Interim Results

1st Dec 2005 07:00

1 December 2005 INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2005 STRONG GROWTH FROM OUTSOURCING BUSINESSES * Profit before tax* - increased by 20 per cent to ‚£244 million * Operating profit from continuing operations - increased by 8 per cent to ‚£ 367 million * Licensed multi-utility operations - operating profit** increased by 13 per cent to ‚£325 million * Infrastructure management - turnover jumped 35 per cent and operating profit** increased by 8 per cent to ‚£41 million * Business process outsourcing - operating profit** of ‚£11 million (2004 - ‚£ 13 million) * Your Communications - decision to accelerate disposal * Successfully completed second stage of rights issue raising ‚£508 million * Interim dividend per ordinary share of 14.29 pence, an increase of 3.4 per cent * relating to continuing operations and before amortisation of intangiblesconsidered as goodwill under UK GAAP, restructuring costs and the impact of IAS39. This adjusted measure is reconciled to reported profit before tax in note 2of this announcement** references to operating profit, operating loss and operating margin andrelated percentage movements are stated before amortisation of intangiblesconsidered as goodwill under UK GAAP, and restructuring costs as shown in thesegmental analysis by class of businessChief Executive John Roberts said:"The group has delivered strong underlying profit growth for the six months to30 September. Operating profit in our licensed multi-utility operationsbusiness has increased by 13 per cent. Our infrastructure management businesshas continued its impressive growth record, delivering an 8 per cent increasein operating profit and a jump of 35 per cent in turnover, as ‚£3.3 billion ofnew contract wins are mobilised."The group successfully completed the second stage of its rights issue in June2005 and raised a further ‚£508 million to help fund the capital investmentrequirements of the regulated businesses. This provides for a solid balancesheet and capital structure in line with regulatory assumptions."Our licensed multi-utility operations business has commenced the newregulatory period successfully. We have established partnerships for ourcapital investment programmes and are progressing well with the implementationof our efficiency initiatives."United Utilities Contract Solutions has firmly established itself as theleading utility infrastructure outsourcing company in the United Kingdom. Inthe half year, it successfully commenced its contracts with Dwr Cymru WelshWater, Southern Water and Northern Gas Networks. The business now serves over17 million people in the UK and is involved in the operation or management ofassets representing around 35 per cent of the UK water industry's asset base.Its order book stands at approximately ‚£5 billion."Vertex has made good progress in replacing revenues from the successful,recently completed, benefits modernisation contract with central government andthe Powergen contract that was renegotiated, with a reduced scope, earlier inthe year. The 15-year, ‚£427 million contract with Thurrock Council, whichcommenced in April, to provide business process outsourcing services to helpthe council serve its residents, is progressing well. In addition we secured anew strategic partnership with Hertfordshire County Council."An important development for Vertex is the recently formed alliance with IBMto provide business process transformation services to the North Americanutilities market, which will enable Vertex to capitalise on the significantopportunities in this market. The alliance secured its first win in June, a$1.6 billion contract with US multi-state energy utility NiSource."As expected, mobilisation costs associated with new contract activity and theinherited trading position of Marlborough Stirling have suppressed Vertex'sprofitability in the short-term, although future prospects for the businessremain healthy. The integration of Marlborough Stirling into Vertex is wellunderway. To reflect the newly-combined business, Marlborough Stirling has beenre-branded as Vertex Financial Services."We have recognised for some time that consolidation of the telecoms sector hasbeen overdue, and we are now seeing evidence of deals being done. At the sametime, the telecoms market continues to weaken as a result of sustained excesscapacity in the industry and intense pricing pressures. Your Communications hasreached broadly neutral EBITDA and cashflow positions, and we are nowaccelerating our plans for its disposal. Consequently, we have taken a netimpairment charge of ‚£99 million in these results, adjusting the carrying valuedown to around one per cent of the group's net operating assets. This chargereflects both the challenging trading outlook for the telecoms industry and ourview that the interests of our telecoms business are best served by itsparticipation in the current round of consolidation in its industry through asale process."In common with other companies now required to adopt International FinancialReporting Standards, we are seeing much more volatility in our financialreporting, particularly through the effect of IAS 39, covering accounting forderivatives. These new reporting requirements will allow greater comparabilityacross the global markets, but investors need to take even greater care tounderstand underlying business performance. In particular, there are no cashflow or financing implications for the group as a result of IFRS."Commenting on the outlook for United Utilities, John Roberts said:"Our regulated businesses will benefit from predictable revenue growth over thenext five years. With our partners we have now successfully commenced the newinvestment programmes and have a number of cost saving initiatives in placewhich are progressing well. We are confident of achieving our regulatoryefficiency targets."The outlook for our support services businesses remains good. In ourinfrastructure management business, the contracts we have mobilised in thishalf year will feed through additional contributions in the future. Vertex,through its acquisition of Marlborough Stirling, has established a strongpresence in the financial services outsourcing market, which has attractivegrowth prospects. Our alliance with IBM should help Vertex extend its presencein the substantial North American utilities market and we see significantopportunities in the UK public sector in the medium-term. In summary, bothinfrastructure management and Vertex are poised for future growth."In conclusion, the Chairman, Sir Richard Evans, said:"These results demonstrate the benefits of a consistent strategy, addingfurther value for shareholders through attractive underlying profit growth. TheBoard is declaring an interim dividend of 14.29 pence. This represents anincrease of 3.4 per cent, which is consistent with our policy of growingdividends in line with inflation. The Board also thanks shareholders forsupporting our strategy through their take up of the second stage of the rightsissue in June." -o0o- For further information on the day, please contact:John Roberts - Chief Executive +44 (0) 20 7307 0300 Simon Batey - Finance Director +44 (0) 20 7307 0300 Darren Jameson - Investor Relations Manager +44 (0) 7733 127707 Evelyn Brodie - Head of Corporate and Financial +44 (0) 20 7307 0309 Communications A presentation to investors and analysts will commence at 8.30 am on Thursday,1 December 2005, at the City Presentation Centre, 4 Chiswell Street, London,EC1Y 4UP. The presentation can also be accessed via a one-way listen inconference call facility, by dialing: + 44 (0) 20 7162 0025. This recordingwill be available for 7 days following 1 December, on +44 (0) 20 7031 4064,access code 682634.The presentation, together with further information on United Utilities, willbe available at 8.30am on the day on our web site at: http://www.unitedutilities.com and later during the day on Bloomberg at: UUIR,where a multimedia version will be available. Photographs for media usesupporting these results can be downloaded via http://www.vismedia.co.uk.DIVIDENDThe Board has declared an interim dividend in respect of the six months ended30 September 2005 of 14.29 pence per ordinary share. This is an increase of 3.4per cent, consistent with the group's policy of growing dividends in line withinflation. As previously stated, the 2004/05 dividend has been adjusted to takeaccount of the second stage of the rights issue. Dividend yield and overallcash return will be maintained for shareholders who subscribed in full to bothstages of the rights issue.This dividend will be paid on 9 February 2006 to shareholders on the registerat the close of business on 23 December 2005. The ex-dividend date for theinterim dividend is 21 December 2005.FINANCIAL PERFORMANCEInternational Financial Reporting Standards (IFRS)From 1 April 2005, United Utilities has been required to comply withInternational Financial Reporting Standards (IFRS). These results, and priorperiod comparisons, are consistent with IFRS, with the exception of IAS 39which, as previously announced, has been applied prospectively from 1 April2005. Reconciliation between IFRS and UK accounting standards is provided forboth the half-year period ended 30 September 2004 and the year ended 31 March2005 in note 11 of this announcement. It should be noted that there are no cashflow or financing implications for the group as a result of IFRS compliance.The Board has taken the opportunity to review the carrying value of YourCommunications under the provisions of International Financial ReportingStandards. The Board's view is that the interests of Your Communications arebest served by its participation in the current round of consolidation in itsindustry through a sale process. Consequently, and in accordance with IFRS,each line of the consolidated income statement and consolidated cash