23rd Nov 2011 07:00
United Utilities Group PLC23 November 2011
HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2011
£m Six months ended
(Continuing operations) 30 September 2011 30 September 2010
Underlying operating profit* 324.2 327.7Underlying profit before 184.9 195.4taxation*,**Underlying profit after 135.9 138.7taxation*, **Underlying earnings per share*,**,*** (pence) 19.9 20.4Revenue 792.7 762.4Operating profit 322.6 311.5Profit before taxation 124.4 122.2Profit after taxation 140.8 133.1Basic earnings per share*** 20.7 19.5
(pence)
Interim dividend per ordinary 10.67 10.00
share (pence)
* Underlying profit measures have been provided to give a more representative view of business performance and are defined in the underlying profit measure tables.
** Re-presented to include capitalised borrowing costs of £0.8m in the comparative period
*** Earnings per share and underlying earnings per share are explained in the earnings per share section.
* Good underlying financial performance
* Underlying operating profit of £324m, down 1% reflecting higher infrastructure renewals expenditure
* Stronger focus on operational performance delivering benefits for customers and shareholders
* Customer service improvements: 20% reduction in customer complaints and improved SIM scores
* Improving trend on relative efficiency: moved up to first quartile for water service
* Sustained improvements in bad debts, despite challenging economic climate
* Continued good progress on capex programme: on course to invest up to £700m in the full year
* On track to meet regulatory outperformance targets
* Interim dividend of 10.67 pence per share, an increase of 6.7%
Steve Mogford, Chief Executive Officer, said:
"This is a good set of results in a tough economic climate.
"Our stronger focus on operational performance is delivering further service improvements for customers and we have reduced customer complaints by 20 per cent in the first half of this year. We were one of only four water and sewerage companies to meet its regulatory leakage target in 2010/11 and our water supply and demand balance remains robust, with our reservoirs at healthy levels.
"We have improved our efficiency and have moved into the firstquartile on relative efficiency for the water service and remain on course tomeet our regulatory outperformance targets. Alongside this, we have continuedto make high levels of capital investment in our assets to maintain andimprove the resilience of our network.
"In line with our dividend policy of targeting growth of two per cent above RPI inflation, we have increased the interim dividend by 6.7 per cent to 10.67 pence per share."
For further information on the day, please contact:
Gaynor Kenyon - Communications Director +44 (0) 7753 622282 Darren Jameson - Head of Investor Relations +44 (0) 7733 127707
Peter Hewer - Tulchan Communications +44 (0) 20 7353 4200A presentation to investors and analysts starts at 9.00 am onWednesday 23 November 2011, at the Auditorium, Deutsche Bank, WinchesterHouse, 1 Great Winchester Street, London, EC2N 2DB. The presentation can beaccessed via a live listen in conference call facility by dialling: +44 (0) 207162 0025, access code 906549. A recording of the call will be available forseven days following 23 November 2011 on +44 (0) 20 7031 4064, access code906549.
This results announcement and the associated presentation will be available on the day at: http://www.unitedutilities.com
BUSINESS REVIEW
Financial overview
The group has delivered a good set of financial results for the six monthsended 30 September 2011. Revenue was up by £30 million to £793 million,principally as a result of the impact of the regulated price increase for2011/12 of 4.5% nominal (0.2% real price decrease plus 4.7% RPI inflation).However, reflecting continued progress on the capital investment programme,infrastructure renewals expenditure was up £18 million. This expenditure,alongside increases in depreciation and property rates and other inflationarycost pressures, resulted in underlying operating profit decreasing marginallyby 1% to £324 million. United Utilities (UU) remains on track to deliver itsregulatory outperformance targets.
Regulatory capital investment in the half year, including £66 million of infrastructure renewals expenditure, was £275 million. This represents good progress in the early part of the 2010-15 period, as management has sought to deliver a smoother investment profile to support efficient delivery of outputs and reduce risk.
Underlying profit before taxation was lower by 5%, at £185 million. This reflected a slightly lower underlying operating profit and a small increase in the underlying net finance expense, mainly relating to indexation of the principal in respect of the group's index-linked debt.
Underlying profit after taxation was marginally lower than thecorresponding period last year, reflecting the movement in underlying netfinance expense. Reported profit after taxation benefited from a £50 milliondeferred taxation credit, which follows the UK government's changes to reducethe mainstream corporation taxation rate. A similar credit of £47 million wasrecognised in the first half of last year.
UU has a robust capital structure and gearing (measured as group net debt to regulatory capital value) as at 30 September 2011 was 60% and 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 Investors Service with a stable outlook.
Following the agreement of a further £200 million index-linked loanfacility with the European Investment Bank (EIB) earlier this month, the groupnow benefits from headroom to cover its projected financing needs into 2014.This provides good flexibility in terms of when and how further debt financeis raised to help fund the regulated capital expenditure programme. Reflectingthis robust financing position, UU accelerated approximately £100 million ofpreviously agreed pension deficit payments in September 2011, providing ahigher return for the group than could have been achieved through short- termdeposits.
UU has secured around £300 million of financing outperformance over the 2010-15 period (based on an average RPI inflation rate of 2.5% per annum), is targeting total operating expenditure outperformance of at least £50 million and expects broadly to meet its capital expenditure allowance.
In line with its policy, the board has declared an interim dividend of 10.67 pence per ordinary share, an increase of 6.7% compared with the interim dividend relating to 2010/11. The intention is to continue with this policy of targeting dividend growth of RPI+2% per annum through to 2015.
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 manner
Operational performance is a top priority for UU and the company aims to deliver improvements in this area and outperform its regulatory contract. The business recently revised its range of key performance indicators (KPIs) to enhance the visibility of its performance and help drive improvements.
Supporting this drive to improve operational performance, a revisedmanagement structure has been put in place with a strong focus onaccountability and delivery. The company has moved, from its previousfunctional structure, to an organisational structure that is aligned to thedelivery of efficient processes. Managers are now responsible for end to enddelivery of capital projects and operational performance within theirrespective regions, providing a more integrated approach. A `whole company'scorecard has also been introduced and short-term incentives are now moredirectly aligned with operational performance. Long-term incentives arealigned with shareholders' and customers' interests, being based 50% on totalshareholder return and 50% on regulatory outperformance.
Best service to customers
Actions:
Customer initiatives - UU recently established a customerexperience programme to help deliver improved customer service. The businessnow offers additional contact options for customers, such as an online accountmanagement facility, to provide more choices as to when and how they cancontact the company. Staff availability has recently been extended, coupledwith a simplified automated telephone routing system and an online call backfacility. A priority is to improve customer data management to ensure thisprovides a single view of the customer to help improve the efficiency andquality of service. Supporting this customer experience programme, thebusiness has increased staff training, better aligned staff incentivemechanisms, put new service level arrangements in place, substantially reducedwork queues and backlogs, and proactively contacts customers to keep theminformed of progress in respect of their enquiries. The company is nowfocusing on identifying potential customer queries in advance, through moreproactive exception billing reporting and contacting the customer before thebill is sent to discuss the matter. Operationally, the business is targetingsame day completion of jobs to improve the customer experience and reduce theneed for unnecessary calls.These initiatives are improving customer service and UU has seen a20% reduction in the total number of complaints in the first half of 2011/12compared with the second half of 2010/11, alongside a further substantialreduction in contacts with and customer complaints assessed by the ConsumerCouncil for Water (CCW). The company has also improved its performance onOfwat's service incentive mechanism (SIM), with a 42% improvement on thequantitative measure in the first half of 2011/12, compared with the firsthalf of 2010/11, and has moved up two places on the qualitative measure.Although this still places UU in the fourth quartile, it does represent goodprogress. Improving customer service further remains a significant area ofcontinued management focus.
Safe, clean drinking water - UU has an action plan to maintain safe, clean drinking water through improving the robustness of its water treatment processes, refurbishing service reservoir assets, ongoing mains cleaning and optimising water treatment to reduce discoloured water events. UU continues to supply a high quality of drinking water, with a mean zonal compliance water quality performance of 99.96%.
