United Utilities Group PLC
25 November 2009
HALF YEARLY FINANCIAL REPORT for the SIX MONTHS ended 30 SEPTEMBER 2009
£m Six months ended
(continuing operations) 30 September 2009 30 September 2008
(restated)**
Operating profit* 358.9 359.4
Underlying operating profit*, 369.9 365.9
***
Profit before tax* 206.1 305.8
Underlying profit before tax 268.2 252.6
*, ***
Pence Six months ended
(continuing operations) 30 September 2009 30 September 2008
(restated)**
Basic earnings per share*, ** 29.1 0.6
**
Interim dividend per ordinary 11.17 10.64
share
* The contributions from the group's investments in Northern Gas Networks
Holdings Limited and Manila Water Company have been included in continuing
operations.
** In accordance with International Financial Reporting Standards, IFRIC 12
'Service Concession Arrangements' is applied retrospectively hence the prior
period has been restated
***Underlying operating profit and underlying profit before tax are defined in
the underlying profit measure tables on page 13
****One-off factors affecting EPS are explained in the earnings per share
section on page 10
* Sound results in a difficult economic environment: underlying operating
profit of £370 million
* Customer satisfaction continues to increase: now at highest level for many
years
* Taking action to improve overall performance: OPA score on track to improve
significantly
* Agreed divestment of holdings in Northern Gas Networks and Manila Water for
c£130 million
* Group plans to assess further opportunities to crystallise value from its
non-regulated business
* Interim dividend increased by 5.0% to 11.17 pence per share, in line with
policy
Commenting, Philip Green, Chief Executive, said:
"This is a sound set of results in a challenging economic climate. We have
delivered an underlying operating profit of £370 million in the half year and
have continued to make high levels of investment in our water and wastewater
infrastructure.
"We responded rapidly to the recent exceptional weather conditions in Cumbria,
with hundreds of our engineers working alongside the emergency services to help
maintain vital water and power supplies. This remains a very difficult time for
our customers and we will continue to work hard in the affected communities in
the aftermath of the floods.
"Improving operational performance remains high on our agenda and the business
is on course to meet its regulatory leakage target for the fourth consecutive
year. In addition, overall service performance, as measured by Ofwat's OPA
score, is on track to improve significantly this year.
"Our aim is to keep customer bills affordable whilst continuing with essential
investment in our infrastructure. In September, we submitted our
representations to Ofwat on the regulator's draft price limit proposals for
2010-15. Tomorrow, Ofwat is due to publish its final determination of prices
and we have a two month period in which we will consider the proposals
carefully before responding.
"We have agreed the disposals of our holdings in Northern Gas Networks and
Manila Water, for approximately £130 million. Following these divestments, the
group plans to assess further opportunities to crystallise value from its
non-regulated business.
"We expect to deliver a sound underlying financial performance over the
remainder of 2009/10, despite facing ongoing revenue and cost pressures. In
line with our policy the board has declared an interim dividend of 11.17 pence
per share, an increase of five per cent."
For further information on the day, please contact:
Philip Green - Chief Executive +44 (0) 20 7307 0300
Tim Weller - Chief Financial Officer +44 (0) 20 7307 0300
Gaynor Kenyon - Communications Director +44 (0) 7753 622282
Darren Jameson - Head of Investor Relations +44 (0) 7733 127707
James Bradley / Tom Murray - Tulchan Communications +44 (0) 20 7353 4200
A presentation to investors and analysts starts at 9.00 am on Wednesday 25
November 2009, at the Auditorium, Deutsche Bank, Winchester House, 1 Great
Winchester Street, London, EC2N 2DB. The presentation can be accessed via a
live listen in conference call facility by dialling: +44 (0) 20 7162 0025,
access code 850308. A recording of the call will be available for seven days
following 25 November 2009 on +44 (0) 20 7031 4064, access code 850308.
This half yearly financial report announcement and the associated presentation
will be available on the day at: http://www.unitedutilities.com
CHIEF EXECUTIVE'S REVIEW
Financial performance
United Utilities has delivered a sound set of financial results for the six
months ended 30 September 2009. Revenue from continuing operations rose by £6
million to £1,210 million. Underlying operating profit increased by 1% to £370
million. Underlying profit before tax increased by 6% to £268 million,
including the effect of a lower underlying cost of net borrowings.