flowstatement now exclude items directly associated with this business. These itemsare now netted in a separate line for both the current half year period andprior periods. Similarly, for the current half year period only, assets andliabilities relating to Your Communications are shown within separate lines onthe balance sheet. IFRS requires this classification where assets are held forsale, and even though a sale transaction has not been identified, there is anexpectation that such a transaction will take place.American Depositary SharesThe company will be filing with the US Securities and Exchange Commission latertoday Form F-6 increasing the limit on its American Depositary ReceiptProgramme, with immediate effect upon filing, from 25,000,000 to 50,000,000American Depositary Shares (ADSs) evidenced by American Depositary Receipts(ADRs), each ADR evidencing two ordinary shares in the company.Turnover and operating profitTurnover including share of joint ventures rose 12.8 per cent to ‚£1,157.3million, reflecting growth across our licensed multi-utility and supportservices businesses.Operating profit** for the group rose 12.1 per cent to ‚£380.3 million comparedwith the same period in the previous year. This increase reflects improvedoperating profit** in licensed multi-utility operations and infrastructuremanagement. Operating profit** relates to continuing operations and ispresented before amortisation of intangibles considered as goodwill under UKGAAP, and restructuring costs to provide a better understanding of the tradingposition of the group. Operating profit for the group, relating to continuingoperations, and after amortisation of intangibles considered as goodwill underUK GAAP, and restructuring costs increased by 8.5 per cent to ‚£366.5 million.Financing costsFollowing a reduction in net interest payable of 0.4 per cent to ‚£136.7million, principally reflecting receipt of the proceeds from the second stageof the rights issue and lower interest costs on debt, profit before tax(relating to continuing operations and before amortisation of intangibles,considered as goodwill under UK GAAP, restructuring costs and the impact of IAS39)* increased by 20.5 per cent to ‚£243.6 million. As expected, the impact ofIAS 39 has introduced some volatility to the income statement and in the firsthalf of the year this has increased the reported finance costs by ‚£67.9million. Since IAS 39 only applies from 1 April 2005, it should be noted thatthere is no impact on comparative periods.In order to hedge the interest cost implicit in the regulatory contracts, thegroup fixes interest rates for the duration of each five-year review period bytypically swapping fixed rate debt to floating at the time of issue and thenswapping back to fixed rate at the outset of each five-year regulatory contractperiod. IAS 39 limits the use of hedge accounting, thereby increasing thepotential volatility of the income statement. However, this has no cash flowimpact and the effect of IAS 39 should broadly balance out over the 2005-10period.Intangibles amortisation and restructuring costsAmortisation of intangibles considered as goodwill under UK GAAP, was ‚£5.0million compared with ‚£1.5 million in the corresponding period last year. Theincrease principally reflects the intangible assets arising from theacquisition of Marlborough Stirling by Vertex which was completed in May 2005.During the period there was a restructuring charge of ‚£8.8 million to theincome statement, which primarily relates to the Marlborough Stirlingintegration. Further restructuring charges are expected to be incurred in thesecond half of the year, principally arising from further rationalisation ofproperty requirements in Vertex.TaxationThe group recorded a current tax charge of ‚£26.4 million during the period,compared with ‚£2.9 million in the previous year. This increase reflects changesin the tax treatment of capitalised revenue expenditure. The deferred taxcharge on ordinary activities was ‚£24.0 million, which primarily relates to therequirement to provide in full for deferred tax under IAS 12. This compareswith a ‚£52.1 million charge in the corresponding period last year. There wasalso a tax credit of ‚£4.1 million in the current period, which principallyrelates to the restructuring costs associated with Marlborough Stirling. Thetotal tax charge is ‚£46.3 million.Excluding the tax credit of ‚£4.1 million and the impact of amortisation ofintangibles considered as goodwill under UK GAAP, and restructuring costs onprofit before tax, the effective current tax rate for the half year isapproximately 15 per cent (29 per cent including deferred tax).Business held for sale - Your CommunicationsYour Communications offers voice, data and mobile services to the public sectorand small and medium-sized corporate customers, predominantly in the Midlandsand North of England. It is now one of the largest alternative fixed linebusiness telecoms providers, and Vodafone's largest independentbusiness-to-business service provider, in the United Kingdom. It is also thedominant alternative carrier in the North West for business customers and thepublic sector.Your Communications has adopted a strategy of selecting its markets carefully,clearly focusing on business customers and the public sector. It also has astrong focus on customer service. This has delivered a diverse and loyalcustomer base, with a low churn rate for business customers. Mobile customersand associated revenues have increased rapidly over the last five years andYour Communications has successfully maintained steady growth in its mobilebusiness this year despite difficult market conditions.In October, Your Communications successfully completed its project with theNorth West Development Agency to provide broadband access in Cumbria. Around 95per cent of businesses, public sector organisations and households in thisregion now have broadband access and this facility provides Your Communicationswith a good opportunity to generate further revenues by extending its servicethroughout Cumbria.Turnover has fallen by 11.5 per cent, to ‚£98.2 million, compared with thesecond half of 2004/05, partially reflecting changes to the tariff for fixed tomobile calls, but also reflecting the substantial pricing pressure beingexperienced in the industry. Gross margin has been relatively stable,reflecting Your Communications' move towards higher margin business traffic andaway from wholesale activity, such as premium rate services. The businessrecorded an operating loss** of ‚£11.8 million in the first half of the year(2004 - ‚£4.6 million operating loss**).Overall, the telecoms sector is experiencing intense pricing pressures andsustained excess capacity. At this point, the Board's view is that theinterests of Your Communications are best served by its participation in thecurrent round of consolidation in its industry through a sale process. Inaccordance with IFRS, Your Communications will now be classified as a businessheld for sale in the context of United Utilities' consolidated accounts. A netreduction in the carrying value of Your Communications of ‚£98.6 million, from anet asset value (excluding inter-company liabilities) as at 30 September 2005of approximately ‚£196 million, has been recorded.Earnings per shareBasic earnings per share, relating to continuing operations, decreased by 25.7per cent to 13.9 pence, primarily as a result of an increase in the reportedfinance costs under IAS 39 and an increase in the weighted average number ofshares following completion of the second stage of the rights issue. Adjustedbasic earnings per share, relating to continuing operations and excludingdeferred tax, the impact of IAS 39, amortisation of intangibles considered asgoodwill under UK GAAP, and restructuring costs, which provides for a morerepresentative view of underlying business performance, increased by 3.1 percent to 26.3 pence.Net debtCash and short term investment balances at 30 September 2005 were ‚£859.3million. Unutilised medium term bank facilities (maturing in more than oneyear) totalled ‚£799.6 million. Combining these sources, with an undrawn ‚£200million loan facility agreed with the European Investment Bank, total availableliquidity was ‚£1.81 billion, excluding joint venture cash of ‚£45.9 million.This gives United Utilities an excellent pre-funded position for its capitalinvestment programmes in both its regulated businesses.Net debt at 30 September 2005 was ‚£4,106.0 million, prior to adjustment for IAS39, a decrease of ‚£172.6 million compared with 31 March 2005. This decreaseprincipally reflects the proceeds from the second stage of the rights issue,offset by capital expenditure in the regulated businesses and payment of the2004/05 final dividend. Taking account of the adjustment to fair value underIAS 39, net debt at 30 September 2005 was ‚£4,204.9 million. This comprised ‚£3,922.9 million of bonds, ‚£638.9 million of loans from the European InvestmentBank, ‚£81.6 million of long term leasing, ‚£186.1 million of joint venture debtand ‚£234.7 million of other loans and overdrafts, offset by ‚£859.3 million ofcash and short term investments.US GAAP reconciliationAs part of the IFRS to US GAAP reconciliation process, a small number ofdifferences have been identified. In total, these differences are notconsidered material. However, the company will be restating its 2004/05 Form20F and re-filing it with the US Securities and Exchange Commission no laterthan 9 December 2005.OPERATING PERFORMANCELICENSED MULTI-UTILITY OPERATIONS * Turnover increased by 9 per cent to ‚£746 million * Operating profit increased by 13 per cent to ‚£325 million Turnover increased by 9 per cent to ‚£746 million, principally reflectingallowed price increases, including inflation, of 8.4 per cent in our water andwastewater business and 11.5 per cent in our electricity business.Operating profit increased by 