Water supply and demand balance - To help ensure a continuous watersupply to its customers, UU's action plan includes innovation and investmentin remote monitoring to better manage and control the company's water supplysystem. UU also has investment projects to optimise water pressures andimprove network resilience. In addition, the company is improving its responseto burst mains to help keep the water flowing, supported by `wet' repairs towater mains where the supply remains on through the repair process. Thecompany has completed the West East Link, a significant capital projectdesigned to improve further the water supply and demand balance in its regionand enhance network resilience to climate change.Wastewater - The company has a range of actions to help support theserviceability of its wastewater assets. To help reduce sewer flooding, theseactions include incident based targeting to focus on areas more likely toexperience flooding, effective intervention in cleaning and rehabilitation orrefurbishment of sewers and advising customers about items not suitable forsewer disposal. The plan also includes an improved approach to risk assessmentto identify and reduce the risk profile of the company's wastewater treatmentworks.Private sewers - The ownership of and responsibility for privatesewers was transferred to the English and Welsh water and sewerage companiesfrom 1 October 2011, providing additional benefits for customers and theopportunity for additional growth in the regulatory capital value. UU had beenpreparing for this for some time to help ensure a smooth transfer and thelevel of customer contacts and the increase in work volumes, thus far, hasbeen broadly in line with expectations. UU outlined its 2011-15 operating andcapital expenditure cost estimates in relation to private sewers in its2010/11 full year results published on 26 May 2011, which were total operatingexpenditure of £55 million and total capital expenditure of £125 million (ofwhich £90 million relates to infrastructure renewals expenditure). There is nochange to the initial cost estimates at this early stage, but UU will continueto assess and review these cost estimates in light of the levels of workloadand activity experienced.Key performance indicators:- Serviceability - Long-term stewardship of assets is critical andOfwat measures 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).Three asset classes (water infrastructure, water non-infrastructure andwastewater non-infrastructure) continue to be rated "stable". UU has beenassessed by the regulator as "marginal" in respect of wastewaterinfrastructure and the company has an action plan in place to return thisasset class back to a "stable" rating. The aim is to hold a "stable" ratingfor all four asset classes, which is aligned with Ofwat's target.- Service incentive mechanism (SIM) - Ofwat has recently introducedthis new measure, which replaces the overall performance assessment (OPA)measure. UU improved its quantitative score for 2010/11 by 44%, compared withthe indicative position for 2009/10. Further improvements have been achievedin the first half of 2011/12, with a score for the half year of 181 points.This represents a 42% improvement on the first half of 2010/11 and 19% on thesecond half of that year. On the qualitative measure, UU has improved itsquarter two score for 2011/12 to 3.99 points, from 3.79 points for the 2010/11financial year, which has moved the company up two places into nineteenthposition (out of 21 water companies). UU is nineth out of the ten water andsewerage companies. Although UU remains in the fourth quartile, this earlyprogress is encouraging. The aim is to move to the first quartile in themedium-term.Lowest sustainable costActions:Staff and pensions - The group placed its pension provision on amore sustainable footing in 2010 and has subsequently taken additional stepsto de-risk the pension scheme further. An inflation funding mechanism has beenintroduced, which has facilitated a move to a lower risk investment strategywith the proportion of pension assets invested in equities now reduced to 20%.The contributions made by UU are flexed in line with inflation, with a rollingfive-year smoothing arrangement to help mitigate fluctuations in RPI. Overall,the de-risking measures taken should result in less volatility in pensionfunding levels. More details on the inflation funding mechanism are providedin the pensions section.Asset optimisation - The company's asset optimisation programme isprogressing well, providing the benefits of increased and more effective useof operational site management to optimise power and chemical use and thedevelopment of more combined heat and power (CHP) assets to improve energyefficiency. The implementation phase is underway at over half of the 30 sitescovered by the programme and a large number of schemes came on line in summer2011, with further projects being scoped. The optimisation programme istargeting approximately £9 million of annual savings by 2013.
Proactive approach - The business is introducing a more proactive approach to asset and network management, with the aim of improving its modelling and forecasting to enable it to address more asset and network problems before they occur, thereby reducing the level of reactive work and improving efficiency.
Power hedging - UU has increased its power hedging and has now substantially locked in its power requirements through to 2014/15, securing outperformance. Power unit costs for 2011/12 are approximately 20% lower compared with 2009/10. Although power unit costs beyond 2011/12 have been secured at higher levels than those for 2011/12, this still delivers additional outperformance versus the regulatory contract.
Debt collection - The business is adopting a more proactiveapproach to debt collection. It has a detailed action plan in place, whichincludes enhancing systems to improve customer segmentation analysis and toobtain better data on customers who have changed address, coupled with a moreproactive debt follow up strategy. To support this, a proportion of its debtcollection function which was previously off-shored was brought back in-housein the last financial year and this is delivering benefits. In addition, thecompany is planning to use more local authority collection agreements. Baddebts as a proportion of regulated revenue improved from 2.5% in 2009/10 to2.1% in 2010/11 and this improvement has been sustained so far in 2011/12,despite the challenging economic environment.
Lean principles - Supporting the company's efficiency drive is its lean principles approach to doing business. Systems and processes continue to be streamlined and the business is rationalising its infrastructure and has in-sourced its IT provision to provide greater control of its IT assets and applications.
Leakage management - The performance of the business in meeting itsregulatory leakage target for 2010/11 was exemplary, given the extreme winterweather. UU was one of only four water and sewerage companies to meet itsregulatory leakage target last year. This reflected strong year roundoperational focus on leakage, an approach which the company has continued in2011/12 and this has created a buffer to help compensate for the inevitableadverse impact of winter weather. The company has also launched its `GetWinter Wise' campaign, which provides advice to customers on how to reduce therisk of frozen and burst pipes as a result of cold weather.Capital delivery - The business has utilised previous experience toimprove the terms and conditions of its supplier contracts and has a robustcommercial capital delivery framework in place for the 2010-15 period.Contractor performance is aligned with the company's business plan throughappropriate incentive arrangements. In addition, the business has introduced amore disciplined approach to spend and outputs through a Time: Cost: Qualityindex (TCQi). This enhances the capital investment governance process andprovides a sharper focus on the delivery of commitments, with a direct link tothe executive remuneration scheme. The TCQi performance score has improvedfrom around 50% last year to over 70% currently and the company's long-termgoal is to achieve over 90%. UU remains on track to deliver up to £700 millionof capital investment in 2011/12. Good progress in the delivery of outputs hasbeen achieved in the early part of the new regulatory period, reflecting asmoother and more efficient investment profile than that experienced in the2005-10 period.Sludge processing - A new £100 million sludge processing centre isbeing developed at the company's Davyhulme wastewater treatment works inManchester. Sludge will arrive from seven feeder treatment works and will beprocessed using advanced thermal hydrolysis technology. The new facility willprovide a range of benefits including energy self-sufficiency for the wholesite, greater sludge disposal flexibility, with a wider choice of landdisposal due to the advanced stage of the treated product, and improved sludgecondition to enhance the efficiency of incineration. There will also be theoption to pump the treated sludge to UU's Shell Green sludge processing centrein Widnes. Early progress has been good and the project is scheduled to becompleted in early 2013.
Key performance indicators:
* Relative efficiency - UU has made improvements on both the waterservice and the wastewater service in 2010/11 (based on UU's internalassessment of Ofwat's econometric models). The company has improved itsrelative efficiency banding to band A for water and is now in the firstquartile for this service in second position. The business has also moved upone place for wastewater into nineth position and remains in band C on thisservice. Overall, this places UU in a mid-ranking position and the aim is tobe first quartile on both services in the medium-term.
* Leakage - UU met its economic level of leakage rolling target for the fifth consecutive year in 2010/11, despite extreme winter weather conditions. The aim is to meet its regulatory leakage target, as set by Ofwat, each year.
Responsible mannerActions:Corporate responsibility - Sustainability is fundamental to themanner in which UU undertakes its business and the group has for many yearsincluded corporate responsibility (CR) factors as a strategic consideration inits decision making. This has contributed to UU retaining the highest platinumplus ranking in Business in the Community's (BITC) CR index, alongside onlyfive other FTSE 100 companies, as well as again being rated `World Class' inthe Dow Jones Sustainability Index. UU's CR policy sets out its commitment toenvironmental, social and economic improvements and this is communicated in away that enables all employees to recognise how their roles andresponsibilities contribute to maintaining and improving sustainabilityperformance.
Sustainable catchment management programme - UU owns approximately 57,000 hectares of land in the North West which it holds to protect the quality of water entering its reservoirs. The company has developed a sustainable catchment management programme which will help to enhance biodiversity and protect and improve water quality.
Renewable energy - UU has a detailed carbon and renewable energy plan, which both contributes to sustainability and reduces costs. In 2010/11 the company generated 111 GWh of renewable electricity, principally from sludge processing. This represents approximately 14% of the group's total electricity consumption.
Environmental performance - This is a high priority for the companyand UU has more than halved the number of major pollution incidents over thelast few years. Wastewater treatment works compliance remains high at over98%, a slight improvement compared with the previous year. UU is working moreclosely with the Environment Agency (EA), through its agreed protocol, to helpminimise the occurrence and environmental impact of pollution incidents. Thisincludes the sharing of resources, knowledge and expertise. The company isalso enhancing its telemetry and flow monitoring equipment to provide earlyidentification of incidents to enable prompt action to be taken to minimisethe potential impact. Recognising that environmental performance iswide-ranging, the company is measuring itself against an EA composite measureas detailed in the key performance indicators below.