Operating profit in our regulated activities was broadly in line with the first
half of last year at £348 million on an underlying basis. This result primarily
reflects the price increase allowed by our regulator, offset as expected by
reduced water demand and ongoing cost pressures, alongside an increase in
depreciation. The price increase supports the high levels of essential
investment in our assets, which helps the business meet strict environmental
standards and deliver an improved service for our customers.
Capital expenditure in our regulated water and wastewater business amounted to
£296 million during the half year, including infrastructure renewals
expenditure. This level of spend is consistent with our planned investment
profile for the final year of the current 2005-10 capital expenditure
programme.
Our business improvement initiatives are delivering benefits, although cost
pressures in areas such as power and bad debts are continuing in 2009/10. The
company has a continuing focus on cost efficiency and is implementing a range
of cost control measures across the group, as we aim to lower the cost to serve
our customers whilst maintaining and improving levels of service. These
initiatives have largely mitigated the increases in power costs, bad debts and
property rates, with further savings expected.
A year ago we launched our workforce management project on time and below
budget. This integrated system is a key initiative in increasing productivity
by using real time data across the workforce to enable more effective work
scheduling. The system is now delivering efficiency benefits, coupled with
improvements in operational performance. Total cost savings in the order of £7
million per annum are expected to be realised in full during 2010/11. In
addition, we have identified further benefits which should increase the total
annual savings to £9 million thereafter.
We have delivered an increased underlying operating profit of £28 million in
our non-regulated business. We continue to be the leading utility
infrastructure outsourcing business in the UK.
The group benefits from headroom to cover its projected financing needs through
to early 2012. During the first half of the year we enhanced our liquidity
through the issuance of an additional £100 million, 5.75% bond maturing in
March 2022; an additional £50 million, 6.125% bond maturing in December 2015;
and a new £70 million, 2.40%+RPI index-linked bond maturing in July 2039. This
provides us with good flexibility in terms of when and how we raise further
debt finance.
Operational performance
Improving operational performance is a key area of focus for the group and we
are pleased to report further progress. The business is on track to meet its
regulatory leakage target for the fourth consecutive year and customer
satisfaction continues to increase and is now at its highest level for many
years.
Since 2005, we have narrowed the operational efficiency gap to the most
efficient water companies and this has been reflected in Ofwat's relative
efficiency assessments. We expect at least to sustain these efficiency ratings
for 2008/09.
We continue to remove properties from our sewer flooding register. Ofwat has
published a review of how registers of properties at risk of sewer flooding are
compiled and reported in the water sector in England and Wales. Following
discussions with Ofwat regarding our methodology and processes in this area we
have reassessed the number of properties on our register, increasing both the
current position and the start point in 2005/06. These reassessed numbers
indicate a net reduction of 101 properties over this three year period and we
have plans in place to offer mitigation measures to all properties on the
register.
Although we are encouraged by the tangible progress we have made, we do
recognise that there is more to do and the business is taking steps to improve
overall service performance. We initiated a capital investment programme at
Fleetwood wastewater treatment works over a year ago and this programme is
scheduled to be completed by summer 2010. We also have plans to introduce an
enhanced online monitoring system to help improve performance in respect of
meeting consent standards at our wastewater treatment works.
Improving our response to customer contacts, in particular billing enquiries,
is another key area of focus and we have introduced new working practices to
enhance our performance. Regulatory targets are monitored more closely,
providing better information and enabling us to allocate resources more
effectively to help meet these targets. Early progress is encouraging.
We expect a significant improvement in our overall performance assessment (OPA)
score for 2009/10 and the management actions we are taking should have a
positive impact on our performance as measured by Ofwat's new service incentive
mechanism, which is scheduled to be introduced in 2010/11.
Disposals of investments
We have agreed the disposals of our holdings in Northern Gas Networks and
Manila Water Company, to existing shareholders, for a combined price of
approximately £130 million and we intend to retain the proceeds within the
group.
Regulatory developments
In April 2009, United Utilities Water PLC (UUW) submitted its final business
plan for the 2010-15 period to Ofwat. On 23 July 2009, Ofwat published its
draft determination of price limits for this five-year period. We responded to
the draft determination in September and engaged with a broad range of
stakeholders to ensure their views were conveyed to Ofwat. The next stage in
the process is the publication by Ofwat of its final determination on 26
November 2009.