13 per cent to ‚£325 million for the period,despite increasing costs that are accompanying the growth in the asset base.The results have also benefited from the IFRS treatment of infrastructurerenewals, resulting in a ‚£9 million lower reported spend, compared with lastyear, as the new five-year programme gets underway.Capital investment in the period was ‚£205 million, of which ‚£143 millionrelated to water and wastewater and ‚£62 million to electricity distribution.Capital investment for the full year is expected to be around ‚£600 million,within the regulatory allowance for the year, reflecting anticipated phasing ofexpenditure in the first year of a five-year programme.The business is well-advanced in the implementation of its partnership approachto its capital programmes and is confident it can reduce the overhead involvedin managing these programmes by working on a more integrated basis with itspartners. Early benefits are being realised through co-location and thedevelopment of common systems. The business has also successfully implemented anew project and investment management system to support delivery of the capitalprogrammes.Good progress has been made in the implementation of operating efficiencyinitiatives in the first half of the year and the business remains confidentthat it can achieve its regulatory efficiency targets. These initiativesinclude: * Management reorganisation - the Customer Sales business has now merged with Service Delivery to form United Utilities North West. * A new customer billing system - to improve customer service and increase efficiency, United Utilities Water, working with Vertex, has successfully developed a new customer billing system and all customer accounts have now been migrated onto this system, on time and to budget. * Multi-utility work management system - the initial roll-out is set to go ahead in the early part of 2006 and involves supplying mobile devices to field employees, introducing new multi-utility map and address management systems and launching a new customer contact system to help improve service levels. * Integrated Performance Management project - this is focused on optimising the way the business manages its major assets in the North West. Positive returns have been realised from the initial pilot programmes and these are now being rolled-out on a more extensive scale. * Improved working practices - United Utilities Electricity has been looking to improve working practices, with a greater focus on productivity and performance, and recent modifications to the logistics processes are expected to realise efficiencies later in the financial year. The group is also looking to leverage its increasing scale of activities byachieving further procurement economies. As part of this drive, earlier in theyear, the group signed a contract with a sole supplier to provide high-pressureand medium density polyethylene pipes to United Utilities Water, in addition toservicing the water and gas outsourcing contracts in the infrastructuremanagement business. This single source arrangement illustrates that, as amarket leader, United Utilities is looking at smarter ways of working to securecost savings across of all of its businesses.United Utilities Water has reduced its leakage level in the first half of theyear by around 40 megalitres per day and at the half year was within 10megalitres of Ofwat's March 2006 spot leakage level target of 470 megalitresper day. This target is expected to be achieved provided that the network isnot adversely affected by harsh winter weather conditions in the last quarterof the financial year. Additionally, United Utilities benefits from robustwater resource capacity, having recently being ranked joint first by Ofwat inits security of supply assessment index. Reservoir levels are currently inexcess of 90 per cent.At the time the water price review was concluded in December 2004, it wasrecognised that there was potential for additional investment relating toprojects that were not part of United Utilities' 2005-10 regulatory contract,but which may be confirmed as additional obligations during this period by theregulators. There was also a carry-over of obligations, funded in 2000-05period, primarily relating to the Unsatisfactory Intermittent Discharge (UID)programme. United Utilities Water, in its negotiations with the EnvironmentAgency and Ofwat, has agreed those outputs relating to the UID carry-overprogramme. The potential projects currently excluded from the finaldetermination continue to be the subject of discussions with the regulators andfurther studies and investigations will be undertaken to assess these projects.INFRASTRUCTURE MANAGEMENT * Turnover increased by 35 per cent to ‚£309 million * Operating profit** (including share of joint ventures) increased by 8 per cent to ‚£41 million * Operating margin** of 13 per cent United Utilities Contract Solutions applies the core infrastructure managementskills of the licensed multi-utility businesses, through outsourcing contracts,and is now involved in the operation or management of assets representingaround 35 per cent of the UK water industry's asset base. Including the Northof England gas distribution network, this represents a total regulated assetvalue of approximately ‚£10 billion. The business now serves a population ofover 17 million in the UK.The infrastructure management business has developed rapidly since itscreation. The value of the outsourced utility contracts which commenced in thishalf year period total approximately ‚£3.3 billion. United Utilities ContractSolutions' total order book stands at around ‚£5 billion.The success of the infrastructure management business in winning new contractshas driven a 35 per cent rise in turnover. The business also continued itsprofit growth record, delivering an 8 per cent increase in operating profit**despite mobilisation costs associated with these substantial new contract wins.Utility SolutionsUtility Solutions is responsible for United Utilities' utility outsourcingcontracts in the United Kingdom. This includes contracts with Southern Water,Scottish Water, Dwr Cymru Welsh Water, the North of England gas distributionnetwork and three Scottish PFI operations.The five-year Southern Water contract, worth around ‚£750 million to theconsortium, of which United Utilities has a 40 per cent share, was successfullymobilised in April. By the end of December, the business expects the first 40capital investment projects to be underway, with the expectation that around 50per cent of Southern Water's AMP 4 programme, by value, will have been approvedby March 2006.The success of the original four-year contract with Dwr Cymru Welsh Waterhelped United Utilities secure a ‚£1.5 billion, 15-year contract renewal toprovide operations, maintenance and shared services, which commenced in April2005. The company's core skills and expertise in this area and its scale,enabling it to transfer best practice, have assisted in moving Dwr Cymru WelshWater from seventh position to joint first position in Ofwat's recentlypublished overall performance assessment league table.United Utilities acquired a 15 per cent stake in the CKI-led consortium thatpurchased the North of England gas distribution network from National GridTransco earlier in the year. United Utilities Contract Solutions secured a ‚£1.1billion, 8-year contract to operate and maintain the network, and manage thecapital expenditure programme, on behalf of the consortium. This contractsuccessfully commenced on 1 June and initial progress has been good. Thebusiness has initiatives in place to meet certain internal key performanceindicators and to achieve efficiency gains, and the attainment of these targetsis on track. United Utilities Contract Solutions will also benefit from theeconomies secured from the single source pipeline deal signed earlier in theyear.Industrial and Commercial SolutionsIndustrial and Commercial Solutions is responsible for multi-utilityconnections and metering services to domestic, commercial and industrialdevelopers, and the provision of specialist water and liquid waste services toindustrial customers. The business also includes United Utilities ContractSolutions' facilities services and energy management services businesses.The ‚£225 million metering contract with British Gas Trading, which was thefirst major meter installation contract to be outsourced, is now three yearsold and has a further three and a half years to run. The contract continues toprogress well. The first mover experience gained from this contract shouldprovide advantages for the business in bidding for similar potentialoutsourcing opportunities from other energy suppliers.Since April, the business has been working in partnership with Vertex todeliver the ‚£427 million contract with Thurrock Council to transform a numberof the authority's business processes, from administration and customerservices through to procurement and highways maintenance. Industrial andCommercial Solutions is focusing on providing facilities management, highwaysengineering and transportation services. A number of reviews have beenundertaken looking at how services are provided and how they are financiallyand commercially controlled. A programme of contract renewals, on behalf ofThurrock Council, has commenced to provide a more robust and flexiblesub-contractor base.InternationalInternational applies United Utilities' expertise in infrastructure managementand operations to develop and manage utility projects around the world. Thebusiness currently operates concessions in Bulgaria, Estonia, Poland, thePhilippines and Australia.Recently, Manila Water and Tallinna Vesi were both successfully listed on theirrespective stock exchanges, via initial public offerings, demonstrating theirvalue and increasing ability to raise new capital in the years ahead. UnitedUtilities continues to retain