Key performance indicators:
* Environmental performance - The EA computes a composite measurewhich incorporates a broad range of areas including pollution. UU improved toa mid-ranking position for 2009/10 improving from its position in 2008/09,when it was ranked tenth out of ten water and sewerage companies. The companyhas reduced further the number of major pollution incidents and this hascontributed to an improved performance score for 2010/11 and UU retains amid-ranking position. UU aims to move from this average relative position tothe first quartile in the medium-term.
* Corporate responsibility - UU has a strong focus on corporate responsibility and is the only UK water company to have a `World Class' rating as measured by the Dow Jones Sustainability Index. The group aims to retain this `World Class' rating each year.
Outperformance of regulatory contract
* Financing outperformance - UU has secured around £300 million offinancing outperformance over the 2010-15 period, based on an average RPIinflation rate of 2.5% per annum. Should average RPI inflation outturn at 3.5%p.a. across the five-year period, this would increase financing outperformanceto around £400 million, net of the impact of the pensions inflation fundingmechanism. The aim is to raise future financing, as required, at interestrates that will deliver further outperformance when compared with Ofwat'sallowed cost of debt of 3.6% real. UU agreed a £200 million index-linked loanwith the European Investment Bank (EIB), drawn down between March and May2011, at an average real interest rate of 1.2%, which secures financingoutperformance of around £20 million through to 2015. Subsequently, a further£200 million index-linked loan facility was agreed with the EIB earlier thismonth and, although pricing is still to be finalised, it is expected that thiswill deliver additional outperformance.* Operating expenditure outperformance - The business is targetingtotal operating expenditure outperformance over the 2010-15 period of at least£50 million, or approximately 2%, compared with the regulatory allowance. Thisis in addition to the base operating expenditure efficiency targets set byOfwat, which equate to a total of approximately £150 million over the fiveyears. UU made good progress in 2010/11 and achieved operating expenditureoutperformance of around £10 million and is targeting a further £10 million ofoutperformance for 2011/12.
* Capital expenditure outperformance - UU is delivering significant efficiencies in the area of capital expenditure and expects broadly to meet Ofwat's revised allowance after adjusting, through the regulatory methodology, for the impact of lower construction output prices.
Political and regulatory developments
UU is actively involved in political and regulatory developments that relate to the UK water sector and has a proactive programme to regularly engage with the key parties. The company has emphasised that benchmark competition has already delivered significant environmental and customer service benefits and can be improved further by adjusting the incentive regime. UU has sought to focus the debate onto areas such as how the sector can help address climate change, sustainability, affordability and water efficiency.
* Climate change and sustainability - Two key challenges facing thewater sector are climate change and sustainability, both of which are expectedto feature in the forthcoming Water White Paper. In addressing these twinchallenges, UU supports exploring the role of water trading in ensuring thatwater is allocated where it is valued most and that innovation and investmentto enable reductions in abstraction or provide additional storage areencouraged. It would be beneficial to establish appropriate levels of securityof water supply and resilience of assets and networks in the event of majoroutages.* Affordability - Ofwat estimates that the average annual householdbill is around £100 lower than it would have otherwise been without thesignificant improvements in efficiency since privatisation. Despite this, UUrecognises the challenge of keeping bills affordable for all customers andbelieves that maintaining investor confidence is critical for the industry tocontinue to raise finance and invest efficiently. Adopting a proportionateapproach to implementing new environmental regulation would also help keepbills affordable. In addition, UU believes that any expansion of retailcompetition should be consistent with the government's position onaffordability.* Water efficiency - UU believes that water companies are in aunique position to help facilitate the use of scarce water resources bycustomers. Recent measures adopted by the company include distributing showerregulators and devices to reduce flush volumes in toilets and rolling outeducation programmes. UU believes that more can be done to promote waterefficiency and the company supports the refinement of the regulatory frameworkto provide companies with incentives to encourage the wise use of water. UUalso supports the promotion of education and innovation in the area of waterefficiency.OutlookUU has a robust capital structure and a sustainable dividend policy, targeting 2% per annum growth above the rate of RPI inflation throughto at least 2015. The company is focused on delivering further operational andcustomer service improvements and is making good progress. The action plansbeing implemented are delivering efficiencies and UU remains on track to meetits regulatory outperformance targets, with substantial financingoutperformance already secured. In the area of regulatory and politicaldevelopments, UU will continue to work with all key parties to help achievethe optimal outcome for all its stakeholders. The group expects to deliver agood underlying financial performance over the remainder of 2011/12.
FINANCIAL PERFORMANCE
Revenue
UU has delivered a good set of financial results for the six months ended 30September 2011. Revenue increased by £30 million to £793 million, principallyreflecting a 4.5% nominal (0.2% real price decrease plus 4.7% RPI inflation)regulated price increase.Operating profit
Underlying operating profit decreased slightly by 1% to £324 million, primarily as a consequence of the increase in revenue being offset by increases in infrastructure renewals expenditure, depreciation and property rates, alongside other inflationary cost pressures. Reported operating profit rose by 4% to £323 million, as the first half of last year was impacted by one-off restructuring costs of approximately £16 million which reduced operating profit in the comparative prior period.
Investment income and finance expense
Investment income and finance expense of £198 million was £9 million higherthan the first half of 2010/11, principally due to higher inflationary uplifton our index-linked debt during the period. The indexation of the principal onindex-linked debt amounted to a net charge in the income statement of £57million, compared with a net charge of £50 million in the first half of lastyear. This reflected a small increase relating to the £200 millionindex-linked loan facility with the EIB, to help fund the regulated capitalinvestment programme, which was drawn down between March and May 2011 at anaverage real interest rate of 1.2%, the lowest rate the company has achievedto date, and marginally higher RPI inflation in respect of the group'sindex-linked debt with an eight month lag. The indexation charge does notrepresent a cash flow during the half year and is more than matched by aninflationary uplift to the regulatory capital value. The group hadapproximately £2.4 billion of index-linked debt as at 30 September 2011.Investment income and finance expense included £56 million of net fair valuelosses on debt and derivative instruments, compared with £53 million of netfair value losses in the first half of 2010/11. The £56 million fair valueloss in the period is largely due to losses on the regulatory swap portfolioresulting from a significant decrease in sterling interest rates during theperiod. The group uses these swaps to effectively fix interest rates on asubstantial proportion of its debt to better match the fixed financing cashflows allowed by the regulator at each price review. The group has continuedto benefit from fixing the majority of its remaining debt for the 2010-15financial period, providing a net effective nominal interest rate ofapproximately 5%. Partially offsetting these losses, there has been a net fairvalue gain during the period due to widening credit spreads in the market,affecting the fair value of our fair value option debt and derivative assets.
The underlying net finance expense of £139 million was £7 million higher than the first six months of last year, principally due to higher inflationary uplift on our index-linked debt during the period. The group's average annualised underlying interest rate was broadly flat at 5.8%.
Profit before taxation
Underlying profit before taxation was £185 million, 5% lower than the firsthalf of last year, principally reflecting an increase in infrastructurerenewals expenditure in line with the planned investment profile, a smallincrease in the underlying net finance expense and a higher depreciationcharge as a result of growth in the commissioned asset base, which broadlyoffset the allowed regulated price increase. This underlying measure adjustsfor the impact of one-off items, principally from restructuring andreorganisation within the business, and fair value movements in respect ofdebt and derivative instruments. Reported profit before taxation increasedmarginally by 2% to £124 million.
Taxation
The current taxation charge was £34 million in the half year and the current taxation effective rate was 27%, compared with 25% in the corresponding period last year.
The group has recognised a deferred taxation credit of £50 millionin first half of 2011/12 which primarily relates to the change substantivelyenacted by the UK government to reduce the mainstream rate of corporationtaxation from 26% to 25% from 1 April 2012. This compares with a net deferredtaxation credit of £41 million in the first half of last year, which includeda £47 million credit following the change enacted on 27 July 2010 to reducethe mainstream rate of corporation taxation from 28% to 27% from 1 April 2011.An overall taxation credit of £16 million has been recognised forthe six months ended 30 September 2011. Excluding the impact of the reductionin the corporation taxation rate, the total taxation charge would be £33million or 27% compared with a £36 million charge or 30% in the first half oflast year. The reduction is principally due to the decrease in the mainstreamrate of corporation tax from 28% to 26%.
The taxation benefit of £18 million relating to pension contributions for deficit funding has been recorded in the statement of comprehensive income, rather than the income statement, as the actuarial movements giving rise to the deficit were previously recorded there.
The group made cash taxation payments during the half year of £29 million. In the first half of the previous year, the group's net taxation payment was £27 million.
