first three years.* 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.
Responsible manner
Sustainability is fundamental to the manner in which we undertake our businessand the group has for many years included corporate responsibility factors as astrategic consideration in its decision making. This has contributed to UUachieving its highest ever score in the 2011/12 Dow Jones Sustainability Indexassessment and retaining its `World Class' rating for the fifth consecutiveyear. UU also holds the highest platinum plus ranking in Business in theCommunity's Corporate Responsibility Index and was recently awarded membershipof the FTSE 350 Carbon Disclosure Leadership Index. UU is one of only four FTSE100 companies to hold all three awards.
UU's strong, year round, operational focus on leakage enabled it to meet its regulatory leakage target for the sixth consecutive year in 2011/12 and the group is performing well in the first half of this year.
Environmental performance is a high priority for UU and we are pleased toreport the lowest number of major pollution incidents of the ten water andwastewater companies, per kilometre of pipe for 2011/12, as assessed throughOfwat's published KPIs. Across Ofwat's six `Environmental Impact' KPIs, UU'sperformance was above average, with three areas assessed as `Green', three as`Amber' and no areas assessed as `Red', on the traffic light reporting matrix.Recognising that environmental performance is wide-ranging, the company ismeasuring itself against an Environment Agency (EA) composite measure asdetailed in the key performance indicators below.
UU has a detailed carbon and renewable energy plan, which contributes to sustainability through reducing emissions and reducing costs. We are on track to meet our target of a 21% reduction in carbon emissions by 2015 (measured from a 2005/06 baseline). UU has consistently generated around 100 GWh of renewable electricity annually for the past three years, principally from sludge processing.
Construction is well underway on UU's £200 million plant expansion to itsexisting wastewater treatment works in Liverpool, serving over half a millioncustomers. This project will deliver both environmental benefits and growth inthe company's regulatory capital value, as well as contributing to the localeconomy.The company's health and safety improvement programme has helped reduce furtheremployee accident frequency rates through the first half of the year. Healthand safety will continue to be a significant area of focus for the company, aswe strive for continuous improvement.
Key performance indicators:
* Leakage - UU met its economic level of leakage rolling target for the sixthconsecutive year in 2011/12, with a performance of 453 megalitres per dayversus the regulatory target of 464 megalitres per day, and the company is oncourse to meet its 2012/13 target. The aim is to meet our regulatory leakagetarget each year.* Environmental performance - The EA is introducing a revised environmentalperformance measure, which is due to be published shortly. UU's goodperformance on Ofwat's KPIs, within the `Environmental Impact' category, shouldpositively impact the EA's overall assessment on this revised measure. UU waspositioned seventh out of the ten water and sewerage companies for 2010/11 onthe EA's previous composite measure. UU aims to move to the first quartile inthe medium-term.* 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, achieving our highest ever score in 2011/12. The group aims to retain this `World Class' rating each year.
Political and regulatory developments
UU is actively involved in political and regulatory developments that relate tothe UK water sector and has a proactive programme to regularly engage with thekey parties. Retaining investor confidence in the sector is of paramountimportance.
Draft Water Bill
The UK Government published a draft Water Bill in July 2012. This proposes theintroduction of both retail competition and wholesale, or upstream,competition. The UK Government is considering the responses it has receivedfrom various interested parties to the draft Water Bill and the pre-legislativescrutiny period is expected to close by the end of the 2012 calendar year. UUsupports the introduction of retail competition for industrial and commercialcustomers, but has responded to the Efra Select Committee that it has concernswith the upstream proposals. As currently drafted, it is questionable to whatextent these proposals are consistent with commitments to protect the existingregulatory capital value (RCV), to secure continued investor confidence neededto support future investment and to allow customers to continue to benefit fromlow cost RCV funding in the long term.
Licence modifications
Ofwat issued proposals to modify company licences under `Section 13' of theWater Industry Act on 26 October 2012. UU responded on 23 November 2012 andannounced that, after careful consideration, the board of United UtilitiesWater PLC (UUW) has concluded that it is unable to accept Ofwat's `Section 13'licence modification proposals because it believes that, in their current form,they are not in the best interests of customers, investors and widerstakeholders. To aid further constructive dialogue, UUW has submittedalternative proposals to Ofwat for its consideration.
UUW's principal concern is that the extent of flexibility in Ofwat's current licence proposals would create unnecessary and prolonged uncertainty for investors, with the potential for this uncertainty to impact customer bills.
UUW is committed to continued positive engagement with Ofwat to support theprogressive evolution of regulation in the water industry. The company'sproposals include the licence changes necessary to facilitate the forthcomingprice review in 2014 and the development of retail competition for businesscustomers. UUW also recognises that additional licence amendments may berequired to accommodate specific changes to the regulatory regime inpreparation for 2020 and beyond and will actively engage in helping to ensurethat the benefits of such developments are fully evaluated and understood.
2014 price review
Ofwat published its statement of principles for the 2014 price review (PR14) inMay 2012, followed by retail and wholesale price control consultations. UU hassubmitted its responses to Ofwat in respect of both of these consultations. Onthe matter of retail price controls, we believe it is essential that theregulator continues to take account of regional socio-economic conditions,addresses reporting inconsistencies between companies, allows for inflation andmakes adjustments to reflect the number of customers who receive only a wateror wastewater service. A framework consultation for PR14 is expected to bepublished by the regulator in December 2012.