operational responsibility.BUSINESS PROCESS OUTSOURCING * Turnover of ‚£207 million (2004 - ‚£201 million) * Operating profit** of ‚£11 million (2004 - ‚£13 million) Vertex is a leading international provider of business process outsourcingservices and is also one of the UK's major customer management servicesuppliers. The business has clients in the private enterprise, financialservices, utility, central and local government sectors.Progress has been good in relation to replacing revenues from the re-shapedcontract portfolio. Vertex's successful contract with central government, tohelp it deliver its benefits modernisation programme, came to a natural closeearlier in the year. The company also renegotiated its contract with Powergenduring the period.The 15-year, ‚£427 million contract with Thurrock Council, which is beingmanaged in partnership with United Utilities Contract Solutions, is progressingwell. In addition to the Thurrock deal, Vertex secured a strategic partnershipwith Hertfordshire County Council in October. The first phase of thepartnership is a 10-year, ‚£26 million contract for the provision of customermanagement and business process re-engineering services. The aim of thestrategic partnership is to transform public service delivery and continuallyimprove services for the resident. Vertex aims to implement a new customerrelationship management system to enhance service levels. Initially, around 100employees will transfer from the council's current supplier to Vertex'smanagement. This partnership builds on Vertex's solid presence in the publicsector and broadens its contract portfolio.The company is pursuing opportunities in the North American utilities market,as it continues to deregulate, and entered into an alliance deal with IBM inJune. The first stage of this alliance initiative was to team with IBM on its$1.6 billion contract with US multi-state utility NiSource to provide customercontact centre, sales and billing services. This contract has started well andthe transition plan is well underway. Call centre operations are beingconsolidated to improve efficiency.The integration of Marlborough Stirling into Vertex is progressing in line withexpectations. Approximately ‚£6 million of efficiencies, on a full-year basis,were identified shortly after acquisition and it is anticipated that over ‚£4million will be delivered in the 2005/06 financial year. The group is confidentthat the combination of Vertex's scale and outsourcing expertise, combined withMarlborough Stirling's technology, knowledge and experience of the financialsector, will provide an attractive outsourcing proposition for this growthmarket. As part of the integration process, and to reflect the strongercombined business offering, Marlborough Stirling has been re-branded as VertexFinancial Services.As expected, margins, in the short-term, have been affected by the start-upcosts associated with the Thurrock Council contract and the weak tradingposition of Marlborough Stirling that was recognised at the time of itsacquisition. Growth prospects for Vertex remain promising in the medium-termwith a number of opportunities in the pipeline, particularly in the publicsector and financial services sector. -o0o- Consolidated income statement - consistent with IFRS Six months Six months Year ended 30 September ended 30 September ended 31 March 2005 2004 2005 Before Intan- Before Intan- Before Intan- intan- gibles* intan- gibles* intan- gibles* gibles* and gibles* and gibles* and and re- and re- and re- re- structur- re- structur- re- structur- structur- ing Total structur- ing Total structur- ing Total ing ‚£m ‚£m ing ‚£m ‚£m ing ‚£m ‚£m ‚£m ‚£m ‚£m Continuing operations Revenue 1,157.3 - 1,157.3 1,025.7 - 1,025.7 2,103.7 - 2,103.7 ---- ---- ---- ---- ---- ---- ---- ---- ---- Other income 11.5 - 11.5 9.9 - 9.9 19.8 - 19.8 Employee costs (228.3) - (228.3) (203.1) - (203.1) (392.8) - (392.8) Depreciation and amortisation (163.2) (5.0) (168.2) (155.3) (1.5) (156.8) (328.1) (2.6) (330.7) Purchases and production costs (278.2) - (278.2) (240.0) - (240.0) (465.9) - (465.9) General and (118.8) - (118.8) (97.8) - (97.8) (253.0) - (253.0)administration costs Other expenses: - Business restructuring - (8.8) (8.8) - - - - (29.7) (29.7) ---- ---- ---- ---- ---- ---- ---- ---- ---- Total operating costs (777.0) (13.8) (790.8) (686.3) (1.5) (687.8) (1,420.0) (32.3) (1,452.3) ---- ---- ---- ---- ---- ---- ---- ---- ---- Operating profit 380.3 (13.8) 366.5 339.4 (1.5) 337.9 683.7 (32.3) 651.4 Finance costs: Interest payable and similar charges (151.2) - (151.2) (150.7) - (150.7) (322.1) - (322.1) Interest receivable and similar income 14.5 - 14.5 13.5 - 13.5 38.3 - 38.3 Fair value loss on derivative instruments (67.9) - (67.9) ---- ---- ---- ---- ---- ---- ---- ---- ---- Net finance costs (204.6) - (204.6) (137.2) - (137.2) (283.8) - (283.8) ---- ---- ---- ---- ---- ---- ---- ---- ---- Profit before taxation 175.7 (13.8) 161.9 202.2 (1.5) 200.7 399.9 (32.3) 367.6 Current taxation (charge)/credit (note (26.4) 2.6 (23.8) (2.9) - (2.9) 30.0 - 30.03) Deferred taxation (charge)/credit (note (24.0) 1.5 (22.5) (52.1) 0.5 (51.6) (135.8) 9.7 (126.1)3) ---- ---- ---- ---- ---- ---- ---- ---- ---- Taxation (50.4) 4.1 (46.3) (55.0) 0.5 (54.5) (105.8) 9.7 (96.1) ---- ---- ---- ---- ---- ---- ---- ---- ---- Profit after taxation from continuing 125.3 (9.7) 115.6 147.2 (1.0) 146.2 294.1 (22.6) 271.5operations Loss from discontinuing operations (business (109.6) (6.4) (9.4)held for sale - note 6) ---- ---- ---- Profit for the period 6.0 139.8 262.1 ---- ---- ---- Attributable to: Equity holders 5.9 138.6 260.3of the parent Minority interest 0.1 1.2 1.8 ---- ---- ---- 6.0 139.8 262.1 ---- ---- ----* - considered as goodwill under UK GAAPBasic earnings per share (note 4) - continuing 13.9p 18.7p 34.8p - discontinuing (13.2)p (0.8)p (1.2)p(business held for sale) -------- -------- -------- 0.7p 17.9p 33.6p -------- -------- -------- Adjusted basic 26.3p 25.5p 55.0pearnings per share (note 5) Diluted earnings per share (note 4) - continuing 13.8p 17.1p 31.4p - discontinuing (13.1)p (0.7)p (1.1)p(business held for sale) -------- -------- -------- 0.7p 16.4p 30.3p -------- -------- -------- Dividend per 14.29p 14.79p 45.42pordinary share (note 10) Re-presented 14.29p 13.82p 42.43pdividend per ordinary share post rights issue (note 10) Dividend cover 1.4 1.4 0.9(note 8) Dividend cover 1.7 1.9 1.3(pre deferred tax) (note 9) Interest cover 2.8 2.5 2.4(note 7) Consolidated balance sheet - consistent with IFRS 30 30 31 March September September 2005 2005 2004 ‚£m ‚£m ‚£m Assets Intangible assets 343.0 298.0 293.4 Property, plant and equipment 8,401.9 8,297.9 8,497.9 Other investments 96.1 2.9 9.7 Derivative financial instruments 50.9 -------- -------- -------- Total non-current assets 8,891.9 8,598.8 8,801.0 Inventories 36.9 40.0 40.9 Trade and other receivables 461.3 442.7 385.0 Other investments 18.7 22.0 19.7 Cash and cash equivalents 859.3 712.7 902.7 Derivative financial instruments 85.4 -------- -------- -------- Total current assets 1,461.6 1,217.4 1,348.3 -------- -------- -------- Assets classified as held for sale (note 117.3 6) Total assets 10,470.8 9,816.2 10,149.3 Liabilities Borrowings 354.8 315.9 512.3 Trade and other payables 835.3 929.4 950.0 Current taxation payable 87.6 128.2 96.0 Derivative financial instruments 130.0 -------- -------- -------- Total current liabilities 1,407.7 1,373.5 1,558.3 Borrowings 4,709.4 4,323.7 4,669.0 Trade and other payables 354.9 327.5 337.3 Retirement benefit obligations 97.3 384.1 84.6 Deferred taxation 1,340.5 1,270.2 1,337.3 Provisions 47.3 5.4 18.4 Derivative financial instruments 31.3 -------- -------- -------- Total non-current liabilities 6,580.7 6,310.9 6,446.6 Liabilities classified as held for sale 41.4 (note 6) Total liabilities 8,029.8 7,684.4 8,004.9 -------- -------- -------- Net assets 2,441.0 2,131.8 2,144.4 -------- -------- -------- Equity Called up share capital 873.1 712.1 716.2 Share premium account 1,397.0 1,024.1 1,038.7 Revaluation reserve 158.8 158.8 158.8 Equity reserve 6.6 3.0 4.7 Retained earnings 3.9 213.0 224.7 -------- -------- -------- Total equity shareholders' funds 2,439.4 2,111.0 2,143.1 Equity minority interest 1.6 20.8 1.3 -------- -------- -------- Total equity 2,441.0 2,131.8 2,144.4 -------- -------- --------Consolidated cash flow statement - consistent with IFRS Six months ended Year ended 30 30 31 March September September 2005 2005 2004 Continuing operations ‚£m ‚£m ‚£m Operating activities Cash generated by operations 487.6 453.3 732.2 Interest paid (168.1) (157.8) (342.0) Interest received 24.0 20.0 67.0 Taxation paid (1.8) (1.2) (1.7) -------- -------- -------- Net cash flow from operating 341.7 314.3 455.5activities Investing activities Acquisitions of subsidiaries (77.1) - (48.2) Purchase of fixed asset investments (86.5) - - Disposals of subsidiaries - - 64.8 Purchase of property, plant and (316.7) (456.1) (862.0)equipment and intangible assets Proceeds from sale of property, plant 4.1 6.2 14.2and equipment Restructuring of joint ventures 13.0 (0.2) (8.3) -------- -------- -------- Net cash flow from investing (463.2) (450.1) (839.5)activities Financing activities Dividends paid to shareholders (216.7) (211.9) (317.5) Proceeds from issue of share capital 515.2 1.3 20.0 New borrowings 11.6 9.4 597.4 Repayment of borrowings (243.5) (8.6) (62.6) Repayment of obligations under (0.3) - -finance leases -------- -------- -------- Net cash flow from financing 66.3 (209.8) 237.3activities Exchange adjustments (0.1) 0.1 0.9 -------- -------- -------- Net decrease in cash and cash (55.3) (345.5) (145.8)equivalents - continuing operations Net decrease in cash and cash (7.2) (15.7) (28.5)equivalents - discontinuing operations (business held for sale - note 6) -------- -------- -------- Net decrease in cash and cash (62.5) (361.2) (174.3)equivalents -------- -------- --------Consolidated statement of recognised income and expense Six months ended Year ended 30 30 31 March September September 2005 2005 2004 ‚£m ‚£m ‚£m Post employment benefits - actuarial - - (7.1)losses on defined benefit schemes (net of tax) Fair value loss on cash flow hedges (1.4) Exchange adjustments 1.1 1.3 3.7 -------- -------- -------- Net (expense)/income recognised (0.3) 1.3 (3.4)directly in equity Profit for the period 6.0 139.8 262.1 -------- -------- -------- Total net income recognised for the 5.7 141.1 258.7period -------- -------- -------- Attributable to: Equity shareholders 5.4 139.9 256.9 Minority interests 0.3 1.2 1.8 -------- -------- -------- 5.7 141.1 258.7 -------- -------- --------Reconciliation of movements in consolidated equity Six months ended Year ended 30 30 31 March September September 2005 2005 2004 ‚£m ‚£m ‚£m Total net income recognised for the 5.7 141.1 258.7period Dividends (219.4) (212.7) (318.0) New share capital issued 515.2 1.3 20.0 Own shares held in employee share 0.2 2.0 2.0trust Equity settled employee share schemes 1.9 3.0 4.7 Exercise of share options (0.7) (1.8) (1.8) Purchase of minority interest - - (20.3) Contribution from minority interests - - 0.2 -------- -------- -------- Net increase/(decrease) in equity for 302.9 (67.1) (54.5)the period Opening equity 2,144.4 2,198.9 2,198.9 Adoption of IAS 32 and IAS 39 (see (6.3) note 1) -------- -------- -------- Closing equity 2,441.0 2,131.8 2,144.4 -------- -------- -------- Attributable to: Equity shareholders 2,439.4 2,111.0 2,143.1 Minority interests 1.6 20.8 1.3 -------- -------- -------- 2,441.0 2,131.8 2,144.4 -------- -------- --------Reconciliation of net cash flow to movement in net debt Six months ended Year ended 30 30 31 March September September 2005 2005 2004 ‚£m ‚£m ‚£m Net decrease in cash and cash (62.5) (361.2) (174.3)equivalents Decrease/(increase) in debt and lease 232.2 (0.8) (534.8)financing -------- -------- -------- Change in net debt resulting from 169.7 (362.0) (709.1)cash flows Exchange and other non-cash 2.9 (0.3) (4.9)adjustments Movement in fair value of debt (160.9) -------- -------- -------- Movement in net debt 11.7 (362.3) (714.0) Opening net debt (4,278.6) (3,564.6) (3,564.6) Adoption of IAS 32 and IAS 39 (see 62.0 note 1) -------- -------- -------- Closing net debt (4,204.9) (3,926.9) (4,278.6) -------- -------- --------Cash generated by continuing operations Six months ended Year ended 30 30 31 March September September 2005 2005 2004 ‚£m ‚£m ‚£m Operating profit 366.5 337.9 651.4 Restructuring costs within operating 8.8 - 29.7profit Depreciation of property, plant and 134.0 126.4 268.3equipment Amortisation of intangible assets 34.2 30.4 62.4 Profit on disposal of tangible fixed (0.8) (2.9) (4.4)assets Inventories increase (0.6) (0.4) (3.2) Receivables (increase)/decrease (89.5) (42.7) 25.2 Payables and provisions increase/ 43.1 4.7 (268.8)(decrease) Outflow related to restructuring (8.1) (0.1) (28.4)costs -------- -------- -------- Cash generated from continuing 487.6 453.3 732.2operations -------- -------- --------Segmental analysis by class of business Six months ended Year ended Continuing operations 30 30 31 March September September 2005 2005 2004 Revenue ‚£m ‚£m ‚£m Licensed multi-utility operations 745.9 682.6 1,384.7 Infrastructure management 308.5 228.4 512.2 Business process outsourcing 207.4 201.2 396.4 -------- -------- -------- 1,261.8 1,112.2 2,293.3 Inter-business eliminations Licensed multi-utility operations (3.3) (3.0) (6.6) Infrastructure management (47.0) (35.8) (80.2) Business process outsourcing (47.7) (40.2) (88.5) Discontinuing operations (6.5) (7.5) (14.3) -------- -------- -------- (104.5) (86.5) (189.6) -------- -------- -------- 1,157.3 1,025.7 2,103.7 -------- -------- -------- Six months ended Year ended Continuing operations 30 30 31 March September September 2005 2005 2004 Operating profit before intangibles* ‚£m ‚£m ‚£mand restructuring Licensed multi-utility operations 325.0 286.8 564.6 Infrastructure management 41.1 37.9 90.0 Business process outsourcing 11.0 12.8 24.3 Other activities 5.7 4.0 7.8 Corporate costs (2.5) (2.1) (3.0) -------- -------- -------- 380.3 339.4 683.7 Intangible asset amortisation * Infrastructure management (0.5) (0.3) 0.6 Business process outsourcing (4.5) (1.2) (3.2) -------- -------- -------- (5.0) (1.5) (2.6) Restructuring costs Licensed multi-utility operations - - (22.9) Infrastructure management (1.6) - (1.5) Business process outsourcing (7.2) - (4.9) Corporate costs - - (0.4) -------- -------- -------- (8.8) - (29.7) -------- -------- -------- Operating profit from continuing 366.5 337.9 651.4operations * - considered as goodwill under UK -------- -------- --------GAAP 30 30 31 March September September 2005 2005 2004 Net operating assets from continuing ‚£m ‚£m ‚£moperations Licensed multi-utility operations 8,080.1 7,646.4 7,843.9 Infrastructure management 291.7 276.3 200.6 Business process outsourcing 193.9 66.0 67.7 Other activities (38.2) (46.1) (44.9) Telecommunications (considered 233.4 230.9discontinuing at 30 September 2005) -------- -------- -------- 8,527.5 8,176.0 8,298.2 -------- -------- --------Net operating assets from continuing operations comprise total non-currentassets, total current assets and total current liabilities excluding net debt,derivative financial instruments, dividends and corporation tax payable.NOTES1. Basis of preparationInternational Financial Reporting StandardsThe consolidated financial statements of United Utilities PLC for the periodended 30 September 2005, which are unaudited but have been reviewed by theauditors (their report to the company is set out at the end of thisannouncement), have been prepared for the first time consistent withInternational Financial Reporting Standards (IFRS) as adopted for use in theEuropean Union (EU), including International Accounting Standards (IAS) andInterpretations issued by the International Financial Reporting InterpretationsCommittee (IFRIC). Results for the comparative periods have been restated underIFRS as adopted for use in the EU.Practice is continuing to evolve on the application and interpretation of IFRS.Further standards may be issued by the International Accounting Standards Board(IASB) and standards currently in issue and endorsed by the EU may be subjectto interpretations issued by the IFRIC. For these reasons, it is possible thatthe financial information for the six months ended 30 September 2005 and therestated information for the year ended 31 March 2005 may be subject to changebefore its inclusion in the group's 2006 annual report, which will contain thegroup's first complete financial statements prepared in accordance with IFRS.The principal IFRS accounting policies of the group can be found on the group'sweb site www.unitedutilities.com. The disclosures required by IFRS 1 concerningthe transition from UK GAAP (United Kingdom generally accepted accountingpractice) to IFRS are given in note 11.The financial information set out in this statement relating to the year ended31 March 2005 does not constitute statutory accounts for that period. Fullaudited accounts of United Utilities PLC in respect of that financial period inaccordance with UK GAAP, which received an unqualified audit opinion and didnot contain a statement under either section 237(2) or (3) of the Companies Act1985, have been delivered to the Registrar of Companies.Implementation of IAS 32 and IAS 39The group adopted IAS 32 (Financial Instruments: Disclosure and Presentation)and IAS 39 (Financial Instruments: Recognition and Measurement), as adopted foruse in the EU, prospectively from 1 April 2005, as permissible under IFRS 1(First Time Adoption of International Financial Reporting Standards). As aconsequence, the group recognised a reduction in net debt of ‚£62.0 million anda reduction in shareholders' equity of ‚£6.3 million as at 1 April 2005, asfollows: ‚£m Fair value of derivatives (44.3) Fair value of debt 62.0 Financial liabilities reinstated as not legally extinguished (26.2) Tax effect 2.2 -------- Reduction in shareholders' equity (6.3) --------Interest rate swap agreements and financial futures are used to manage interestrate exposure, while the group enters into currency swaps to manage itsexposure to fluctuations in currency rates. In accordance with IAS 39, allfinancial derivatives are recognised in the balance sheet at fair value.Where possible, hedge accounting is applied. Therefore, where derivatives thatare designated as fair value hedges meet the hedge effectiveness criteriaspecified in IAS 39, changes in the recognised value of hedged debt that areattributable to the hedged risk are adjusted through the income statement tooffset changes in the fair value of derivatives.For qualifying cashflow hedges, the fair value gain or loss associated with theeffective portion of the cashflow hedge is recognised initially directly inshareholders' equity and recycled to the income statement in the period whenthe hedged item will affect profit or loss.Where changes in the fair value of a derivative differ to changes in the fairvalue of the hedged item, the hedge ineffectiveness is recorded in the incomestatement within finance costs.Where hedge accounting has not been applied, the group may elect to designate afinancial instrument at inception as at fair value through profit or lossprovided the financial liability meets the conditions specified in IAS 39 asadopted for use in the EU.2. Profit from continuing operations before tax, intangible asset amortisation*, restructuring and the impact of IAS 39Profit from continuing operations before tax is reconciled to profit fromcontinuing operations before tax, intangible asset amortisation*, restructuringand the impact of IAS 39 as follows: Six months Six months Year ended ended ended 31 March 2005 30 September 30 September ‚£m 