Profit after taxation
Reported profit after taxation from continuing operations was £141million compared with £133 million in the corresponding period last year.Underlying profit after taxation was £136 million. This is based on theunderlying profit before taxation figure less an underlying taxation charge of£49 million, which includes an adjustment for the deferred taxation credit inrelation to the change in the mainstream rate of corporation taxation.
Earnings per share
Basic earnings per share increased from 19.5 pence to 20.7 pence,principally reflecting the aforementioned taxation credits and an increase inprofit before taxation in the current period. Underlying earnings per sharereduced slightly from 20.4 pence to 19.9 pence. This underlying measure isderived from underlying profit before taxation less underlying taxation. Thisincludes the adjustments for the deferred taxation credits in both the firsthalf of 2011/12 and 2010/11, associated with the reduction in the corporationtaxation rate.Dividend per shareThe board has declared an interim dividend of 10.67 pence perordinary share in respect of the six months ended 30 September 2011. This isan increase of 6.7%, compared with the interim dividend relating to theprevious year, in line with group's dividend policy of targeting a real growthrate of RPI+2% per annum through to at least 2015. The inflationary increaseof 4.7% is based on the RPI element included within the allowed regulatedprice increase for the 2011/12 financial year (i.e. the movement in RPIbetween November 2009 and November 2010).
The interim dividend is expected to be paid on 1 February 2012 to shareholders on the register at the close of business on 16 December 2011. The ex-dividend date is 14 December 2011.
Cash flow
Net cash generated from continuing operating activities for the sixmonths ended 30 September 2011 was £218 million, compared with £331 million inthe first half of last year. This is predominantly due to the acceleratedpension deficit repair payment. The group's net capital expenditure was £224million, principally in the regulated water and wastewater investmentprogrammes. This excludes infrastructure renewals expenditure which is treatedas an operating cost under International Financial Reporting Standards.
Net debt including derivatives at 30 September 2011 was £5,010 million, compared with £4,778 million at 31 March 2011. This expected increase reflects expenditure on the regulatory capital investment programmes and payments of dividends, interest and taxation, alongside the accelerated pension deficit repair payment, partly offset by operating cash flows.
Debt financing and interest rate management
Gearing (measured as group net debt divided by UUW's regulatorycapital value) marginally increased to 60% at 30 September 2011, compared with59% at 31 March 2011, and remains comfortably within Ofwat's 55% to 65%assumed gearing range. This reflects indexation of the principal of thegroup's index-linked debt and the accelerated pension deficit repair payment,with growth in the regulatory capital value resulting in just a slightincrease in gearing. The group now has a small pensions surplus of £28million, on an accounting basis, compared with a deficit of £195 million at 31March 2011. Taking account of this small surplus, and treating it as cash,gearing remains at 60%.
At the half year end, United Utilities Water PLC had long-term credit ratings of A3/BBB+ and United Utilities PLC had long-term credit ratings of Baa1/BBB- from Moody's Investors Service and Standard & Poor's Ratings Services respectively. The split rating reflects differing methodologies used by the credit rating agencies.
Cash and short-term deposits at 30 September 2011 amounted to £325million. Between March and May 2011 UUW drew down a £200 million index-linkedloan facility with the EIB. The group also renewed £100 million of bankfacilities in the first half of 2011/12. In addition, in November 2011, UUWagreed a further £200 million index-linked loan facility with the EIB. UU nowhas headroom to cover its projected financing needs into 2014.The group has access to the international debt capital marketsthrough its €7 billion euro medium-term note programme which provides for theperiodic issuance by United Utilities PLC and United Utilities Water PLC ofdebt instruments on terms and conditions determined at the time theinstruments are issued. The programme does not represent a funding commitment,with funding dependent on the successful issue of the debt securities.
Long-term borrowings are structured or hedged to match assets and earnings, which are largely in sterling, indexed to UK retail price inflation and subject to regulatory price reviews every five years.
Very long-term sterling inflation index-linked debt is the group's preferred form of funding as this provides a natural hedge to assets and earnings. At 30 September 2011, approximately 48% of the group's net debt was in index-linked form, representing around 29% of UUW's regulatory capital value, with an average real interest rate of 1.8%. The long-term nature of this funding also provides a good match to the company's long-life infrastructure assets and is a key contributor to the group's average term debt maturity profile which is in excess of 25 years.
Where nominal debt is raised in a currency other than sterlingand/or with a fixed interest rate, to manage exposure to long-term interestrates, the debt is generally swapped to create a floating rate sterlingliability for the term of the liability. To manage exposure to medium-terminterest rates, the group fixed interest costs for a substantial proportion ofthe group's debt for the duration of the 2010-15 regulatory period at aroundthe time of the price review.Following the 2009 price review, the group has assessed itsinterest rate hedging policy with a view to further reducing regulatory risk.To help address the uncertainty as to how Ofwat may approach the setting ofinterest rate costs at the next price review in 2014, UU has revised itsinterest rate management strategy and has now extended its fixed interest ratehedge out to a ten year maturity on a reducing balance basis. The intention isto extend the interest rate hedge each year to eventually achieve a ten yearrolling average interest rate on the group's nominal debt. UU believes thatthis revised interest rate hedging policy, which provides for a longer fixingof interest rates, will put the company in a good position to respond towhatever approach Ofwat adopts to the industry cost of debt in future.
Liquidity
Short-term liquidity requirements are met from the group's normal operating cash flow and its short-term bank deposits. The group has a €2 billion euro-commercial paper programme and further liquidity is provided by committed but undrawn credit facilities.
In line with the board's treasury policy, UU aims to maintain a healthyheadroom position. Available headroom at 30 September 2011 was £509 millionbased on cash, short-term deposits and medium-term committed bank facilities,net of short-term debt. This headroom is sufficient to cover the group'sprojected financing 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 either prime commercial banks or with triple Arated money market funds.
UU operates a bilateral, rather than a syndicated, approach to its core relationship banking facilities. This approach spreads maturities more evenly over a longer time period, thereby reducing refinancing risk and providing the benefit of several renewal points rather than a large single refinancing requirement.
Pensions
As at 30 September 2011, the group had a net retirement benefit, orpension, surplus of £28 million, compared with a net pension deficit of £195million at 31 March 2011. This £223 million positive movement principallyreflects payment of the £100 million accelerated deficit repair contribution,investment returns exceeding expectations as a result of the effect of fallinginterest rates on the interest rate hedge put in place, and payments under theinflation funding mechanism. From an accounting perspective, IAS 19 treats theinflation funding mechanism as a schedule of contributions rather than apension scheme asset. This means that the liabilities position can change toreflect a change in market expectations of long-term inflation, without acommensurate movement in assets. The change in inflation has decreased thepresent value of the liabilities during the six months to 30 September 2011.This accounting treatment means that there is likely to be a degree ofvolatility in future pension valuations.
The group has sought to adopt a more sustainable approach to the delivery of pension provision and in the second half of 2009/10 amended the terms of its defined benefit pension schemes, the details of which were included in the 2010 annual report and financial statements. UU has also reduced its future pension obligations as a result of the sale of non-regulated activities.
The group stated previously that it would continue to evaluate itspensions investment strategy to de-risk further its pension provision and hasintroduced an inflation funding mechanism, which facilitates a move to a lowerrisk investment strategy. UU has agreed with the trustee of its main pensionscheme to use a lower investment return assumption and a fixed inflationassumption of 2.75% in carrying out a valuation of the scheme. In periods wheninflation is higher than 2.75%, UU will make additional contributions(smoothed over a five year period to help mitigate RPI fluctuations). Thecompany is comfortable in making these additional contributions, as itsregulatory capital value is linked to RPI inflation and therefore thisprovides a natural hedge against this risk. The inflation funding mechanismhas allowed UU to reduce the allocation of its pension assets to 20% inequities, from 34% at 31 March 2011. The group has also increased its interestrate hedge to around 65% of pension scheme liabilities. Overall, the mechanismprovides for less volatility in pension scheme funding levels. Although anyadditional payments under this mechanism would reduce financingoutperformance, there would be a positive benefit to the pensions surplus ordeficit position.
Further detail is provided in note 9 ("Retirement benefit surplus/(obligations)") of these condensed consolidated financial statements.
Going concern
The directors have reviewed the financial resources available to the group and have concluded that the group is a going concern. This conclusion is based upon, amongst other matters, a review of the group's financial projections together with a review of the cash and committed borrowing facilities available to the group.