FINANCIAL PERFORMANCE
Revenue
UU has delivered a good set of financial results for the six month period ended30 September 2012. Revenue increased by £30 million to £823 million,principally reflecting a 5.8% nominal (0.6% real price increase plus 5.2% RPIinflation) regulated price increase, partially offset by reduced commercialvolumes and lower property sales. Commercial volumes continued to be impactedby the tough economic climate, with a large rise in unemployment in the NorthWest during 2011/12. The impact of meter switching and reduced domesticconsumption was in line with our expectations, however, this was offset byadditional revenue derived from new property connections. We would expect torecover the majority of any regulated revenue shortfall through the regulatorymethodology.Operating profit
Underlying operating profit decreased by 3% to £316 million, primarily as aresult of an increase in depreciation alongside higher infrastructure renewalsexpenditure and other operating costs, both of which are impacted by thetransfer of private sewers, largely offset by the increase in revenue. Reportedoperating profit decreased by 2% to £315 million.
Investment income and finance expense
Investment income and finance expense of £180 million was £19 million lowerthan the first half of 2011/12, principally reflecting a £13 million fall inthe underlying net finance expense and a £7 million decrease in fair valuelosses on debt and derivative instruments. The £49 million net fair value lossin the period is largely due to losses on the regulatory swap portfolioresulting from a further decrease in sterling interest rates during the period.The group uses these swaps to fix interest rates on a substantial proportion ofits debt to better match the financing cash flows allowed by the regulator ateach price review. The group has continued to benefit from fixing the majorityof its remaining debt for the 2010-15 financial period, providing a neteffective nominal interest rate of approximately 5%.The underlying net finance expense of £126 million was £13 million lower thanthe first six months of last year, principally reflecting lower RPI inflationin respect of the group's index-linked debt. The indexation of the principal onindex-linked debt amounted to a net charge in the income statement of £43million, compared with a net charge of £57 million in the corresponding periodlast year. The group had approximately £2.7 billion of index-linked debt as at30 September 2012. The lower RPI indexation charge contributed to the group'saverage underlying interest rate of 5.0% being lower than the rate of 5.8% forthe first six months of 2011/12.
Profit before taxation
Underlying profit before taxation was £190 million, £5 million higher than thefirst half of last year as the £8 million decrease in underlying operatingprofit was more than offset by the £13 million reduction in underlying financeexpense. This underlying measure adjusts for the impact of one-off items,principally from restructuring and reorganisation within the business, and fairvalue movements in respect of debt and derivative instruments. Reported profitbefore taxation increased by £11 million to £136 million, primarily as a resultof the increase in underlying profit before tax and a decrease in net fairvalue losses on debt and derivative instruments.
Taxation
The current taxation charge was £33 million in the half year and the currenttaxation effective rate was 24%, compared with 27% in the corresponding periodlast year.The group has recognised a net deferred taxation credit of £51 million in thefirst half of 2012/13, which primarily relates to a £53 million credit inrespect of the change substantively enacted by the UK government on 3 July 2012to reduce the mainstream rate of corporation taxation from 24% to 23% witheffect from 1 April 2013. A net deferred taxation credit of £50 million wasalso recognised in the first half of 2011/12, reflecting a similar 1% stagedreduction in the rate of corporation taxation.An overall taxation credit of £18 million has been recognised for the sixmonths ended 30 September 2012. Excluding the deferred taxation impact of thefuture reduction in the corporation taxation rate, the total taxation chargewould have been £35 million or 25% compared with a £33 million charge or 27% inthe first half of last year. This reduction is principally due to the decreasein the mainstream rate of corporation taxation from 26% for 2011/12 to thecurrent rate of 24%.The group made cash taxation payments during the half year of £17 million. Thiswas lower than the group's net taxation payment of £29 million in the firsthalf of last year primarily due to the high levels of pension contributionsmade in 2011/12 which reduced the cash tax paid in the first half of 2012/13.
Profit after taxation
Underlying profit after taxation of £142 million was £6 million higher than thefirst half of last year, reflecting the increase in underlying profit beforetaxation and a lower underlying taxation charge. Reported profit after taxationwas £154 million compared with £141 million last year.
Earnings per share
Underlying earnings per share increased from 19.9 pence to 20.9 pence. Thisunderlying measure is derived from underlying profit after taxation. Thisincludes the adjustments for the deferred taxation credits in both the firsthalf of 2012/13 and 2011/12, associated with the reductions in the corporationtaxation rate. Basic earnings per share increased from 20.7 pence to 22.6pence.
Dividend per share
The board has declared an interim dividend of 11.44 pence per ordinary share inrespect of the six months ended 30 September 2012. This is an increase of 7.2%,compared with the interim dividend relating to the previous year, in line withgroup's dividend policy of targeting a growth rate of RPI+2% per annum throughto at least 2015. The inflationary increase of 5.2% is based on the RPI elementincluded within the allowed regulated price increase for the 2012/13 financialyear (i.e. the movement in RPI between November 2010 and November 2011).The interim dividend is expected to be paid on 1 February 2013 to shareholderson the register at the close of business on 21 December 2012. The ex-dividenddate is 19 December 2012.Cash flow
Net cash generated from continuing operating activities for the six monthsended 30 September 2012 was £265 million, compared with £212 million in thefirst half of last year. This is predominantly due to a reduction in theaccelerated pension deficit repair payments between the two six monthlyperiods. The group's net capital expenditure was £294 million, principally inthe regulated water and wastewater investment programmes. This excludesinfrastructure renewals expenditure which is treated as an operating cost underInternational Financial Reporting Standards.Net debt including derivatives at 30 September 2012 was £5,323 million,compared with £5,076 million at 31 March 2012. This expected increase reflectsexpenditure on the regulatory capital expenditure programmes and payments ofdividends, interest and taxation, alongside the accelerated pension deficitrepair payment, partly offset by operating cash flows.