The final determination will not take account of potential additional
investment in respect of the North East Irish Sea, which is dependent on a
European court case decision involving the UK government scheduled for 10
December 2009. This is a complex issue and would require subsequent
interpretation in terms of costs and outputs. If additional work is required,
it is likely to be the subject of a further price determination as it would
mean UUW investing in nutrient removal at many of its larger wastewater
treatment works to improve the quality of discharges to the marine environment.
Outlook
We expect to deliver a sound underlying financial performance over the
remainder of 2009/10, although the company is experiencing ongoing revenue and
cost pressures. United Utilities has a healthy level of headroom to cover its
projected financing needs through to early 2012. We will continue with our
strong focus on operational performance and aim to build on the improvements
already achieved. In line with the group's policy, the board expects to grow
the final dividend for 2009/10 by 5%.
Following the divestments of United Utilities' stakes in Northern Gas Networks
and Manila Water Company, the group plans to assess further opportunities to
crystallise value from its non-regulated business.
Ofwat is scheduled to publish its final determination of price limits, for the
2010-15 period, on 26 November 2009. We then have a two month period, until
late January 2010, in which we will consider the final proposals carefully
before responding.
OPERATING PERFORMANCE
REGULATED ACTIVITIES
Financial highlights
* Regulated revenue increased by 2% to £769 million
* Regulated underlying operating profit broadly in line with comparative
period at £348 million
Revenue from regulated activities increased by 2% to £769 million, principally
as a result of an allowed price increase of 6.0% (including inflation of 3.0%),
partially offset, as expected and indicated previously, by reduced water demand
reflecting the challenging economic climate. The regulated price increase
supports significant investment in UUW's infrastructure which provides vital
water and wastewater services to customers.
Underlying operating profit for the period was broadly in line with the first
half of last year, primarily reflecting the revenue increase, offset by higher
depreciation, property rates, bad debts and power costs. The increase in
depreciation reflects the recent high levels of capital spend, in line with the
planned profile of the investment programme. Reported operating profit was
marginally lower than the corresponding period last year, reflecting one-off
costs of approximately £4 million which principally relate to restructuring
within the business.
In line with UUW's policy, the business had entered into forward contracts for
the majority of its power requirements for 2009/10. As a result, unit power
costs in 2009/10 are approximately 10% higher than in 2008/09 and, coupled with
a volume impact, power expense has increased by around £4 million. Bad debt
expense has marginally increased compared with the prior period and now
represents a slightly higher proportion of regulated revenue at 3.6%. This
compares with 3.4% in the year ended 31 March 2009 and reflects the impact of
the tough economic environment on cash collection rates.
Capital investment in the period, including £58 million of infrastructure
renewals expenditure, was £296 million. This level of spend is in line with the
planned capital investment profile, with UUW now in the final year of its
2005-10 regulatory programme.
Operational performance
Operational performance is a key area of focus and UUW is targeting an upper
quartile position among UK water companies on key operational measures in the
medium-term. The regulated business continues to upgrade its infrastructure,
replacing 64 kilometres of water mains during the period. UUW continues to
supply high quality drinking water with a mean zonal compliance water quality
performance for the year to date of 99.95%, which compares with 99.92% for the
previous year. UUW is making good progress against its key performance
indicators:
* Relative efficiency - UUW has narrowed the operational efficiency gap to
the most efficient water companies since 2005. This is reflected in Ofwat's
most recent (2007/08) assessment of United Utilities as band B for the
water service and band C for the wastewater service and represents a one
band improvement for both services over this period. UUW expects at least
to sustain these bandings in Ofwat's 2008/09 assessment.
* Security of water supply - UUW has met its economic level of leakage
rolling target for the last three years and is on course to meet its
regulatory target for the fourth consecutive year in 2009/10.
* Pollution - The business has now met or outperformed its medium-term target
of a 50% reduction in major pollution incidents in each of the last three
years. One water and ten wastewater Category 1&2 incidents were recorded in
2008 compared with the base position of two water and 21 wastewater
incidents in 2005. UUW is on track to meet this target for the fourth
consecutive year.