Underlying profit
In considering the underlying results for the period, the directors have excluded fair value movements on debt and derivative instruments and one-off items. Reported operating profit and profit before taxation from continuing operations are reconciled to underlying operating profit, underlying profit before taxation and underlying profit after taxation (non-GAAP measures) as follows:
Continuing operations Six months ended Six months endedOperating profit 30 September 30 September 2011 2010 £m £m
Operating profit per published results 322.6
311.5One-off items* 1.6 16.2 ----- -----Underlying operating profit 324.2 327.7 ----- ----- Net finance expense £m £mFinance expense (199.9) (190.5)Investment income 1.7 1.2 ----- -----
Net finance expense per published results (198.2)
(189.3)
Net fair value losses on debt and derivative instruments 55.9
53.2
Adjustment for interest on swaps and debt under fair 3.8value option
2.0
Adjustment for net pension interest expense 3.2
2.6
Adjustment for capitalised borrowing costs (4.0)
(0.8)
-----
-----
Underlying net finance expense** (139.3)
(132.3) ----- ----- Profit before taxation £m £m
Profit before taxation per published results 124.4
122.2
One-off items* 1.6
16.2
Net fair value losses on debt and derivative 55.9instruments
53.2
Adjustment for interest on swaps and debt under fair 3.8value option
2.0
Adjustment for net pension interest expense 3.2
2.6
Adjustment for capitalised borrowing costs (4.0)
(0.8)
-----
-----
Underlying profit before taxation** 184.9
195.4 ----- ----- Profit after taxation £m £m
Underlying profit before taxation 184.9
195.4
Reported taxation 16.4
10.9
Deferred taxation credit - change in taxation rate (49.7)
(47.1)
Taxation relating to underlying profit before taxation adjustments (15.7)
(20.5)
-----
-----
Underlying profit after taxation** 135.9
138.7
-----
-----
* Principally relates to restructuring and other reorganisation costs within the business
** Re-presented to include capitalised borrowing costs of £0.8m in the comparative period
PRINCIPAL RISKS AND UNCERTAINTIES
The group maintains an internal control framework that assesses,throughout the year, the nature and magnitude of internal and external risksto the achievement of business goals. Managers are required to employ bothproactive and reactive mitigation measures in a prioritised manner to reduceexposures and ensure ongoing resilience should a risk materialise. Theexecutive management team regularly reviews significant risks so that theboard can determine the nature and extent of those risks it is willing to takein achieving its strategic objectives. The audit committee regularly reviewsthe framework's effectiveness and the group's compliance with it.The group's anticipated principal risks and uncertainties over thesecond half of the financial year and beyond remain as stated in its 2011Annual Report and Financial Statements. The principal risks and uncertaintiesare set out in full on pages 18-22 of the 2011 Annual Report and FinancialStatements, namely (a) government market reform agenda; (b) capital investmentprogrammes; (c) service incentive mechanism; (d) serviceability assessment;(e) the adoption of private sewers; (f) pension scheme obligations; (g)failure to comply with applicable law or regulations; (h) events, serviceinterruptions, systems failures, water shortages or contamination of watersupplies; and (i) material litigation (excluding the NOSS Consortiumarbitration in Thailand, which was settled in June 2011 within existingprovisions).
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 respect to the operations, performance and financial condition of the group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this financial report and the company undertakes no obligation to update these forward-looking statements. Nothing in this financial report should be construed as a profit forecast.
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 2011 2011 2010 £m £m £mContinuing operations ----- ----- -----Revenue 792.7 762.4 1,513.3 ----- ----- ----- Employee benefits expense:- excluding restructuring costs (66.0) (67.9) (142.8)- restructuring costs (1.6) (3.4) (3.1) ----- ----- -----Total employee benefits expense (67.6) (71.3) (145.9) ----- ----- ----- Other reorganisation costs - (12.8) (13.1)Other operating costs (192.2) (177.8) (355.4)Other income 2.7 0.7 2.2
Depreciation and amortisation expense (146.6) (141.7) (290.5) Infrastructure renewals expenditure
(66.4) (48.0) (130.4) ----- ----- -----Total operating expenses (470.1) (450.9) (933.1) ----- ----- ----- Operating profit 322.6 311.5 580.2 Investment income (note 3) 1.7 1.2 2.8Finance expense (note 4) (199.9) (190.5) (255.9) ----- ----- -----Investment income and finance expense (198.2) (189.3) (253.1) ----- ----- ----- Profit before taxation 124.4 122.2 327.1 Current taxation charge (34.0) (30.2) (34.6)Deferred taxation credit/(charge) 0.7 (6.0) (37.0)Deferred taxation credit - 49.7 47.1 99.0change in taxation rate ----- ----- -----Taxation (note 5) 16.4 10.9 27.4 ----- ----- ----- Profit after taxation from continuing operations 140.8 133.1 354.5 Discontinued operationsProfit after taxation from discontinued operations (note 6) 0.9 20.3 103.7 ----- ----- -----Profit after taxation 141.7 153.4 458.2 ----- ----- ----- Earnings per sharefrom continuing anddiscontinued operations (note 7) Basic 20.8p 22.5p 67.2pDiluted 20.8p 22.5p 67.2p Earnings per sharefrom continuing operations (note 7)Basic 20.7p 19.5p 52.0pDiluted 20.7p 19.5p 52.0p
Dividend per ordinary share (note 8) 10.67p 10.00p 30.00p
Consolidated statement of comprehensive income
Six months Six months Year ended ended ended 31 March 30 September 30 September 2011 2011 2010 £m £m £m Profit after taxation 141.7 153.4 458.2 Other comprehensive incomeActuarial gains/(losses) on definedbenefit pension schemes (note 9) 98.8 (70.7)
(44.7)
Revaluation of investments - 1.1
1.1
Reclassification from otherreserves arising on disposal of financial asset investment (note 6) - - (6.6)Net fair value losses on cash flow hedges - (0.2) (0.2)Reclassification from otherreserves arising on disposal of subsidiaries (note 6) - -
1.8
Reclassification from cumulativeexchange reserve arising on disposal of subsidiaries (note 6) - -
(26.1)
Taxation on items taken directly to equity (note 5) (24.7) 19.2 11.7Foreign exchange adjustments (1.1) (3.1) 0.7 ----- ----- -----Total comprehensive income 214.7 99.7 395.9 ----- ----- -----
Consolidated statement of financial position
30 September 30 September 31 March 2011 2010 2011 £m £m £mASSETSNon-current assetsProperty, plant and equipment 8,380.9 8,113.0 8,274.9Goodwill 5.0 - 5.0Other intangible assets 90.5 97.9 93.9Investments 3.4 2.1 2.3Trade and other receivables 4.5 - -
Retirement benefit surplus (note 9) 27.9 - -Derivative financial instruments 646.4 565.1 363.3 ----- ----- ----- 9,158.6 8,778.1 8,739.4 ----- ----- ----- Current assetsInventories 46.8 50.3 47.6Trade and other receivables 342.6 333.4 296.8Cash and short-term deposits 325.2 135.6 255.2Derivative financial instruments 3.8 2.2
2.0
Assets classified as held for sale - 524.1
- ----- ----- ----- 718.4 1,045.6 601.6 ----- ----- -----Total assets 9,877.0 9,823.7 9,341.0 ----- ----- ----- LIABILITIESNon-current liabilitiesTrade and other payables (281.9) (203.5) (249.8)Borrowings (5,513.2) (5,323.5) (5,203.6)Retirement benefit obligations (note 9) - (300.6)
(195.0)
Deferred taxation liabilities (1,284.8) (1,303.2)
(1,293.1)
Provisions (6.8) (8.6)
(9.3)
Derivative financial instruments (152.6) (151.5) (84.6) ----- ----- ----- (7,239.3) (7,290.9) (7,035.4) ----- ----- ----- Current liabilitiesTrade and other payables (490.9) (470.2) (433.0)Borrowings (319.9) (89.9) (109.7)Current income taxation liabilities (58.2) (93.8)
(70.5)
Provisions (12.1) (30.0)
(14.5)
Derivative financial instruments - (2.4)
(0.4)
Liabilities classified as held for sale - (397.0) -
----- ----- ----- (881.1) (1,083.3) (628.1) ----- ----- ----- Total liabilities (8,120.4) (8,374.2) (7,663.5) ----- ----- ----- Total net assets 1,756.6 1,449.5 1,677.5 ----- ----- ----- EQUITYCapital and reserves attributable to equity holders of the companyShare capital 499.8 499.8 499.8Share premium account 2.3 1.1 1.3Retained earnings 770.2 436.2 691.0Other non-distributable reserves 484.3 512.4 485.4 ----- ----- -----Shareholders' equity 1,756.6 1,449.5 1,677.5 ----- ----- -----