Debt financing and interest rate management
Gearing (measured as group net debt divided by UUW's regulatory capital valueadjusted for actual capital expenditure) marginally increased to 60% at 30September 2012, compared with 59% at 31 March 2012, and remains comfortablywithin Ofwat's 55% to 65% assumed gearing range. The group now has a smallpensions surplus of £39 million, on an IFRS basis, compared with a deficit of £92 million as at 31 March 2012. Taking account of this small surplus, andtreating it as cash, gearing remains at 60%.At 30 September 2012, United Utilities Water PLC had long-term credit ratingsof A3/BBB+ and United Utilities PLC had long-term credit ratings of Baa1/BBB-from Moody's Investors Service and Standard & Poor's Ratings Servicesrespectively. The split rating reflects differing methodologies used by thecredit rating agencies.Cash and short-term deposits at 30 September 2012 amounted to £153 million.Between March 2011 and March 2012, the group's financing headroom position wasenhanced by drawing down £400 million of index-linked loan facilities with theEuropean Investment Bank. There were no further debt issuances in the firsthalf of 2012/13, although the group also renewed £50 million of existing bankfacilities in the period. UU has headroom to cover its projected financingneeds into 2014.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 United Utilities Water PLC of debtinstruments on terms and conditions determined at the time the instruments areissued. The programme does not represent a funding commitment, with fundingdependent on the successful issue of the debt securities.
Long-term borrowings are structured or hedged to match assets and earnings, which are largely in sterling, indexed to UK retail price inflation and subject to regulatory price reviews every five years.
Very long-term sterling inflation index-linked debt is the group's preferredform of funding as this provides a natural hedge to assets and earnings. At 30September 2012, approximately 51% of the group's net debt was in index-linkedform, representing around 31% of UUW's regulatory capital value, with anaverage real interest rate of 1.7%. The long-term nature of this funding alsoprovides a good match to the company's long-life infrastructure assets and is akey contributor to the group's average term debt maturity profile which isapproximately 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 pricereview.Following the 2009 price review, the group re-assessed its interest ratehedging policy with a view to further reducing regulatory risk. To help addressthe uncertainty 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 put the company in a more flexible position to respond to whateverapproach 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 2012 was £414 million based oncash, short-term deposits and medium-term committed bank facilities, net ofshort-term debt. This headroom is sufficient to cover the group's projectedfinancing needs into 2014.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 prime commercial banks.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 2012, the group had an IAS 19 net retirement benefit, orpension, surplus of £39 million, compared with a net pension deficit of £92million at 31 March 2012. This £131 million positive movement principallyreflects payments of £65 million in respect of accelerated, previously agreed,deficit repair contributions, payments under the inflation funding mechanismand the favourable impact of a fall in inflation. This was partly offset by afall in interest rates, the impact of which was tempered through positiveinvestment returns due to the group's interest rate hedge. Following theaccelerated deficit repair contributions paid in the period, the group has nowcompleted all scheduled deficit repair payments through to March 2015.The group has sought to adopt a more sustainable approach to the delivery ofpension provision and prior to the start of the 2010-15 regulatory periodamended the terms of its defined benefit pension schemes. UU stated previouslythat it would continue to evaluate its pensions investment strategy to de-riskfurther its pension provision and introduced an inflation funding mechanism,which facilitates a move to a lower risk investment strategy. This allowed UUto reduce the allocation of its pension assets to 25% in equities and otherhigh risk assets, down from 48% at 31 March 2010. In addition, UU has adoptedthe use of more prudent longevity assumptions. Over the last two financialyears, the group also progressively increased its interest rate hedge and since30 September 2012 has extended this further to around 75% of the pension schemeliabilities. Although any additional payments under the inflation fundingmechanism would reduce financing outperformance, there would be a positivebenefit to the pensions surplus or deficit position.From an accounting perspective, IAS 19 treats the inflation funding mechanismas a schedule of contributions rather than a pension scheme asset. This meansthat the liabilities position can change to reflect a change in marketexpectations of long-term inflation, without a commensurate movement in assets.The change in inflation has decreased the present value of the liabilitiesduring the six months to 30 September 2012. This accounting treatment meansthat there is likely to be a degree of volatility in future IAS 19 pensionvaluations.