* Sewer flooding - UUW continues to remove properties from the sewer flooding
register. Earlier in the year, an independent review of UUW's sewer
flooding recording and reporting process was undertaken and the report
submitted to Ofwat for consideration. The independent reviewer concluded
that the processes are generally fit for purpose with some scope for
streamlining and further improvement. UUW has agreed to implement changes
required by Ofwat as a result of this review. The company has now
reassessed its sewer flooding registers. This shows 990 properties on the
register in 2008/09 (for properties at risk of experiencing at least one
sewer flooding incident in ten years), which compares with a reassessed
number for 2005/06 of 1,091 properties, a net reduction of 101 properties
over the three year period. The company has plans in place to reduce the
number of incidents due to sewer flooding (other causes) and to offer
mitigation measures to all properties on the register.
* Overall customer satisfaction - Significant improvements have been
delivered. Overall customer satisfaction, in response to enquiries, has
improved from less than 50% in 2005 to consistently over 70%. These
satisfaction levels are based on a comprehensive independent survey
conducted on behalf of UUW each month. Further progress has been achieved
and customer satisfaction is now at its highest levels for many years, with
a satisfaction rating of 78% for the 12 months to 30 September 2009. The
rating for October 2009 was 83%, the highest score attained for an
individual month, and the business remains focused on achieving further
improvements.
Although UUW has delivered real progress, the business recognises that there is
more to do. As indicated previously, sewer flooding incidents, together with
environmental underperformance at Fleetwood wastewater treatment works,
negatively impacted the 2008/09 OPA score.
UUW initiated a capital investment programme at Fleetwood works over a year ago
and this programme is scheduled to be completed by summer 2010. The business
also has plans to introduce an enhanced monitoring system across the company's
wastewater treatment works to help improve performance in respect of meeting
consent standards at its works. With regard to sewer flooding, the business has
identified those areas of its sewer network which are high risk with the
potential to have a major flooding impact and is allocating operational
resources more effectively to help mitigate these risks.
Improving the company's response to customer contacts is another key area of
focus, in particular billing enquiries. We have introduced new working
practices to help improve our performance and early progress is encouraging.
Regulatory targets are monitored more closely and managers now have better
information and the flexibility to reallocate resources to help meet these
targets. The more complex work has also been brought back in-house, giving the
business greater control to resolve issues and help meet its targets.
The business expects a significant improvement in its OPA score for 2009/10 and
the actions being taken should have a positive impact on UUW's performance as
measured by Ofwat's new service incentive mechanism, due to be introduced in
2010/11.
Efficiency initiatives
UUW's efficiency initiatives are progressing well, although the business is
facing ongoing cost pressures in areas such as power and bad debts.
The company's principal efficiency initiatives include an integrated
performance management project, which increases remote operational site
management and optimises chemical and power usage, and its asset improvement
programme which is improving the efficiency of operational pumps. These schemes
are key elements of United Utilities' plan to mitigate its carbon emissions,
alongside its combined heat and power assets which recycle energy generated
from wastewater treatment processes. Earlier in the year, UUW was awarded
funding from Defra to convert biogas, a by-product of the sludge treatment
process, into bio-methane for vehicle fuel. There is potential in the future to
export biogas into the national gas distribution network.
Other key initiatives include supply chain management, which has been
centralised and is delivering procurement economies, and a workforce management
project. There is a strong drive to improve customer service and the business
is focusing on reducing the number of customer queries, improving staff
productivity and implementing improved cash collection procedures.
The company has a strong focus on cost efficiency and is implementing a range
of cost control initiatives, as the business aims to lower the cost to serve
its customers whilst maintaining and improving levels of service. These
initiatives have largely mitigated the increases in power costs, bad debts and
property rates, with further savings expected.
The workforce management system, implemented a year ago on time and below
budget, is a key element in improving the efficiency of frontline staff. The
system is now delivering the dual benefits of reducing the cost to serve and
improving customer satisfaction. The business has halved the time taken to
resolve poor water supply issues and cost savings of approximately £7 million
per annum are expected to be realised in full during 2010/11. In addition,
further benefits have been identified which will increase the total annual
savings to £9 million thereafter.
2009 water price review
UUW submitted its final water and wastewater business plan, covering the
2010-15 period, to Ofwat in April 2009. On 23 July 2009 Ofwat published its
draft determination of prices for this five-year period, which for UUW
included:
* a £3.4 billion capital investment programme (2007/08 prices);
* an average annual underlying operating efficiency of 1.8% for the water
service and 2.4% for the wastewater service;
* a return on capital of 4.5% (post-tax, real); and
* an average annual real price decrease of 0.6% across the five-year period,
with a real price decrease of 6.3% in the first year.