Consolidated statement of changes in equity
Six months ended 30 September 2011
Share
Cumulative
Share premium Retained
exchange Merger Revaluation
capital account earnings reserve* reserve* reserve* Total £m £m £m £m £m £m £mAt 1 April 2011 499.8 1.3 691.0 (3.1) 329.7 158.8 1,677.5 Profit after taxation - - 141.7 - - - 141.7Other comprehensive incomeActuarial gains on definedbenefit pension schemes (note 9) - - 98.8 - - - 98.8Taxation on items taken directlyto equity (note 5) - - (24.7) - - - (24.7)Foreign exchange adjustments - - - (1.1) - - (1.1) ----- ----- ----- ----- ----- ----- -----Total comprehensive income/(expense) for the period - - 215.8 (1.1) - - 214.7 ----- ----- ----- ----- ----- ----- -----Transactions with ownersDividends (note 8) - - (136.3) - - - (136.3)New share capital issued - 1.0 - - - - 1.0
Equity-settled share-based payments - - 0.6 - - - 0.6Exercise of share options - - (0.9)
- - - (0.9) ----- ----- ----- ----- ----- ----- -----At 30 September 2011 499.8 2.3 770.2 (4.2) 329.7 158.8 1,756.6 ----- ----- ----- ----- ----- ----- -----* Other non-distributable reserves
Six months ended 30 September 2010
Share Cumulative Share premium Retained Treasury exchange
Merger Other Revaluation
capital account earnings shares reserve* reserve* reserves* reserve* Total £m £m £m £m £m £m £m £m £mAt 1 April 2010 499.8 0.9 492.7 (0.1) 22.3 329.7 3.8 158.8 1,507.9 Profit after taxation - - 153.4 - - - - - 153.4Other comprehensive incomeActuarial losseson defined benefitpension schemes (note 9) - - (70.7) - - - - - (70.7)Revaluation of investments - - - - - - 1.1 - 1.1Net fair value losses oncash flow hedges - - - - - - (0.2) - (0.2)Taxation on items takendirectly to equity(note 5) - - 19.1 - - - 0.1 - 19.2Foreign exchangeadjustments - - - - (3.1) - - - (3.1) ----- ----- ----- ----- ----- ----- ----- ----- -----Total comprehensiveincome/(expense)for the period - - 101.8 - (3.1) - 1.0 - 99.7 ----- ----- ----- ----- ----- ----- ----- ----- -----Transactions with ownersDividends (note 8) - - (157.6) - - - - - (157.6)New share capital issued - 0.2 - - - - - - 0.2Equity-settledshare-based payments - - (0.7) - - - - - (0.7) ----- ----- ----- ----- ----- ----- ----- ----- -----At 30 September 2010 499.8 1.1 436.2 (0.1) 19.2 329.7 4.8 158.8 1,449.5 ----- ----- ----- ----- ----- ----- ----- ----- -----* Other non-distributable reserves
Year ended 31 March 2011
Share Cumulative Share premium Retained Treasury exchange
Merger Other Revaluation
capital account earnings shares reserve* reserve* reserves* reserve* Total £m £m £m £m £m £m £m £m £mAt 1 April 2010 499.8 0.9 492.7 (0.1) 22.3 329.7 3.8 158.8 1,507.9 Profit after taxation - - 458.2 - - - - - 458.2Other comprehensive incomeActuarial losseson defined benefitpension schemes (note 9) - - (44.7) - - - - - (44.7)Revaluation of investments - - - - - - 1.1 - 1.1Reclassificationfrom other reservesarising on disposalof financial assetinvestment (note 6) - - - - - - (6.6) - (6.6)Net fair value losses oncash flow hedges - - - - - - (0.2) - (0.2)Reclassificationfrom otherreserves arisingon disposalof subsidiaries (note 6) - - - - - - 1.8 - 1.8Reclassificationfrom cumulativeexchange reservearising on disposalof subsidiaries (note 6) - - - - (26.1) - - - (26.1)Taxation on items takendirectly to equity(note 5) - - 11.6 - - - 0.1 - 11.7Foreign exchangeadjustments - - - - 0.7 - - - 0.7 ----- ----- ----- ----- ----- ----- ----- ----- -----Total comprehensiveincome/(expense)for the year - - 425.1 - (25.4) - (3.8) - 395.9 ----- ----- ----- ----- ----- ----- ----- ----- -----Transactions with ownersDividends (note 8) - - (225.8) - - - - - (225.8)New share capital issued - 0.4 - - - - - - 0.4Shares disposed of fromemployee share trust - - (0.1) 0.1 - - - - -Equity-settledshare-based payments - - (0.1) - - - - - (0.1)Exercise of share options - - (0.8) - - - - - ( 0.8) ----- ----- ----- ----- ----- ----- ----- ----- -----At 31 March 2011 499.8 1.3 691.0 - (3.1) 329.7 - 158.8 1,677.5 ----- ----- ----- ----- ----- ----- ----- ----- -----* Other non-distributable reservesConsolidated statement of cash flows Six months Six months
Year ended ended ended 31 March 30 September 30 September 2011 2011 2010 £m £m £mOperating activities
Cash generated from continuing operations 312.6 419.9
784.6
Interest paid (67.0) (63.9)
(165.8)
Interest received and similar income 1.6 1.2
3.1Tax paid (29.0) (26.7) (46.5) ----- ----- -----Net cash generated from operatingactivities (continuing operations) 218.2 330.5
575.4
----- -----
-----
Net cash (used in)/generated fromoperating activities (discontinued operations) - (11.9) 13.7 ----- ----- -----Investing activitiesProceeds from disposal of discontinued operations - 34.4
268.4
Transaction costs, deferred consideration and cash disposed - (17.3)
(97.9)
----- -----
-----
Proceeds from disposal of discontinuedoperations net of deferred consideration, cash disposed and transaction costs - 17.1
170.5
Purchase of property, plant and equipment (216.5) (239.0)
(475.4)
Purchase of increased shareholding in joint venture - -
(5.0)
Purchase of other intangible assets (8.1) (8.4)
(20.2)
Proceeds from sale of property, plant and equipment 0.6 - 9.8Purchase of investments (1.1) - - ----- ----- -----Net cash used in investing activities (continuing operations) (225.1) (230.3)
(320.3)
----- -----
-----
Net cash used in investing activities(discontinued operations) - (11.8) (52.7) ----- ----- -----Financing activities
Proceeds from issue of ordinary shares 1.0 0.2
0.4Proceeds from borrowings 222.2 29.3 94.1Repayment of borrowings (5.8) (59.4) (88.0)Exercise of share options - purchase of shares (0.9) -
-
Dividends paid to equity holders of the company (136.3) (157.6)
(225.8)
----- -----
-----
Net cash generated from/(used in)financing activities (continuing operations) 80.2 (187.5)
(219.3)
----- -----
-----
Net cash used in financing activities(discontinued operations) - (1.2)
(4.8)
----- -----
-----
Effects of exchange rate changes (continuing operations) 0.2 -
-
Effects of exchange rate changes (discontinued operations) - (0.7)
(1.3)
----- -----
-----
Net increase/(decrease) in cash and cashequivalents (continuing operations) 73.5 (87.3)
35.8
----- -----
-----
Net decrease in cash and cash equivalents(discontinued operations) - (25.6)
(45.1)
----- -----
-----
Cash and cash equivalents at beginning of the period 244.4 253.7
253.7
----- -----
-----
Cash and cash equivalents at end of the period 317.9 140.8 244.4 ----- ----- -----
Cash generated from continuing operations
Six months Six months Year ended ended ended 31 March 30 September 30 September 2011 2011 2010 £m £m £m Operating profit 322.6 311.5 580.2Adjustments for:Depreciation of property, plant and equipment 135.2 126.5
258.3
Amortisation of other intangible assets 11.4 15.2
32.2
Loss on disposal of property, plant and equipment 1.5 0.6
2.7
Loss on disposal of other intangible assets - -
2.8
Equity-settled share-based payments charge/(credit) 0.6 (0.7) (0.1)Other non-cash movements (0.4) - - Changes in working capital:
Decrease/(increase) in inventories 0.8 (0.6)
2.1
Increase in trade and other receivables (50.3) (52.4)
(20.1)
(Decrease)/increase in provisions and payables (108.8) 19.8
(73.5)
----- -----
-----
Cash generated from continuing operations 312.6 419.9
784.6 ----- ----- -----NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the six monthsended 30 September 2011 have been prepared in accordance with the Disclosureand Transparency Rules of the Financial Services Authority and InternationalAccounting Standard 34 `Interim Financial Reporting' (IAS 34).
The accounting policies, presentation and methods of computation are consistent with those set out in the audited consolidated financial statements of United Utilities Group PLC for the year ended 31 March 2011, which are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU).
The adoption of the following amendments to standards that are mandatory for the period commencing 1 April 2011, has not had a material impact on the group's financial statements.
'Improvements to IFRSs (2010)'
This is a collection of amendments to 7 standards as part of the International Accounting Standards Board's (IASB) programme of annual improvements. The improvements were issued in May 2010, are effective for periods commencing on or after 1 July 2010 or 1 January 2011 and were endorsed by the EU on 18 February 2011.