Further detail is provided in note 7 ("Retirement benefit surplus/(obligations) ") 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 Six months Six months Operating profit ended ended 30 September 30 September 2012 2011 £m £m Operating profit per published results 315.1 322.6 One-off items* 0.6 1.6 ----- ----- Underlying operating profit 315.7 324.2 ----- ----- Net finance expense £m £m Finance expense (180.8) (199.9) Investment income 1.3 1.7 ----- ----- Net finance expense per published results (179.5)
(198.2)
Net fair value losses on debt and derivative 49.4 55.9instruments
Adjustment for interest on swaps and debt 3.0
3.8under fair value option
Adjustment for net pension interest expense 6.5
3.2
Adjustment for capitalised borrowing costs (5.4)
(4.0)
Underlying net finance expense (126.0) (139.3) ----- ----- Profit before taxation £m £m Profit before taxation per published results 135.6 124.4 One-off items* 0.6 1.6 Net fair value losses on debt and derivative 49.4 55.9instruments
Adjustment for interest on swaps and debt 3.0
3.8under fair value option
Adjustment for net pension interest expense 6.5
3.2
Adjustment for capitalised borrowing costs (5.4) (4.0) ----- ----- Underlying profit before taxation 189.7 184.9 ----- ----- Profit after taxation £m £m Underlying profit before taxation 189.7 184.9 Reported taxation 18.3 16.4 Deferred taxation credit - change in taxation (52.8) (49.7)rate Taxation in respect of adjustments to (13.0)
(15.7)
underlying profit before taxation
----- ----- Underlying profit after taxation 142.2 135.9 ----- -----
* Principally relates to restructuring costs within the business
PRINCIPAL RISKS AND UNCERTAINTIES
We manage risk through our corporate risk management framework. As part of thiswe maintain a process that regularly assesses the nature and magnitude ofinternal and external risks. Mitigation measures are used in a prioritisedmanner to reduce exposure and ensure resilience. The executive reviewssignificant risks so that the board can determine the nature and extent ofthose risks it is willing to take in achieving our strategic objectives. Theaudit and risk committee regularly reviews the framework's effectiveness andthe group's compliance with it.The group's anticipated principal risks and uncertainties over the second halfof the financial year and beyond remain as stated in its 2012 Annual Report andFinancial Statements, with two additions: the recent RPI methodologyconsultation initiated by the UK Office for National Statistics; and theinfraction hearing decision regarding the UK's implementation of the UrbanWaste Water Treatment Directive in respect of combined sewer overflows, thedetails of which are outlined below. The principal risks and uncertainties areset out in full on pages 26-32 of the 2012 Annual Report and FinancialStatements, namely (a) government market reform agenda; (b) future price limits- average cost to serve; (c) future price limits - licence modifications; (d)capital investment programmes; (e) service incentive mechanism; (f)serviceability assessment; (g) pension scheme obligations; (h) failure tocomply with applicable law or regulations; (i) events, service interruptions,systems failures, water shortages or contamination of water supplies; and (j)material litigation. An update in respect of "(c) price limits - licencemodifications" has been provided in the political and regulatory developmentssection of this half year report.The UK Office for National Statistics initiated a consultation in October 2012in respect of the methodology for calculating RPI inflation. The options beingconsidered range from no change to a change which would likely lower the valueof RPI, compared with the current methodology, and align the formulae to thatof CPI inflation. UU has contributed to the consultation process, which runsthrough to the end of November 2012. The water industry is awaiting the outcomeof this consultation and any subsequent decisions by the UK Government inrespect of whether any potential changes are considered to be `fundamental'.There remains much uncertainty as to the possible outcome and implications.Depending on the outcome, which is expected in early 2013, this may impactgrowth in the RCV and revenue, alongside implications for operating costs,finance expense and pensions. Any possible changes in RPI are likely to ensuebefore the next regulatory price review in 2014, providing Ofwat with theopportunity to consider and respond to the potential impact on the waterindustry.On 18 October 2012 the European Commission delivered its verdict and found theUK to have failed to implement correctly the Urban Waste Water TreatmentDirective for the Whitburn and the London test cases, in respect of combinedsewer overflows. The water industry is now awaiting the UK Government'sresponse to this outcome. Should material additional capital expenditure berequired, UU would expect this to be reflected in future regulatory pricedeterminations. UU will engage with its regulators and stakeholders asappropriate.
There has been no change to the nature of related party transactions in the first six months of the financial year which has materially affected the financial 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 is subject to regulatory audit.
Consolidated income statement
Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m Continuing operations ----- ----- ----- Revenue 822.9 792.7 1,564.9 ----- ----- ----- Employee benefits expense: - excluding restructuring costs (69.7) (66.0) (135.4) - restructuring costs (0.6) (1.6) (2.6) ----- ----- ----- Total employee benefits expense (70.3) (67.6) (138.0) Other operating costs (199.8) (192.2) (388.0) Other income 1.3 2.7 4.8