2005 2004 ‚£m ‚£m Continuing operations Profit before tax 161.9 200.7 367.6 Business restructuring 8.8 - 29.7 Intangible asset amortisation * 5.0 1.5 2.6 Fair value loss on derivative 67.9 instruments -------- -------- -------- 81.7 1.5 32.3 -------- -------- -------- Profit before tax, intangibles asset amortisation*, 243.6 202.2 399.9restructuring and the impact of IAS 39 -------- -------- --------* - considered as goodwill under UK GAAP3. Taxation Six months Six months Year ended ended ended 31 March 2005 30 September 30 September ‚£m 2005 2004 ‚£m ‚£m Current tax: UK corporation tax (charge)/ (24.4) (2.2) 31.7credit Overseas tax (2.0) (0.7) (1.7) Tax on restructuring costs 2.6 - - -------- -------- -------- (23.8) (2.9) 30.0 Deferred tax: Gross movement in deferred tax (24.0) (52.1) (112.2) Prior period tax adjustments - - (23.6) Tax on restructuring costs and 1.5 0.5 9.7intangibles* -------- -------- -------- (22.5) (51.6) (126.1) -------- -------- -------- (46.3) (54.5) (96.1) -------- -------- --------4. Earnings per shareBasic earnings per share and diluted earnings per share are calculated bydividing profit for the period by the following weighted average number ofshares in issue: Basic Diluted (i) Period ended 30 September 2005 829.3 835.2 million million (ii) Period ended 30 September 2004 (restated) 780.4 853.9 million million (iii) Year ended 31 March 2005 (restated) 781.0 865.2 million million The 5 for 9 rights issue, structured so that the proceeds were received in twostages, was approved at the Extraordinary General Meeting (EGM) of shareholderson 26 August 2003. The first tranche of the proceeds, received during September2003, raised ‚£501.2 million (net of costs) from the issuing of 309,286,997 Ashares. The second tranche of proceeds received in June 2005 raised ‚£508.1million (net of costs), reflecting the subscription of 309,286,997 further Ashares. In July 2005, all A shares were then consolidated and reclassified asordinary shares on the basis of one ordinary share for two A shares.For the purposes of calculating the weighted average number of shares used inthe earnings per share calculations, the A shares have been treated as partpaid ordinary shares, two A shares being equivalent to one ordinary share, forthe period prior to their consolidation as ordinary shares in July 2005.The difference between the weighted average number of shares used in the basicand the diluted earnings per share calculations represents those ordinaryshares deemed to have been issued for no consideration on the conversion of allpotential dilutive ordinary shares in accordance with IAS 33 (Earnings PerShare).The basic and diluted weighted average number of shares have been restated forall periods prior to the second stage of the rights issue to reflect the bonuselement of the rights issue as required by IAS 33. The adjustment factor, basedon the consideration received from the second stage of the rights issue, is0.9122, calculated using 653.5p per ordinary share, being the closing price on27 June 2005, the last day on which A shares were traded with the rights.The basic and diluted earnings per share for the period are as follows: Six months Six months Year ended ended ended 31 March 2005 30 September 30 September 2005 2004 Basic earnings per share - continuing 13.9p 18.7p 34.8p - discontinuing (business held (13.2)p (0.8)p (1.2)pfor sale) -------- -------- -------- 0.7p 17.9p 33.6p -------- -------- -------- Diluted earnings per share - continuing 13.8p 17.1p 31.4p - discontinuing (business held (13.1)p (0.7)p (1.1)pfor sale) -------- -------- -------- 0.7p 16.4p 30.3p -------- -------- --------5. Adjusted basic earnings per shareAdjusted basic earnings per share has been calculated by dividing adjustedprofit for the period (see below) by the weighted average number of shares inissue.The adjusted profit for the period is calculated as follows: Six months Six months Year ended ended ended 31 March 2005 30 September 30 September ‚£m 2005 2004 ‚£m ‚£m Profit for the period 6.0 139.8 262.1 Business restructuring 8.8 - 29.7 Intangible asset amortisation* 5.0 1.5 2.6 Tax on restructuring and (4.1) (0.5) (9.7)intangibles* Discontinuing operations 109.6 6.4 9.4(business held for sale) Deferred taxation 24.0 52.1 135.8 Fair value loss on derivative 68.9 instruments (gross of current tax charge) -------- -------- -------- Adjusted profit for the period 218.2 199.3 429.9 -------- -------- --------* - considered as goodwill under UK GAAPThe adjusted basic earnings per share for the period is as follows: Six months Six months Year ended ended ended 31 March 2005 30 September 30 September 2005 2004 Adjusted basic earnings per share 26.3p 25.5p 55.0p6. Discontinuing operations (business held for sale)At this point, the Board's view is that the interests of Your Communicationsare best served by its participation in the current round of consolidation inits industry through a sale process. As the business is being actively marketedfor disposal and there is an expectation that a transaction will qualify forrecognition as a completed sale within one year, Your Communications meets thedefinition of a disposal group in accordance with IFRS 5 (Non-current AssetsHeld for Sale and Discontinued Operations) as adopted for use in the EU at 30September 2005 and therefore is classified as held for sale and a discontinuingoperation.In accordance with IFRS 5, the assets and liabilities of Your Communicationshave been adjusted to their fair value less estimated costs to sell. This hasresulted in a net reduction in the carrying value of Your Communications in theconsolidated balance sheet at 30 September 2005 of ‚£98.6 million.The results of the discontinuing operation (business held for sale), which havebeen disclosed separately in the consolidated income statement as required byIFRS 5, are as follows: Six months Six months Year ended ended ended 31 March 2005 30 September 30 September ‚£m 2005 2004 ‚£m ‚£m Revenue 98.2 122.7 233.6 Other net operating costs (110.0) (127.3) (238.4) -------- -------- -------- Operating loss before intangibles (11.8) (4.6) (4.8)* and adjustment to value Amortisation of intangible assets (3.4) (3.4) (6.7)* Adjustment to value (147.7) - - -------- -------- -------- Loss before tax (162.9) (8.0) (11.5) Taxation on revenues and costs 4.2 1.6 2.1 Taxation on adjustment to value 49.1 - - -------- -------- -------- Loss after tax (109.6) (6.4) (9.4) -------- -------- --------In accordance with IAS 36 (Impairment of Assets), the adjustment to carryingvalue of ‚£147.7 million has been allocated against intangible assets (‚£42.3million) and tangible assets (‚£105.4 million).The cash flows from the discontinuing operation (business held for sale), whichhave been disclosed separately in the consolidated cash flow statement asrequired by IFRS 5, are as follows: Six months Six months Year ended ended ended 31 March 2005 30 September 30 September ‚£m 2005 2004 ‚£m ‚£m Net cash flow from operating (2.6) (9.9) (15.9)activities Net cash flow from investing (4.6) (5.8) (12.6)activities -------- -------- -------- Net decrease in cash and cash (7.2) (15.7) (28.5)equivalents -------- -------- --------The significant classes of assets and liabilities classified as held for salein the consolidated balance sheet at 30 September 2005 are as follows: 30 September 2005 ‚£m Intangible assets 9.5 Property, plant and equipment 55.8 Inventories 9.6 Trade and other receivables 40.4 Retirement benefit asset 2.0 -------- Assets classified as held for sale 117.3 Trade and other payables (41.1) Provisions and non-current trade and other payables (0.3) -------- Liabilities classified as held for sale (41.4)7. Interest coverInterest cover is calculated as the number of times the interest charge for theperiod (excluding the impact of IAS 39) is covered by profit before intangibleasset amortisation*, restructuring costs, interest and tax.8. Dividend coverDividend cover is calculated by dividing profit for the period from continuingoperations before intangible asset amortisation*, restructuring costs and thepost-tax impact of IAS 39 by the dividends relating to the period.9. Dividend cover (pre deferred tax)Dividend cover (pre deferred tax) is calculated by dividing profit for theperiod from continuing operations before intangible asset amortisation*,restructuring costs, the post-tax impact of IAS 39 and deferred tax by thedividends relating to the period.