UUW formally responded to the regulator's draft proposals in September 2009 and
has been in discussions with Ofwat, having engaged with a broad range of
stakeholders to ensure their views were conveyed to the regulator. The next
stage of the price review process is publication of the final determination by
Ofwat on 26 November 2009. Water companies have until late January 2010 to
decide whether to accept the final determination, or alternatively have it
referred to the Competition Commission to be re-determined. UUW will consider
the regulator's final proposals carefully before responding.
The final determination will not take account of potential additional
investment in respect of the North East Irish Sea, which is dependent on a
European court case decision involving the UK government scheduled for 10
December 2009. This is a complex issue and would require subsequent
interpretation in terms of costs and outputs. If additional work is required,
it is likely to be the subject of a further price determination as it would
mean UUW investing in nutrient removal at many of its larger wastewater
treatment works to improve the quality of discharges to the marine environment.
NON-REGULATEDACTIVITIES
Financial highlights
* Non-regulated revenue marginally down to £437 million
* Non-regulated underlying operating profit increased by £5 million to £28
million
Non-regulated revenue was marginally lower at £437 million, reflecting the
impact of difficult conditions in the UK property market on the group's utility
connections business. The business has implemented tight cost control measures.
Underlying operating profit increased by £5 million, compared with the first
half of last year (restated in accordance with IFRIC 12 as explained in the
accounting policies section on page 12). Reported operating profit was £26
million and this included one-off costs of approximately £2 million, which
principally relate to restructuring within the business.
Business update
United Utilities is the leading utility infrastructure outsourcing business in
the UK, applying the core utility skills from its regulated activities. United
Utilities holds major outsourcing contracts working on behalf of Dwr Cymru
Welsh Water, Southern Water, Scottish Water, Electricity North West, Northern
Gas Networks and British Gas Trading (meter installation).
United Utilities also has a meter ownership contract with British Gas Trading
which provides a revenue stream to the group through rental income once the
meters have been installed. In addition, United Utilities has three Scottish
PFI operations and operations in Bulgaria, Estonia, Poland and Australia.
The contract with Scottish Water, via Scottish Water Solutions Limited in which
United Utilities is a major partner, is expected to come to a natural end in
March 2010.
In June 2009, United Utilities, via the 4D consortium, won a new capital
delivery contract with Southern Water to manage the design and build of a new
wastewater treatment works in the Brighton and Hove area. The contract has now
commenced and the construction phase is expected to take approximately three
years, followed by the potential for a two-year contract to operate and
maintain the new plant.
Earlier this month, United Utilities agreed the disposals of its 15.0% stake in
Northern Gas Networks and its 11.7% holding in Manila Water Company, to
existing shareholders, for a combined price of approximately £130 million,
enabling the group to crystallise value from these investments. The Northern
Gas Networks divestment has now been completed and completion of the Manila
Water Company transaction is expected by the end of 2009. The contribution in
dividends from United Utilities' investments in Northern Gas Networks and
Manila Water Company was just over £12 million for the year ended 31 March
2009, the vast majority of which was received in the second half of the year.
United Utilities plans to assess further opportunities to crystallise value
from its non-regulated business.
ALL OTHER SEGMENTS
As expected, the group's other activities, which include central costs,
delivered an underlying operating loss during the half year of £6 million,
compared with an underlying operating loss of £5 million in the corresponding
period last year, reflecting a minimal contribution from United Utilities
Property Solutions (UUPS). As indicated previously, the difficult conditions in
the UK property market have affected the performance of UUPS, the property
sales and management business of the group.
The reported operating loss for other activities was £12 million, reflecting
one-off costs incurred in the half year of approximately £5 million. These
costs principally relate to restructuring within the business.
FINANCIAL PERFORMANCE
Investment income and finance expense
Finance expense of £163 million was £58 million higher than the corresponding
period last year. This expense included £63 million of net fair value losses on
debt and derivative instruments, compared with £31 million of net fair value
gains in the first half of last year. This volatility in financing expense
reflects the fact that, in order to provide a hedge of the interest cost
implicit in the regulatory period, the group fixes interest rates for the
duration of each five-year review period for the majority of its debt using
interest rate swaps. IAS 39 limits the use of hedge accounting for these
commercial hedges, thereby increasing the potential volatility of the income
statement. In addition, the impact of changes in credit spreads on debt
accounted for at fair value through profit or loss can result in significant
additional volatility and this is the principal reason for the large net fair
value movement in the period. However, this volatility in fair values has no
cashflow impact. Interest expense on swaps and debt under the fair value option
was £12 million, compared with £8 million in the comparative period.