Depreciation and amortisation expense (160.2) (146.6) (297.8)
Infrastructure renewals expenditure (78.8) (66.4) (154.4) ----- ----- ----- Total operating expenses (507.8) (470.1) (973.4) ----- ----- ----- Operating profit 315.1 322.6 591.5 Investment income 1.3 1.7 4.4 Finance expense (note 3) (180.8) (199.9) (315.5) ----- ----- ----- Investment income and finance expense (179.5) (198.2) (311.1) ----- ----- ----- Profit before taxation 135.6 124.4 280.4 Current taxation charge (32.6) (34.0) (45.5) Deferred taxation (charge)/credit (1.9) 0.7
(28.1)
Deferred taxation credit - change in 52.8 49.7 104.6taxation rate ----- ----- ----- Taxation (note 4) 18.3 16.4 31.0 ----- ----- ----- Profit after taxation from continuing 153.9 140.8 311.4operations Discontinued operations
Profit after taxation from discontinued 3.0 0.9
5.1operations ----- ----- ----- Profit after taxation 156.9 141.7 316.5 ----- ----- ----- Earnings per share
from continuing and discontinued
operations (note 5) Basic 23.0p 20.8p 46.4p Diluted 23.0p 20.8p 46.4p Earnings per share
from continuing operations (note 5)
Basic 22.6p 20.7p 45.7p Diluted 22.5p 20.7p 45.6p Dividend per ordinary share (note 6) 11.44p 10.67p
32.01p
Consolidated statement of comprehensive income
Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m Profit after taxation 156.9 141.7 316.5 Other comprehensive income
Actuarial gains/(losses) on defined
benefit pension schemes 62.2 98.8 (24.3) (note 7)
Taxation on items taken directly to (15.1) (24.7)
4.4equity (note 4) Foreign exchange adjustments (1.7) (1.1) (1.9) ----- ----- ----- Total comprehensive income 202.3 214.7 294.7 ----- ----- -----
Consolidated statement of financial
position 30 September 30 September 31 March 2012 2011 2012 £m £m £m ASSETS Non-current assets Property, plant and equipment 8,785.4 8,380.9 8,644.5 Goodwill 4.7 5.0 5.0 Other intangible assets 90.9 90.5 89.5 Investments 4.5 3.4 3.3 Trade and other receivables 1.2 4.5 1.1
Retirement benefit surplus (note 7) 39.3 27.9
-
Derivative financial instruments 612.8 646.4 567.5 ----- ----- ----- 9,538.8 9,158.6 9,310.9 ----- ----- ----- Current assets Inventories 47.7 46.8 47.4 Trade and other receivables 360.8 342.6 301.4 Cash and short-term deposits 152.5 325.2 321.2
Derivative financial instruments 99.7 3.8
49.9 ----- ----- ----- 660.7 718.4 719.9 ----- ----- ----- Total assets 10,199.5 9,877.0 10,030.8 ----- ----- ----- LIABILITIES Non-current liabilities Trade and other payables (397.0) (281.9) (378.0) Borrowings (5,821.2) (5,513.2) (5,728.1) Retirement benefit obligations (note 7) - -
(92.0)
Deferred taxation liabilities (1,211.5) (1,284.8) (1,245.2) Provisions (2.5) (6.8) (4.0) Derivative financial instruments (207.2) (152.6) (159.7) ----- ----- ----- (7,639.4) (7,239.3) (7,607.0) ----- ----- ----- Current liabilities Trade and other payables (481.2) (490.9) (447.6) Borrowings (158.1) (319.9) (127.1) Current income taxation liabilities (91.5) (58.2) (78.1) Provisions (6.4) (12.1) (6.3) Derivative financial instruments (1.3) - (0.1) ----- ----- ----- (738.5) (881.1) (659.2) ----- ----- ----- Total liabilities (8,377.9) (8,120.4) (8,266.2) ----- ----- ----- Total net assets 1,821.6 1,756.6 1,764.6 ----- ----- ----- EQUITY Share capital 499.8 499.8 499.8 Share premium account 2.9 2.3 2.4 Revaluation reserve 158.8 158.8 158.8 Cumulative exchange reserve (6.7) (4.2) (5.0) Merger reserve 329.7 329.7 329.7 Retained earnings 837.1 770.2 778.9 ----- ----- ----- Shareholders' equity 1,821.6 1,756.6 1,764.6 ----- ----- -----
Consolidated statement of changes in equity Six months ended 30 September 2012 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 - - - - - 156.9 156.9 Other comprehensive income Actuarial gains on - - - - - 62.2 62.2defined benefit pension schemes (note 7) Taxation on items taken - - - - - (15.1) (15.1)directly to equity (note 4) Foreign exchange - - - (1.7) - - (1.7)adjustments ---- ---- ---- ---- ---- ---- ---- Total comprehensive - - - (1.7) - 204.0 202.3(expense)/income for the period ---- ---- ---- ---- ---- ---- ---- Transactions with owners Dividends (note 6) - - - - - (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 of shares ---- ---- ---- ---- ---- ---- ---- At 30 September 2012 499.8 2.9 158.8 (6.7) 329.7 837.1 1,821.6 ---- ---- ---- ---- ---- ---- ----
Six months ended 30 September 2011 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 2011 499.8 1.3 158.8 (3.1) 329.7 691.0 1,677.5 Profit after taxation - - - - - 141.7 141.7 Other comprehensive income Actuarial gains on - - - - - 98.8 98.8defined benefit pension schemes (note 7) Taxation on items taken - - - - - (24.7) (24.7)directly to equity (note 4) Foreign exchange - - - (1.1) - - (1.1)adjustments ---- ---- ---- ---- ---- ---- ---- Total comprehensive - - - (1.1) - 215.8 214.7(expense)/income for the period ---- ---- ---- ---- ---- ---- ---- Transactions with owners Dividends (note 6) - - - - - (136.3) (136.3) New share capital - 1.0 - - - - 1.0issued Equity-settled - - - - - 0.6 0.6share-based payments Exercise of share - - - - - (0.9) (0.9)options - purchase of shares ---- ---- ---- ---- ---- ---- ---- At 30 September 2011 499.8 2.3 158.8 (4.2) 329.7 770.2 1,756.6 ---- ---- ---- ---- ---- ---- ----