* - considered as goodwill under UK GAAP10. Dividends Six months Six months Year ended ended ended 31 March 2005 30 September 30 September ‚£m 2005 2004 ‚£m ‚£m Dividends relating to the period comprise: Interim dividend 124.8 105.3 105.3 Final dividend - - 219.4 -------- -------- -------- 124.8 105.3 324.7 -------- -------- -------- Six months Six months Year ended ended ended 31 March 2005 30 September 30 September ‚£m 2005 2004 ‚£m ‚£m Dividends deducted from equity shareholders' funds (once authorised) comprise: Interim dividend - - 105.3 Final dividend 219.4 212.7 212.7 -------- -------- -------- 219.4 212.7 318.0 -------- -------- --------Prior period dividends per ordinary share have been re-presented forcomparative purposes to take account of the bonus element of the second stageof the rights issue. The factor applied to the prior period dividends is0.9342, which when combined with the factor applied for the first stage of therights issue of 0.9072 gives an overall adjustment factor of 0.8475. Thisoverall factor is calculated using 576.0 pence per ordinary share, being theclosing price on 25 July 2003, the last business day prior to the announcementof the rights issue.The interim dividend of 14.29 pence per ordinary share will be paid on 9February 2006 to shareholders on the register at the close of business on 23December 2005. The ex-dividend date for the interim dividend is 21 December2005.11. Reconciliations between IFRS and UK GAAPThe group adopted IFRS with a transition date of 1 April 2004. Comparativefigures for the year ended 31 March 2005 and 30 September 2004, which werepreviously reported in accordance with UK GAAP, have been restated to complywith IFRS.The rules for first time adoption of IFRS are set out in IFRS 1 (First TimeAdoption of International Financial Reporting Standards). IFRS 1 requires thatIFRS be applied retrospectively unless a specific exemption is applied. Inpreparing these IFRS consolidated financial statements, the group has adoptedthe following exemptions: * To apply IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS 39 (Financial Instruments: Recognition and Measurement) as adopted for use in the EU from 1 April 2005 (see note 1); * To establish a deemed cost for the opening balance sheet carrying value of the water and wastewater infrastructure fixed assets by reference to fair value at the date of transition to IFRS (1 April 2004); * To select 1 April 1999 as the date of adoption of IFRS 3 (Business Combinations). As a result of this decision the group must also apply IAS 38 (Intangible Assets) and IAS 36 (Impairment of Assets) from the same date; * To apply IFRS 2 (Share Based Payments) to those share options granted after 7 November 2002 that had not vested by 1 April 2004; * To deem cumulative translation differences for all foreign operations to be zero as at the opening IFRS balance sheet date; and * To recognise in full all actuarial gains and losses relating to pension schemes both at the opening balance sheet date and, prospectively, through the statement of recognised income and expense. A summary of the adjustments that affected profit after tax, shareholders'equity and net debt in both of these comparative periods is presented below: Six months Year ended ended 31 March 2005 30 September ‚£m 2004 ‚£m Profit after tax under UK GAAP 169.2 334.9 Adjustments: Infrastructure accounting 1.9 (27.0) Defined benefit pension schemes (1.7) 4.5 Deferred tax discounting (35.7) (65.6) Business combinations 3.0 5.4 Other 1.9 2.8 Tax impact of adjustments 1.2 7.1 -------- -------- Profit for the period under IFRS 139.8 262.1 -------- -------- 30 September 31 March 2005 2004 ‚£m ‚£m Shareholders' equity under UK GAAP 3,150.3 3,117.4 Adjustments: Infrastructure accounting (net of tax) 167.7 145.2 Defined benefit pension schemes (net of tax) (328.9) (331.6) Deferred tax discounting (922.1) (952.0) Business combinations (net of tax) (1.4) 2.9 Dividends 105.3 219.4 Other (59.9) (58.2) -------- -------- Shareholders' equity under IFRS 2,111.0 2,143.1 -------- -------- 30 September 31 March 2005 2004 ‚£m ‚£m Net debt under UK GAAP 3,795.7 4,141.1 Adjustments: Proportional consolidation of joint ventures 131.2 137.5 -------- -------- Net debt under IFRS 3,926.9 4,278.6 -------- --------A summary of the adjustments that affected profit for the year ended 31 March2005 and shareholders' equity as at 31 March 2005 was presented in the group's`International Financial Reporting Standards Adoption' announcement dated 19July 2005 which is available on the group's website, www.unitedutilities.com.The information presented in this announcement only differs from that presentedin July 2005 in that certain balance sheet and income statement items have beenreclassified.An explanation of the significant adjustments between UK GAAP and IFRS at 31March 2005 and 30 September 2004 is provided below:Infrastructure accountingThe most material impact of IAS 16 (Property, Plant and Equipment) relates tothe accounting for water and wastewater infrastructure assets within thegroup's licensed multi-utility operations. Under UK GAAP, these assets wereaccounted for in accordance with the renewals accounting paragraphs of FRS 15(Tangible Fixed Assets). Such provisions are not present within IAS 16 and itis therefore necessary to change the way in which the assets are accounted foron transition to IFRS.The accounting policies applied under UK GAAP in respect of all other fixedassets, including water non-infrastructure assets and the electricityinfrastructure network, are compliant with IFRS and continue to remainappropriate.Under renewals accounting the water and wastewater infrastructure networks areassumed to be single assets and the depreciation charged is the estimated levelof annual expenditure required to maintain the operating capability of thenetwork. Actual expenditure is then capitalised as incurred.In accordance with IAS 16 this treatment may not be applied. Therefore, thesignificant parts within the infrastructure networks have been identified and,for each, a useful life and residual value determined so that each segment maybe depreciated individually. The segments recognised within the water andwastewater networks have been based upon asset class (for example sewers, watermains and tunnels) since no single pipe or section of sewer is significantcompared to the total value of the networks. This has led to the identificationof 14 segments which have been assigned zero residual values at the end oftheir useful lives. The lives allocated to these segments range from 15 - 300years. This results in an additional charge of ‚£27.0 million and a credit of ‚£1.9 million in the IFRS results for the periods ended 31 March 2005 and 30September 2004 respectively when compared with UK GAAP.As the UK GAAP net book value of the infrastructure network was determinedusing an accounting policy not compliant with IFRS a deemed cost has beenestablished for the opening balance sheet carrying value of the infrastructurenetworks by reference to the fair value at the date of transition, 1 April 2004(as permitted by IFRS 1). The election to record the carrying value of thewater and wastewater infrastructure networks at fair value, and to use thatfair value as the deemed cost in the opening IFRS balance sheet, increases netassets by ‚£145.2 million and ‚£167.7 million (net of deferred tax) as at 31March 2005 and 30 September 2004 respectively compared with UK GAAP.Defined Benefit Pension SchemesThe group prepared its year ended 31 March 2005 UK GAAP results in accordancewith SSAP 24 (Accounting for Pension Costs), with FRS 17 (Retirement Benefits)transitional disclosures provided in the notes to the accounts. Under SSAP 24,any pension scheme surplus or deficit identified at the most recent actuarialvaluation is recognised gradually through the profit and loss account over theaverage expected future working lifetime of current employees. The net pensioncost under SSAP 24 therefore includes both the cost of providing an additionalyear of pension benefits to employees (regular cost) and an element of thesurplus / deficit relating to previous years (variation).The difference between employer's contributions paid and the SSAP 24 netpensions cost is recognised as a prepayment/accrual, resulting in a balancesheet position that does not necessarily reflect the actuarial position.Interest is calculated on this balance sheet entry and is also included withinthe net pension cost.In accordance with IAS 19 (Employee Benefits), any legal and constructiveobligation for post employment benefit plans must be immediately recognised asan asset or liability on the balance sheet. Where actual experience differsfrom the assumptions made at the start of a financial year, actuarial gains andlosses will be recognised through the statement of recognised income andexpense. Defined benefit assets are measured at fair value while liabilitiesare measured at present value. The difference between the two amounts isrecognised as an asset or liability in the balance sheet.The cost of providing pension benefits to employees relating to the currentyear's service and the expected return on scheme assets and interest on schemeliabilities are included within employee costs in the income statement.All actuarial gains and losses as at 1 April 2004, the date of transition toIFRS, were recognised in full. All future actuarial gains and losses arerecognised outside the income statement in retained earnings and presented inthe statement of recognised income and expense.The adoption of IAS 19 increases the year ended 31 March 2005 profit before taxby ‚£4.5 million and reduces the period ended 30 September 2004 profit beforetax by ‚£1.7 million compared with UK GAAP. The derecognition of the UK GAAPSSAP 24 prepayment reduces net assets at 31 March 2005 by ‚£272.4 million (netof deferred tax). This prepayment reflects the lump sum payment of ‚£320 million(pre tax) made at 31 March 2005. Net assets are then further reduced at 31March 2005 by the recognition of the IAS 19 deficit of ‚£59.2 million (net ofdeferred tax). The reduction in net assets at 30 September 2004 on adoption ofIAS 19 is ‚£328.9 million.The final price determinations for both water and electricity make explicitallowance for funding of the relevant elements of the pension scheme deficit.Deferred tax discountingThe major impact of IAS 12 (Income Taxes) for the group relates to discountingof deferred tax not being permitted. FRS 19 (Deferred Tax) permits, but doesnot require, a deferred tax asset or liability to be discounted and as a resultthe group has been able to apply a policy of discounting its deferred taxliability. However, IAS 12 does not permit discounting in any circumstances.This is of particular significance to a utility business where any reversal oftiming differences is likely to be deferred long into the future due to thelong asset lives of network assets.The inability to discount results in an increase in the balance sheet deferredtax liability of ‚£952.0 million and ‚£922.1 million at 31 March 2005 and 30September 2004 respectively and consequently a reduction in net assets.The final price determinations for both water and electricity set pricesallowing for tax on an anticipated cash basis and are therefore unaffected bydeferred tax.Business combinationsUnder IFRS, the recognition