Investment income was £10 million, compared with £51 million in the
corresponding prior period, principally reflecting a reduction in cash
following the return of approximately £1.5 billion to shareholders in the
previous financial year. The underlying cost of net borrowings for continuing
operations of £93 million was £6 million lower than the prior period. This
reflects a reduction in the group's average net borrowing rate from around 5.7%
to 3.8% partly offset by higher average net debt, primarily due to the return
of approximately £1.5 billion to shareholders in August 2008. The group has
just over £2 billion of index-linked debt and the reduction in finance expense
primarily reflects lower RPI. In a period of RPI deflation, the principal
amount of the index-linked debt is adjusted downwards, reducing interest
expense in the income statement. During the six months ended 30 September 2009,
indexation of the principal of index-linked debt amounted to a net credit in
the income statement of £8 million compared with a charge of £38 million in the
comparative period.
Profit before taxation
Underlying profit before taxation was £268 million, 6% ahead of the results for
the six months ended 30 September 2008. This underlying measure adjusts for the
impact of one-off items, fair value movements in respect of debt and derivative
instruments and the short-term interest benefit in the first half of last year
associated with the cash proceeds from the sale of United Utilities Electricity
(UUE), prior to the £1.5 billion return to shareholders. Reported profit before
taxation decreased by 33% to £206 million as a result of the £63 million of
fair value losses compared with £31 million of fair value gains in the prior
period, reflecting the movement in credit spreads on the group's debt.
Taxation
The group received a cash tax inflow for the half year of £51 million,
following agreement with UK tax authorities of prior years' tax returns.
The current tax charge relating to continuing operations was £20 million and
the current tax effective rate was 10%, compared with 24% in the prior period.
The current tax charge included a £35 million credit in relation to the
agreement with the tax authorities of prior years' tax returns.
In the corresponding period last year, the group recognised a one-off deferred
tax charge of £214 million relating to the abolition of industrial buildings
allowances with a cash impact expected to be spread over a period of
approximately 20 years. This one-off item resulted in a significant increase in
the effective tax rate for the prior period.
The group has recognised a net deferred tax credit relating to continuing
operations of £12 million compared with a deferred tax charge in the first half
of last year of £228 million. This included a £16 million credit in relation to
the agreement with the tax authorities of prior years' tax returns.
An overall tax charge of £8 million relating to continuing operations has been
recognised for the six months ended 30 September 2009. Excluding the impact of
prior years' adjustments and the abolition of industrial buildings allowances,
the total tax charge relating to continuing operations would be £59 million or
29% compared with a £88 million charge or 29% in the corresponding prior
period.
Earnings per share
Basic earnings per share relating to continuing operations increased from 0.6
pence to 29.1 pence, principally reflecting the one-off deferred tax charge of
£214 million in the comparative period relating to the abolition of industrial
buildings allowances (equivalent to 31.3 pence per share). The adjustments
relating to the agreement of prior years' tax returns increased earnings per
share by 7.5 pence in the six months ended 30 September 2009.
Dividend per share
The board has declared an interim dividend of 11.17 pence per ordinary share in
respect of the six months ended 30 September 2009. This is an increase of 5.0%,
in line with the group's dividend policy of a target real growth rate of
RPI+2.0%. The inflationary increase of 3.0% is based on the RPI element
included within the allowed regulated price increase for UUW for the 2009/10
financial year (i.e. the movement in RPI between November 2007 and November
2008).
The interim dividend is expected to be paid on 3 February 2010 to shareholders
on the register at the close of business on 18 December 2009. The ex-dividend
date is 16 December 2009.
Cashflow
Cash generated from the group's continuing operations for the six months ended
30 September 2009 was £497 million, compared with £431 million in the
corresponding period last year. The group's capital expenditure on property,
plant and equipment for the period was £283 million, principally in the
regulated water and wastewater investment programmes. This excludes
infrastructure renewals expenditure which is treated as an operating cost under
International Financial Reporting Standards.
Net debt including derivatives at 30 September 2009 was £4,888 million, similar
to the position at 31 March 2009 (£4,895 million). This principally reflects
expenditure on the regulatory capital investment programmes, payment of the
2008/09 final dividend and payments of interest, offset by operational cash
flows and the aforementioned cash tax receipt.