Consolidated statement of changes in equity Year ended 31 March 2012 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 2011 499.8 1.3 158.8 (3.1) 329.7 691.0 1,677.5 Profit after taxation - - - - - 316.5 316.5 Other comprehensive income Actuarial losses on - - - - - (24.3) (24.3)defined benefit pension schemes (note 7) Taxation on items - - - - - 4.4 4.4taken directly to equity (note 4) Foreign exchange - - - (1.9) - - (1.9)adjustments ---- ---- ---- ---- ---- ---- ---- Total comprehensive - - - (1.9) - 296.6 294.7(expense)/income for the year ---- ---- ---- ---- ---- ---- ---- Transactions with owners Dividends (note 6) - - - - - (209.0) (209.0) New share capital - 1.1 - - - - 1.1issued Equity-settled - - - - - 1.2 1.2share-based payments Exercise of share - - - - - (0.9) (0.9)options - purchase of shares ---- ---- ---- ---- ---- ---- ---- At 31 March 2012 499.8 2.4 158.8 (5.0) 329.7 778.9 1,764.6 ---- ---- ---- ---- ---- ---- ----
Consolidated statement of cash flows Re-presented*
Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m Operating activities Cash generated from continuing 347.5 306.5 727.4operations Interest paid (66.6) (67.0) (167.2)
Interest received and similar income 1.3 1.6
4.4 Tax paid (17.1) (29.0) (39.8) Tax received - - 35.0 ----- ----- -----
Net cash generated from operating activities (continuing operations) 265.1 212.1 559.8 ----- ----- ----- Investing activities
Proceeds from disposal of discontinued - -
3.5operations Transaction costs, deferred - - 2.0
consideration and cash disposed
----- ----- -----
Proceeds from disposal of discontinued operations net of transaction costs, - -
5.5
deferred consideration and cash
disposed Purchase of property, plant and (285.4) (216.5) (502.2)equipment Purchase of other intangible assets (14.8) (8.1)
(17.3)
Proceeds from sale of property, plant 0.7 0.6
4.8and equipment
Grants and contributions received 5.6 6.1
13.0 Purchase of investments (1.1) (1.1) (2.2) ----- ----- ----- Net cash used in investing activities (295.0) (219.0) (498.4)(continuing operations) ----- ----- ----- Financing activities
Proceeds from issue of ordinary shares 0.5 1.0
1.1 Proceeds from borrowings 26.3 222.2 446.3 Repayment of borrowings (31.2) (5.8) (231.7) Exercise of share options - purchase (1.0) (0.9) (0.9)of shares Dividends paid to equity holders of (145.5) (136.3) (209.0)the company ----- ----- -----
Net cash (used in)/generated from financing activities (continuing (150.9) 80.2
5.8operations) ----- ----- -----
Effects of exchange rate changes (0.3) 0.2
0.5(continuing operations) ----- ----- -----
Net (decrease)/increase in cash and (181.1) 73.5
67.7cash equivalents ----- ----- ----- Cash and cash equivalents at beginning 312.1 244.4 244.4of the period ----- ----- ----- Cash and cash equivalents at end of 131.0 317.9 312.1the period ----- ----- -----\* The comparatives for the six months ended 30 September 2011 have beenre-presented to show grants and contributions received of £6.1 millionseparately within investing activities (previously included within increase intrade and other payables as part of cash generated from operating activities)to be consistent with the presentation adopted at 31 March 2012.Cash generated from continuing operations
Re-presented* Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m Operating profit 315.1 322.6 591.5 Adjustments for: Depreciation of property, plant and 148.4 135.2 278.0equipment
Amortisation of other intangible assets 11.8 11.4
19.8
Loss on disposal of property, plant and 2.2 1.5
5.5equipment
Loss on disposal of other intangible 2.7 -
2.6assets Amortisation of deferred grants and (3.5) (3.4) (6.9)contributions
Equity-settled share-based payments 0.7 0.6
1.2charge Other non-cash movements (0.8) (0.4) (0.1) Changes in working capital: (Increase)/decrease in inventories (0.3) 0.8
(0.1)
Increase in trade and other receivables (59.8) (50.3) (8.2)
Increase/(decrease) in trade and other 8.0 20.6 (26.5)payables Decrease in provisions and retirement (77.0) (132.1) (129.4)benefit obligations ----- ----- ----- Cash generated from continuing 347.5 306.5 727.4operations ----- ----- -----\* The comparatives for the six months ended 30 September 2011 have beenre-presented to show amortisation of deferred grants and contributionsseparately (previously included within increase in trade and other payables)along with the reclassification of grants and contributions received which werepreviously included in increase in trade and other payables, now shownseparately on the consolidated statement of cash flows within investingactivities. This presentation is consistent with that adopted in the March
2012financial statements.NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the six months ended 30 September 2012 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and International Accounting 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 2012, which are prepared inaccordance with International Financial Reporting Standards (IFRSs) as adoptedby the European Union (EU).The adoption of the following amendment to standards that are mandatory for theperiod commencing 1 April 2012, has not had a material impact on the group'sfinancial statements.
`Amendments to IFRS 7 Financial Instruments'
This amendment introduces new disclosure requirements about transfers of financial assets which will impact the group only if it enters into any relevant transactions in the future.
The group has updated the valuation of its defined benefit pension schemes in the half yearly financial statements due to continued volatility in the financial markets.