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 the information and disclosures required for full annual financial statements, do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006 and should be read in conjunction with the group's annual report and financial statements for the year ended 31 March 2011.
The comparative figures for the year ended 31 March 2011 do notcomprise the group's statutory accounts for that financial year. Thoseaccounts have been reported upon by the group's previous auditor and deliveredto the registrar of companies. The report of the auditor was unqualified anddid not include a reference to any matters to which the auditor drew attentionby way of emphasis without qualifying their report and did not contain astatement under section 498(2) or (3) of the Companies Act 2006.
Going concern
The directors have reviewed the financial resources available to the group and have concluded that the group is a going concern. This conclusion is based upon, amongst other matters, a review of the group's financial projections together with a review of the cash and committed borrowing facilities available to the group.
2. Segmental reporting
As previously reported, United Utilities has reshaped its portfolioover the last few years, from a group with a wide-ranging set of activitiesand interests, such as telecommunications, business process outsourcing, gasand electricity distribution and metering and international utilityoperations, into a focused regulated UK water and wastewater business. Thegroup completed its non-regulated disposal programme in November 2010 and theresidual non-regulated activities now represent less than 2% of operatingprofit.
The board of directors of United Utilities Group PLC (the board) are provided with information on a single segment basis for the purposes of assessing performance and allocating resources. The board reviews revenue, underlying operating profit, operating profit, assets and liabilities at a consolidated level.
In light of this, the group has a single segment for financial reporting purposes and the segmental information presented in previous periods is no longer required to be disclosed separately within this note.
Statutory operating profit is reconciled to underlying operatingprofit as follows: Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £m Continuing operations Operating profit 322.6 311.5 580.2Restructuring and other reorganisation costs 1.6 16.2 16.2 ----- ----- -----Underlying operating profit 324.2 327.7 596.4 ----- ----- -----3. Investment income Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £m Continuing operations Interest receivable 1.7 1.2 2.8 ----- ----- -----4. Finance expense Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £m Continuing operationsInterest payable (140.8) (134.7) (271.3)Net fair value (losses)/gains on debtand derivative instruments (55.9) (53.2) 19.2 ----- ----- ----- (196.7) (187.9) (252.1)Expected return on pension schemes' assets 48.4 51.6
102.2
Interest cost on pension schemes' (51.6) (54.2)
(106.0)
obligations
----- -----
-----
Net pension interest expense (note 9) (3.2) (2.6)
(3.8) ----- ----- ----- (199.9) (190.5) (255.9) ----- ----- -----The group has fixed interest costs for a substantial proportion ofthe group's net debt for the duration of the regulatory pricing period and hashedged currency exposures for the term of each relevant debt instrument. Thegroup has hedged its position through the use of interest rate and crosscurrency swap contracts where applicable. The economic underlying net financeexpense for the continuing group of £139.3 million (30 September 2010: £132.3million, 31 March 2011: £267.2 million) is derived as shown in the tablebelow. Re-presented* Six months ended Six months ended Year ended 30 September 30 September 31 MarchContinuing operations 2011 2010 2011 £m £m £m Finance expense (199.9) (190.5) (255.9)Net fair value losses/(gains) on debtand derivative instruments 55.9 53.2
(19.2)
Interest on swaps and debt under fair value option 3.8 2.0
5.7
Investment income (note 3) 1.7 1.2
2.8
Adjustment for capitalised borrowing costs (4.0) (0.8)
(4.4)
Adjustment for net pension interest expense (note 9) (4.0) (0.8)
(4.4)
----- -----
-----
Underlying net finance expense (139.3) (132.3)
(267.2)
----- -----
-----
* The comparatives for the six months ended 30 September 2010 have been re-presented to include an adjustment for capitalised borrowing costs within the calculation.5. Taxation Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011Continuing operations £m £m £mCurrent taxationUK corporation taxation 32.7 28.3 61.8Foreign taxation 1.3 1.9 1.9
Adjustments in respect of prior years - -
(29.1) ----- ----- ----- 34.0 30.2 34.6 ----- ----- -----Deferred taxationCurrent period (0.7) 6.0 25.7
Adjustments in respect of prior years - -
11.3 ----- ----- ----- (0.7) 6.0 37.0Change in taxation rate (49.7) (47.1) (99.0) ----- ----- ----- (50.4) (41.1) (62.0) ----- ----- ----- ----- ----- -----
Total taxation credit for the period (16.4) (10.9)
(27.4)
----- -----
-----
The deferred taxation credit for the period ended 30 September 2011 includes a credit of £49.7 million to reflect the change enacted on 5 July 2011 to reduce the mainstream corporation tax rate from 26 per cent to 25 per cent effective from 1 April 2012.
The deferred taxation credit for the six months ended 30 September2010 includes £47.1 million reflecting the changes enacted on 27 July 2010 toreduce the mainstream rate of corporation tax from 28 per cent to 27 per centfrom 1 April 2011. The deferred taxation credit for the year ended 31 March2011 includes £99.0 million which also reflects the reduction enacted on 29March 2011 to reduce the mainstream corporation tax rate from 27 per cent to26 per cent effective from 1 April 2011.
There will be a further phased reduction in the mainstream rate to 23 per cent by 1 April 2014. The total deferred taxation credit in respect of this further reduction is expected to be in the region of £100.0 million.
Taxation on items taken directly to equity
The taxation charge/(credit) relating to items taken directly to equity is asfollows: Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011Continuing operations £m £m £mCurrent taxation
Relating to other pension movements (17.5) -
- ----- ----- ----- (17.5) - - ----- ----- -----Deferred taxationOn actuarial gains/(losses) on definedbenefit pension schemes 24.7 (19.1)
(11.6)
Relating to other pension movements 17.5 -
-
On net fair value losses on cash flow hedges - (0.1) (0.1) ----- ----- ----- 42.2 (19.2) (11.7) ----- ----- ----- ----- ----- -----Total taxation on items taken directly to equity 24.7 (19.2) (11.7) ----- ----- -----6. Discontinued operations
During the prior year, the group completed its non-regulated disposal programme, which, including the 2009/10 investment disposals, achieved a total enterprise value of £579.2 million. In accordance with IFRS 5 `Non-current Assets Held for Sale and Discontinued Operations' the relevant disposal groups were therefore classified as discontinued operations in the consolidated income statement and consolidated statement of cash flows.
Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £m Revenue - 311.1 353.4
Total operating income/(expenses) 1.4 (270.5)
(317.6) ----- ----- -----Operating profit 1.4 40.6 35.8
Investment income and finance expense - (6.6)
(7.0)
Evaluation and disposal costs relating todiscontinued operations - (5.0) (5.0) ----- ----- -----Profit before taxation 1.4 29.0 23.8 Taxation (0.2) (9.0) (9.2) ----- ----- -----Profit after taxation 1.2 20.0 14.6(Loss)/profit on disposal of discontinuedoperations after taxation (0.3) 0.3
89.1
----- -----
-----
Total profit after taxation from discontinued operations 0.9 20.3 103.7 ----- ----- ----- Six months Six months Year ended ended ended 31 March 30 September 30 September 2011 2011 2010 £m £m £m Total proceeds - 34.4 268.4*Net assets disposed of (0.3) (31.7) (164.3)
Transaction and other costs of disposal - (2.4)
(45.9)
Reclassification from other reservesarising on disposal of financial asset investment - -
6.6
Reclassification from other reservesarising on disposal of subsidiaries - -
(1.8)
Reclassification from cumulative exchangereserve arising on disposal of subsidiaries - -
26.1
----- -----
-----
(Loss)/profit on disposal of discontinuedoperations after taxation (0.3) 0.3 89.1 ----- ----- -----* Total fair value of proceeds comprised cash of £268.4 million.The enterprise value of £447.1 million incorporates cash considerationreceived added to the market value of the net debt disposed of which at thedate of disposal totalled £178.7 million. Combined with the cash considerationreceived from the disposal of investments in 2009/10 of £132.1 million, thenon-regulated disposal programme achieved a total enterprise value of £579.2million.7. 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 millionSix months ended 30 September 2011 681.7 682.1Six months ended 30 September 2010 681.5 682.0Year ended 31 March 2011 681.6 681.9The difference between the weighted average number of shares used in the basicand diluted earnings per share calculations arises due to the group'soperation of share-based payment compensation arrangements. The differencerepresents those ordinary shares deemed to have been issued for noconsideration on the conversion of all potential dilutive ordinary shares inaccordance with IAS 33 `Earnings per Share'.The basic and diluted earnings per share for the current and priorperiods are as follows: Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011From continuing and discontinuedoperationsBasic 20.8p 22.5p 67.2pDiluted 20.8p 22.5p 67.2p From continuing operationsBasic 20.7p 19.5p 52.0pDiluted 20.7p 19.5p 52.0p Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £m
Profit after taxation - continuing and 141.7 153.4
458.2
discontinued operationsAdjustment for profit after taxation (0.9) (20.3)
(103.7)
from discontinued operations
----- -----
-----
Profit after taxation - continuing 140.8 133.1
354.5operations ----- ----- -----8. Dividends Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £mDividends relating to the periodcomprise:Interim dividend 72.7 68.2 68.2Final dividend - - 136.3 ----- ----- ----- 72.7 68.2 204.5 ----- ----- ----- Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £mDividends deducted from shareholders' equity comprise:Interim dividend - - 68.2Final dividend 136.3 157.6 157.6 ----- ----- ----- 136.3 157.6 225.8 ----- ----- -----The proposed interim dividends for the six months ended 30 September 2011 and 30 September 2010 and the final dividend for the year ended 31 March 2011 have not been included as liabilities in the consolidated financial statements at 30 September 2011, 30 September 2010 and 31 March 2011 respectively.