Debt financing and interest rate management
Gearing (measured as group net debt divided by UUW's regulatory capital value)
decreased to 65% at 30 September 2009, compared with 66% at 31 March 2009.
Adjusting for the group's non-recourse joint venture debt of £234 million,
gearing was 62%. At the period end, United Utilities Water PLC had long-term
credit ratings of A3/A- and United Utilities PLC had long-term credit ratings
of Baa1/BBB+ from Moody's Investors Services and Standard and Poor's Ratings
Services respectively. Following the publication of the draft determination of
prices by Ofwat in July 2009, Standard and Poor's placed United Utilities on
credit watch with negative implications.
Cash and short-term deposits at 30 September 2009 amounted to £332 million.
During the period, the group's financing headroom position was enhanced through
the issuance of an additional £100 million, 5.75% bond maturing in March 2022;
an additional £50 million, 6.125% bond maturing in December 2015; and a new £70
million, 2.40%+RPI index-linked bond maturing in July 2039. United Utilities
has headroom to cover its projected financing needs through to early 2012.
The group has access to the international debt capital markets through its €7
billion medium-term note programme which provides for the periodic issuance by
United Utilities PLC and United Utilities Water PLC of debt instruments on
terms and conditions determined at the time the instruments 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 earnings and assets,
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 earnings and assets. At 30
September 2009, approximately 41% of the group's net debt was in index-linked
form, representing around 27% 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 group'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 debt is raised in a currency other than sterling and/or with a fixed
interest rate, it is generally swapped to create a floating rate sterling
liability for the term of the liability. The group's policy is to seek to match
the debt service costs to regulatory cashflow which is impacted by the general
interest rate environment at the time of each price control determination and
is then fixed for the five-year period of that price control. To hedge the
exposure to each price control determination, the group enters into interest
rate swaps, around the time of each price control determination, to fix
interest costs for a substantial proportion of the group's debt for the
duration of that price control period. The group does not undertake any
speculative trading activity.
The group enters into joint ventures with consortium partners. The financial
and legal structure of joint ventures is designed to limit the group's exposure
to the extent of the equity investment and loans provided by the group, with no
further recourse should the joint venture default. All joint venture
arrangements have been incorporated into the group's results on a proportionate
consolidation basis.
Liquidity
Short-term liquidity requirements are met from the group's normal operating
cashflow and its short-term bank deposits. Further liquidity is provided by
committed but undrawn credit facilities. This liquidity supports the group's €2
billion euro-commercial paper programme.
In line with the board's treasury policy, United Utilities aims to maintain a
healthy headroom position. Available headroom at 30 September 2009 was £977
million based on cash, short-term deposits and medium-term committed bank
facilities, net of short-term debt. This headroom is sufficient to cover the
group's projected financing needs through to early 2012.
United Utilities believes that it operates a prudent approach to managing
banking counterparty risk. The group does not have any cash (or cash
equivalents) invested in money market funds. Its cash is held in the form of
short-term (generally no longer than three months) money market deposits with
prime commercial banks.
United Utilities 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
United Utilities has updated its pension assumptions in response to changes in
market conditions. The group's net pension obligations increased during the
period from £213 million at 31 March 2009 to £359 million at 30 September 2009.
Further detail is provided in note 8 ("Retirement benefit obligations") of
these half year financial statements.
Accounting policies
In line with International Financial Reporting Standards (IAS 23 'Borrowing
Costs - Revised standard') United Utilities is required to capitalise borrowing
costs directly attributable to the acquisition, construction or production of a
qualifying asset as part of the cost of that asset. Qualifying assets include
property, plant and equipment, inventories and intangible assets developed in
projects that take a substantial period of time to prepare for use. Other
borrowing costs which are not directly attributable to a qualifying asset are
recognised as an expense. During the six months ended 30 September 2009,
borrowing costs of £0.3 million have been capitalised.