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 2012.The comparative figures for the year ended 31 March 2012 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.2. Segmental reportingThe 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 at a consolidatedlevel. In light of this, the group has a single segment for financial reportingpurposes and therefore no further detailed segmental information is provided inthis note.3. Finance expenseContinuing operations Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m Interest payable (124.9) (140.8) (269.0) Net fair value losses on debt and (49.4) (55.9) (43.2)derivative instruments ----- ----- ----- (174.3) (196.7) (312.2) Expected return on pension schemes' 47.7 48.4 100.5assets Interest cost on pension schemes' (54.2) (51.6) (103.8)obligations ----- ----- ----- Net pension interest expense (note (6.5) (3.2) (3.3)7) ----- ----- ----- (180.8) (199.9) (315.5) ----- ----- -----The group has fixed interest costs for a substantial proportion of the group'snet debt for the duration of the regulatory pricing period and has hedgedcurrency exposures for the term of each relevant debt instrument. The group hashedged its position through the use of interest rate and cross currency swapcontracts where applicable. The underlying net finance expense for thecontinuing group of £126.0 million (30 September 2011: £139.3 million, 31 March2012: £267.1 million) is derived as shown in the table below.Continuing operations Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m Finance expense (180.8) (199.9) (315.5) Net fair value losses on debt and 49.4 55.9 43.2derivative instruments Interest on swaps and debt under 3.0 3.8 7.2fair value option Investment income 1.3 1.7 4.4 Adjustment for capitalised borrowing (5.4) (4.0) (9.7)costs Adjustment for net pension interest 6.5 3.2 3.3expense (note 7) ----- ----- ----- Underlying net finance expense (126.0) (139.3) (267.1) ----- ----- -----4. TaxationContinuing operations Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m Current taxation UK corporation taxation 31.3 32.7 60.1 Foreign taxation 1.3 1.3 1.3 Adjustments in respect of prior - - (15.9)years ----- ----- ----- 32.6 34.0 45.5 ----- ----- ----- Deferred taxation Current period 1.9 (0.7) 12.6 Adjustments in respect of prior - - 15.5years ----- ----- ----- 1.9 (0.7) 28.1 Change in taxation rate (52.8) (49.7) (104.6) ----- ----- ----- Total deferred taxation credit for (50.9) (50.4) (76.5)the period ----- ----- ----- ----- ----- ----- Total taxation credit for the period (18.3) (16.4) (31.0) ----- ----- -----The deferred taxation credit for the period ended 30 September 2012 includes acredit of £52.8 million to reflect the change enacted on 3 July 2012 to reducethe mainstream corporation tax rate from 24 per cent to 23 per cent effectivefrom 1 April 2013. A related deferred taxation charge of £0.9 million isincluded within items taken directly to equity.The deferred taxation credit for the period ended 30 September 2011 includes acredit of £49.7 million to reflect the change enacted on 5 July 2011 to reducethe mainstream rate of corporation tax from 26 per cent to 25 per centeffective from 1 April 2012.The deferred taxation credit for the year ended 31 March 2012 includes a creditof £104.6 million to reflect the change enacted on 5 July 2011 to reduce themainstream rate of corporation tax from 26 per cent to 25 per cent and thesubsequent change enacted on 26 March 2012 to reduce the mainstream rate ofcorporation tax further to 24 per cent effective from 1 April 2012. A relateddeferred taxation charge of £3.9 million is included within items takendirectly to equity. There will be a further reduction in the mainstream rate of corporation tax to22 per cent by 1 April 2014. The total deferred taxation credit in respect ofthis further reduction is expected to be in the region of £50.0 million.
Taxation on items taken directly to equity
The taxation charge/(credit) relating to items taken directly to equity is asfollows:Continuing operations Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m Current taxation Relating to other pension movements (2.1) (17.5) (33.1) ----- ----- ----- Deferred taxation
On actuarial gains/(losses) on defined benefit pension schemes 14.3 24.7
(5.8)
Relating to other pension movements 2.0 17.5 30.6 Change in taxation rate 0.9 - 3.9 ----- ----- ----- 17.2 42.2 28.7 ----- ----- ----- ----- ----- ----- Total taxation on items taken 15.1 24.7 (4.4)directly to equity ----- ----- -----5. Earnings per share
Basic and diluted earnings per share are calculated by dividing profit after taxation by the following weighted average number of shares in issue:
Basic Diluted million million Six months ended 30 September 2012 681.8
682.6
Six months ended 30 September 2011 681.7 682.1 Year ended 31 March 2012 681.8 682.2The 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: Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011
From continuing and discontinued
operations Basic 23.0p 20.8p 46.4p Diluted 23.0p 20.8p 46.4p From continuing operations Basic 22.6p 20.7p 45.7p Diluted 22.5p 20.7p 45.6p Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m
Profit after taxation - continuing
and discontinued operations 156.9 141.7 316.5 Adjustment for profit after taxation from discontinued (3.0) (0.9) (5.1)operations ----- ----- ----- Profit after taxation - continuing 153.9 140.8 311.4operations ----- ----- -----6. Dividends Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m
Dividends relating to the period
comprise: Interim dividend 78.0 72.7 72.7 Final dividend - - 145.5 ----- ----- ----- 78.0 72.7 218.2 ----- ----- ----- Six months Six months Year ended ended ended 31 March 30 September 30 September 2012 2012 2011 £m £m £m
Dividends deducted from shareholders' equity
comprise: Interim dividend - - 72.7 Final dividend 145.5 136.3 136.3 ----- ----- ----- 145.5 136.3 209.0 ----- ----- -----
The interim dividends for the six months ended 30 September 2012 and 30 September 2011 and the final dividend for the year ended 31 March 2012 have not been included as liabilities in the consolidated financial statements at 30 September 2012, 30 September 2011 and 31 March 2012 respectively.
The interim dividend of 11.44 pence per ordinary share (2012: interim dividendof 10.67 pence per ordinary share; final dividend of 21.34 pence per ordinaryshare) is expected to be paid on 1 February 2013 to shareholders on theregister at the close of business on 21 December 2012. The ex-dividend date forthe interim dividend is 19 December 2012.