The interim dividend of 10.67 pence per ordinary share (2011: interim dividend of 10.00 pence per ordinary share; final dividend of 20.00 pence per ordinary share) is expected to be paid on 1 February 2012 to shareholders on the register at the close of business on 16 December 2011. The ex-dividend date for the final dividend is 14 December 2011.
9. Retirement benefit surplus/(obligations)
The main financial assumptions used by the company's actuary to calculate the defined benefit obligations of the United Utilities Pension Scheme (UUPS) and the 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 2011 2010 2011 %pa %pa %pa Discount rate 5.20 5.20 5.50
Expected return on assets - UUPS 5.65 6.20
5.65
Expected return on assets - ESPS 6.10 6.30
6.10Pensionable salary growth 3.10 3.10 3.35Pension increases 3.10 3.10 3.35Price inflation 3.10 3.10 3.35The net pension expense before taxation for continuing operationsin the income statement in respect of the defined benefit schemes issummarised as follows: Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £mContinuing operationsCurrent service cost (6.7) (6.1) (11.9)
Curtailments/settlements arising on - (4.9)
(3.4)reorganisation*Past service cost (1.6) (1.0) - ----- ----- -----
Pension expense charged to operating (8.3) (12.0)
(15.3)profit ----- ----- -----
Expected return on schemes' assets 48.4 51.6
102.2
Interest on schemes' obligations (51.6) (54.2)
(106.0)
----- -----
-----
Net pension interest expense charged tofinance expense (note 4) (3.2) (2.6) (3.8) ----- ----- -----
Net pension expense charged before (11.5) (14.6)
(19.1)taxation ----- ----- -----
* No curtailments arising on reorganisation are included within restructuring costs within total employee benefits expense (30 September 2010: £4.9 million; 31 March 2011: £2.7 million) or within other reorganisation costs (30 September 2010: £nil; 31 March 2011: £0.7 million).
The net pension (expense)/income (charged)/credited before taxation for discontinued operations in the income statement in respect of defined benefit pension schemes is summarised as follows:
Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £mDiscontinued operationsCurrent service cost - (3.5) (3.5)
Curtailments/settlements arising on - 3.0
3.0
reorganisation
----- -----
-----
Pension expense charged to operating - (0.5)
(0.5)profit ----- ----- -----
Expected return on schemes' assets - 6.9
6.9
Interest on schemes' obligations - (6.6)
(6.6)
----- -----
-----
Net pension interest income credited toinvestment income and finance expense - 0.3
0.3
Curtailment/settlement arising ondisposal and (charged)/credited toprofit on disposal of discontinued (0.4) (0.9)
7.3operations ----- ----- -----Net pension (expense)/income
(charged)/credited before taxation (0.4) (1.1)
7.1
----- -----
-----
The reconciliation of the opening and closing net pensionsurplus/(obligations) included in the statement of financial position is asfollows: Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £m At the start of the period (195.0) (271.3) (271.3)Expense recognised in the incomestatement - continuing operations (11.5) (14.6)
(19.1)
(Expense)/income recognised in theincome statement - discontinuedoperations (0.4) (1.1)
7.1
Contributions paid 136.0 47.9
133.0
Actuarial gains/(losses) gross of 98.8 (70.7)
(44.7)
taxation
Reclassified to liabilities held for - 9.2
-sale ----- ----- -----At the end of the period 27.9 (300.6) (195.0) ----- ----- -----The closing surplus/(obligations) at each reporting date are analysed as follows: 30 September 30 September 31 March 2011 2010 2011 £m £m £m
Present value of defined benefit (1,950.7) (1,917.5)
(1,912.9)
obligations
Fair value of schemes' assets 1,978.6 1,616.9
1,717.9 ----- ----- -----Net retirement benefit 27.9 (300.6) (195.0)surplus/(obligations) ----- ----- -----
10. 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 joint ventures: Six months ended Six months ended Year ended 30 September 30 September 31 March 2011 2010 2011 £m £m £mGroupSales of services 0.3 38.5 44.2
Purchases of goods and services 0.2 8.1
9.5
----- -----
-----
Included within the comparatives in the table above are amounts relating to entities disposed of during the year ended 31 March 2011.
Amounts owed by and to the group's joint ventures are as follows:
30 September 30 September 31 March 2011 2010 2011 £m £m £mGroup
Amounts owed by related parties 1.4 16.8
2.7
Amounts owed to related parties - 3.8
-
----- -----
-----
Sales of services to related parties were on the group's normal trading terms.
The amounts outstanding are unsecured and will be settled inaccordance with normal credit terms. The group has issued guarantees of £5.5million (30 September 2010: £180.2 million; 31 March 2011: £5.9 million) toits joint ventures.A £0.1 million provision has been made for doubtful receivables inrespect of the amounts owed by related parties (30 September 2010: £0.7million; 31 March 2011: £0.3 million). No expense has been recognised for badand doubtful receivables in respect of the amounts owed by related parties (30September 2010: £0.4 million; 31 March 2011: £nil).
11. Contingent liabilities
The group has entered into performance guarantees as at 30 September 2011 where a financial limit has been specified of £87.4 million (30 September 2010: £279.4 million; 31 March 2011: £104.5 million).
12. Changes in circumstances significantly affecting the fair value of financial assets and financial liabilities
From 1 April 2011 to 30 September 2011 market interest rates have fallen significantly, which has been partially offset by an increase in credit spread in relation to the group's borrowings.
The group's borrowings have a carrying amount of £5,833.1 million(31 March 2011: £5,313.3 million). The fair value of these borrowings is£5,426.0 million (31 March 2011: £5,065.0 million). There has been a netincrease in funds from new borrowings during the period of £216.4 million. Thegroup's derivatives measured at fair value are a net asset of £497.6 million(31 March 2011: £280.3 million).
13. Events after the reporting period
There were no events arising after the reporting date that required recognition or disclosure in the financial statements for the six months ended 30 September 2011.
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 anindication of important events during the first six months of the currentfinancial year and their impact on the condensed set of financial statements;and a description of principal risks and uncertainties for the remaining sixmonths of the year; and* DTR 4.2.8R of the Disclosure and Transparency Rules, beingrelated party transactions that have taken place in the first six months ofthe current financial year and that have materially affected the financialposition or performance of the entity during that period; and any changes inthe related party transactions described in the last annual report that coulddo so.
The directors of United Utilities Group PLC at the date of this announcement are listed below:
Dr John McAdamSteve MogfordRuss HouldenDr Catherine Bell CBPaul HeidenDavid Jones CBENick Salmon
This responsibility statement was approved by the board and signed on its behalf by:
............................. ............................
Steve Mogford Russ Houlden22 November 2011 22 November 2011Chief 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 offinancial statements in the half yearly financial report for the six monthsended 30 September 2011 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. Wehave read the other information contained in the half yearly financial reportand considered 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 theterms of our engagement to assist the company in meeting the requirements ofthe Disclosure and Transparency Rules ("the DTR") of the UK's FinancialServices Authority ("the UK FSA"). Our review has been undertaken so that wemight state to the company those matters we are required to state to it inthis report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the company forour review work, for this 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 thegroup are prepared in accordance with IFRSs as adopted by the EU. Thecondensed set of financial statements included in this half-yearly financialreport has been prepared in accordance with IAS 34 Interim Financial Reportingas adopted by the EU.Our responsibility
Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International Standardon Review Engagements (UK and Ireland) 2410 Review of Interim FinancialInformation Performed by the Independent Auditor of the Entity issued by theAuditing Practices Board for use in the UK. A review of interim financialinformation consists of making enquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly,we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half yearly financial report for the six months ended 30 September 2011 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.
John Lukefor and on behalf of KPMG Audit PlcChartered AccountantsSt James' SquareManchesterM2 6DS22 November 2011
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United Utilities