test for intangible assets acquired in businesscombinations is less restrictive than that of UK GAAP, and therefore moreintangible assets will be separately identified from goodwill. FRS 10 (Goodwilland Intangible Assets) requires an intangible asset to be controlled by theentity through custody or legal rights and to be capable of disposal separatelyfrom the business. By contrast IAS 38 (Intangible Assets) does not require anintangible asset to be separable from the entity if its ownership can bedemonstrated through contractual or legal rights.Goodwill is not amortised under IFRS, but rather subject to annual impairmentreviews. Therefore, although it may be possible to carry goodwill for longer ifthe future cashflows are strong, there is the potential for increasedvolatility to be introduced to the income statement.Intangible assets (other than goodwill) are stated at cost less accumulateddepreciation and are amortised over their useful lives on a straight linebasis.In accordance with IFRS 1 all business combinations prior to 1 April 1999 havebeen accounted for in accordance with UK GAAP applicable at the date ofacquisition. All combinations completed subsequent to that date are recorded inaccordance with IFRS.IFRS 3 (Business Combinations) has a minimal impact on the net assets of thegroup, with the reduction in goodwill broadly offset by the recognition ofnewly identified intangible assets from business combinations (mainly relatingto customer lists and contracts). However, IAS 12 (Income Taxes) requires adeferred tax liability to be created for any transfers from goodwill tointangible fixed assets. This deferred tax liability results in an increase inthe goodwill arising on business combinations of ‚£13.8 million and ‚£12.4million as at 31 March 2005 and 30 September 2004 respectively.Since goodwill is no longer being amortised, the year ended 31 March 2005amortisation charge reduces by ‚£7.5 million. Operating profit is furtherreduced by ‚£2.1 million due to the reversal of goodwill amortisation relatingto businesses disposed of in 2004/05. The period ended 30 September 2004amortisation charge reduces by ‚£3.0 million.DividendsIAS 10 (Events After the Balance Sheet Date) and SSAP 17 (Accounting for PostBalance Sheet Events) both distinguish `adjusting events' from `non-adjustingevents' with similar definitions and applications. However, under IAS 10dividends may not be recognised until they have been appropriately authorisedand are no longer at the discretion of the company. Therefore, if this occursafter the balance sheet date, the dividends are not recognised as a liabilityat the balance sheet date. However, they are disclosed in the notes to theaccounts in accordance with IAS 1 (Presentation of Financial Statements).Therefore, the final dividend of ‚£219.4 million included within the year ended31 March 2005 UK GAAP financial statements and the interim dividend of ‚£105.3million included within the period ended 30 September 2004 UK GAAP results arederecognised, thereby increasing the net assets of the group.Furthermore, dividends are no longer recognised within the income statement andare instead reported in the statement of recognised income and expense.Proportional consolidation - joint venturesJoint ventures are entities in which United Utilities PLC holds an interest ona long-term basis and which are jointly controlled with one or more partiesunder a contractual arrangement. For the purposes of UK GAAP, FRS 9 (Associatesand Joint Ventures) requires joint ventures to be accounted for in theconsolidated financial statements using the gross equity method. IAS 31(Interests in Joint Ventures) does not permit gross equity accounting andinstead presents the options of equity accounting or proportionalconsolidation.The group has elected to apply proportional consolidation on adoption of IAS31, as the most representative accounting treatment of the group's activities.This enables the group to include its share of joint venture results, balancesheet and cashflows within each line item of the consolidated financialstatements.Proportional consolidation does not affect operating profit, profit before taxor net assets. However, proportional consolidation does have a material impacton certain individual balance sheet captions: most noticeably an increase of ‚£206.0 million and ‚£205.0 million in property, plant and equipment and increasednet debt of ‚£137.5 million and ‚£131.2 million as at 31 March 2005 and 30September 2004 respectively, which is typically non-recourse to the group.Other differencesThe main other differences are: * the impact of fair valuing share options granted after 7 November 2002 in accordance with IFRS 2 (Share Based Payments); * the reclassification of software costs from tangible to intangible fixed assets in accordance with IAS 38 (Intangible Assets); * the reclassification of long-term contract balances in accordance with IAS 11 (Construction Contracts); * amended depreciation and amortisation resulting from the application of IAS 36 (Impairment of Assets); and * the deferred tax impacts of these adjustments including the recognition of a ‚£55.3 million and ‚£55.8 million deferred tax liability as at 31 March 2005 and 30 September 2004 respectively relating to fair value adjustments on previous acquisitions. With the exception of deferred tax, the impact of these adjustments on profitbefore tax and net assets, both individually and in aggregate, is notconsidered to be material although the impact of IFRS 2 will increase goingforward as more awards fall within its scope.CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSThis interim results statement contains certain forward-looking statements withrespect to the financial condition, results of operations and business of thecompany.Statements that are not historical facts, including statements about thecompany's beliefs and expectations, are forward-looking statements within themeaning of the US Private Securities Litigation Reform Act of 1995. Words suchas "expects", "anticipates", "intends", "plans", "believes", "seeks","estimates", "potential", "reasonably possible" and variations of these wordsand similar expressions are intended to identify forward-looking statements.These statements are based on current plans, assumptions, estimates andprojections which may be significantly varied, and therefore investors shouldnot rely on them. Forward-looking statements involve known and unknown risksand speak only as of the date they are made, and except as required by therules of the UK Listing Authority and the London Stock Exchange, the companyundertakes no obligation to update publicly any of them in the light of newinformation or future events.Forward-looking statements involve inherent risks and uncertainties. UnitedUtilities PLC cautions investors that a number of important factors could causeactual results to differ materially from those anticipated or implied in anyforward-looking statements. These factors include: (i) the effect of, andchanges in, regulation and government policy; (ii) the effects of competitionand price pressures; (iii) the ability of the company to achieve cost savingsand operational synergies; (iv) the ability of the company to service itsfuture operations and capital requirements; (v) the timely development andacceptance of new products and services by the company; (vi) the effect oftechnological changes; and (vii) the company's success at managing the risks ofthe foregoing. The company cautions that the foregoing list of importantfactors does not address all the factors that could cause the results to differmaterially.INDEPENDENT REVIEW REPORT TO UNITED UTILITIES PLCIntroductionWe have been instructed by the company to review the financial information forthe six months ended 30 September 2005 which comprises the consolidated incomestatement, the consolidated balance sheet, the consolidated cash flowstatement, the consolidated statement of recognised income and expense, thereconciliation of movements in consolidated equity, the reconciliation of netcash flow to movement in net debt, cash generated by continuing operations, thesegmental analysis by class of business and the related notes 1 to 11. We haveread the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information.This report is made solely to the company in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone otherthan the company, for our review work, for this report, or for the conclusionswe have formed.Directors' responsibilitiesThe interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed.International Financial Reporting StandardsAs disclosed in note 1, the next annual financial statements of the group andthe company will be prepared in accordance with International FinancialReporting Standards as adopted for use in the EU. Accordingly, the interimreport has been prepared in accordance with the recognition and measurementcriteria of IFRS and the disclosure requirements of the Listing Rules. Theaccounting policies are consistent with those that the directors intend to usein the annual financial statements.Review work performedWe conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management andapplying analytical procedures to the financial information and underlyingfinancial data and, based thereon, assessing whether the accounting policiesand presentation have been consistently applied unless otherwise disclosed. Areview excludes audit procedures such as tests of controls and verification ofassets, liabilities and transactions. It is substantially less in scope than anaudit performed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information.Review conclusionOn the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 September 2005.Deloitte & Touche LLPChartered AccountantsManchester1 December 2005ENDUNITED UTILITIES PLC

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