7. Retirement benefit surplus/(obligations)
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 Group PLC section of the Electricity Supply Pension Scheme(ESPS) were as follows: Six months ended Six months ended Year ended 30 September 30 September 31 March 2012 2011 2012 %pa %pa %pa Discount rate 4.40 5.20 5.00
Expected return on assets - UUPS 4.45 5.65
4.45
Expected return on assets - ESPS 5.00 6.10
5.00
Pensionable salary growth and 2.85 3.10
3.25pension increases Price inflation 2.85 3.10 3.25The net pension expense before taxation for continuing operations in the incomestatement in respect of the defined benefit schemes is summarised as follows: Six months ended Six months ended Year ended 30 September 30 September 31 March 2012 2011 2012 £m £m £m Continuing operations Current service cost (8.0) (6.7) (13.3)
Curtailments/settlements and past - (1.6)
(5.4)service costs ----- ----- -----
Pension expense charged to operating (8.0) (8.3)
(18.7)profit ----- ----- -----
Expected return on schemes' assets 47.7 48.4
100.5
Interest on schemes' obligations (54.2) (51.6) (103.8) ----- ----- -----
Net pension interest expense charged
to finance expense (note 3) (6.5) (3.2) (3.3) ----- ----- -----
Net pension expense charged before (14.5) (11.5)
(22.0)taxation ----- ----- -----
The reconciliation of the opening and closing net pension surplus/(obligations) included in the statement of financial position is as follows:
Six months ended Six months ended Year ended 30 September 30 September 31 March 2012 2011 2012 £m £m £m At the start of the period (92.0) (195.0) (195.0)
Expense recognised in the income (14.5) (11.5)
(22.0)
statement - continuing operations Expense recognised in the income - (0.4)
(0.4)
statement - discontinued operations
Contributions paid 83.6 136.0 149.7
Actuarial gains/(losses) gross of 62.2 98.8
(24.3)taxation ----- ----- ----- At the end of the period 39.3 27.9 (92.0) ----- ----- ----- The closing surplus/(obligations) at each reporting date are analysed asfollows: 30 September 30 September 31 March 2012 2011 2012 £m £m £m Present value of defined benefit (2,313.3) (1,950.7) (2,205.0)obligations Fair value of schemes' assets 2,352.6 1,978.6 2,113.0 ----- ----- ----- Net retirement benefit surplus/ 39.3 27.9 (92.0)(obligations) ----- ----- -----8. Related party transactions
Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
The following trading transactions were carried out with the group's jointventures: Six months ended Six months ended Year ended 30 September 30 September 31 March 2012 2011 2012 £m £m £m Group Sales of services 0.5 0.3 1.1
Purchases of goods and services 0.4 0.2
0.3 ----- ----- -----
Amounts owed by the group's joint ventures are as follows:
30 September 30 September 31 March 2012 2011 2012 £m £m £m Group
Amounts owed by related parties 1.1 1.4
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 £5.0 million (30September 2011: £5.5 million; 31 March 2012: £5.4 million) in support of itsjoint ventures.
No provision has been made for doubtful receivables in respect of the amounts owed by related parties (30 September 2011: £0.1 million; 31 March 2012: £nil).
9. Contingent liabilities
As at 30 September 2012, the group has entered into performance guarantees andhas provided letters of credit where a financial limit has been specified of £85.3 million (30 September 2011: £87.4 million; 31 March 2012: £85.2 million).
10. Changes in circumstances significantly affecting the fair value of financial assets and financial liabilities
From 1 April 2012 to 30 September 2012 market interest rates have fallen significantly, increasing the fair value of the group's borrowings and derivative assets.
The group's borrowings have a carrying amount of £5,979.3 million (31 March2012: £5,855.2 million). The fair value of these borrowings is £5,962.2 million(31 March 2012: £5,830.3 million). The group's derivatives measured at fairvalue are a net asset of £504.0 million (31 March 2012: £457.6 million).
11. 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 September2012.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The half yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
Responsibility statement
We confirm that to the best of our knowledge:
* the condensed set of financial statements has been prepared in accordance
with IAS 34 Interim Financial Reporting as adopted by the EU; and * the interim management report includes a fair review of the information required by:
* DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of
important events during the first six months of the current financial year
and their impact on the condensed set of financial statements; and a description of principal risks and uncertainties for the remaining six months of the year; and
* DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the entity during that period; and any changes in the
related party 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 McAdamSteve MogfordRuss HouldenDr Catherine Bell CBPaul HeidenNick SalmonSara Weller
Brian May (appointed 1 September 2012)
This responsibility statement was approved by the board and signed on its behalf by:
………………………..
……………………….
Steve Mogford Russ Houlden27 November 2012 27 November 2012 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 2012 which comprises the consolidated income statement, theconsolidated statement of comprehensive income, the consolidated statement offinancial position, the consolidated statement of changes in equity, theconsolidated 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 Services Authority("the UK FSA"). 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 been approved by, the directors. The directors are responsible for preparing the half yearly financial report in accordance with the DTR of the UK FSA.
As disclosed in note 1, the annual financial statements of the group areprepared in accordance with IFRSs as adopted by the EU. The condensed set offinancial statements included in this half-yearly financial report has beenprepared in accordance with IAS 34 Interim Financial Reporting as adopted bythe EU.Our responsibilityOur 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.ConclusionBased 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 2012 is not prepared, inall material respects, in accordance with IAS 34 as adopted by the EU and theDTR of the UK FSA.John Luke
for and on behalf of KPMG Audit Plc
Chartered AccountantsSt James' SquareManchesterM2 6DS27 November 2012
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