On 30 November 2006, the International Financial Reporting Interpretations
Committee (IFRIC) issued IFRIC 12 'Service Concession Arrangements'. The
interpretation addresses the accounting by private sector operators involved in
the provision of public sector infrastructure assets and services. The group
has adopted IFRIC 12 during the six months ended 30 September 2009. IFRIC 12 is
applied retrospectively hence the prior period has been restated to reflect
this. For the arrangements falling within its scope, the relevant assets are
recognised as a financial asset (where the operator has an unconditional right
to receive a specified amount of cash or other financial asset over the life of
the arrangement); or an intangible asset (where the operator's future cash
flows are not specified); or both a financial asset and an intangible asset
(where the operator's return is provided partially by a financial asset and
partially by an intangible asset). Previously the infrastructure assets were
generally recognised as property, plant and equipment.
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 results for the period, the directors have adjusted the
group's statutory measures for fair value movements on debt and derivative
instruments and those significant items identified as non-recurring. Operating
profit and profit before taxation from continuing operations are reconciled to
underlying operating profit from continuing operations and underlying profit
before taxation from continuing operations as follows:
Continuing operations Regulated Non- All other Group
activities regulated segments
Operating profit/(loss) for the six activities
months ended £m £m £m £m
30 September 2009
Operating profit/(loss) per published 344.9 25.6 (11.6) 358.9
results
One-off items***** 3.5 2.3 5.2 11.0
------ ------ ------ ------
Underlying operating profit/(loss) 348.4 27.9 (6.4) 369.9
------ ------ ------ ------
Continuing operations Regulated Non- All other Group
activities regulated segments
Operating profit/(loss) for the six activities
months ended £m £m £m £m
30 September 2008 (restated)
Operating profit/(loss) per published 347.4 23.3 (11.3) 359.4
results
Restructuring costs****** - - 6.5 6.5
------ ------ ------ ------
Underlying operating profit/(loss) 347.4 23.3 (4.8) 365.9
------ ------ ------ ------
Continuing operations Restated
Six Six
Profit before taxation months months
ended 30 ended 30
September September
2009 2008
£m £m
Profit before taxation per published 206.1 305.8
results
Operating profit adjustments (see 11.0 6.5
above)
Net fair value losses/(gains) on debt 62.8 (30.8)
and derivative instruments
Interest on swaps and debt under fair (11.7) (8.3)
value option
Interest associated with cash - (20.6)
proceeds from UUE sale*******
------ ------
Underlying profit before taxation 268.2 252.6
------ ------
Continuing operations Restated
Six Six
Underlying cost of net borrowings months months
ended 30 ended 30
September September
2009 2008
£m £m
Finance expense 163.1 104.8
Net fair value (losses)/gains on debt (62.8) 30.8
and derivative instruments
Interest on swaps and debt under fair 11.7 8.3
value option
------ ------
Underlying interest payable 112.0 143.9
------ ------
Investment income (10.3) (51.2)
Adjustment for net pension interest (11.5) 3.6
(expense)/income
Adjustment for IFRIC 12 financing 2.9 2.6
income
------ ------
Underlying cost of net borrowings 93.1 98.9
------ ------
Add back adjustment for net pension 11.5 (3.6)
interest expense/(income)
Add back adjustment for IFRIC 12 (2.9) (2.6)
financing income
Interest associated with cash - 20.6
proceeds from UUE sale7
------ ------
Underlying net interest payable 101.7 113.3
------ ------
*****Principally relates to restructuring within the business.
******Principally relates to the capital restructuring associated with the £1.5
billion return to shareholders.
*******The interest associated with the cash proceeds from the sale of UUE has been
deducted to provide a more representative view of underlying performance. As
the cash proceeds from the sale of UUE were held by the group until the £1.5
billion return to shareholders in August 2008, this resulted in a short-term
net debt and interest reduction.
PRINCIPAL RISKS AND UNCERTAINTIES
The group performs an annual risk assessment exercise involving consideration
by management of all business risks in terms of impact, likelihood and control
strength and an objective challenge of that assessment by the internal audit
team. The group's anticipated principal risks and uncertainties over the second
half of the financial year and beyond remain as stated in its 2009 Annual
Report and Financial Statements. The principal risks and uncertainties are set
out in full on pages 16-19 of the 2009 Annual Report and Financial Statements,
namely (a) unfavourable price determination; (b) capital investment programmes;
(c) current capital market conditions; (d) pension scheme obligations; (e)
failure to comply with applicable law or regulations; (f) increased competition
in the water and wastewater industry; (g) events, service interruptions,
systems failures, water shortages or contamination of water supplies; (h) risks
in the group's non-regulated business; (i) material litigation.
An update as to the combined IAS 19 deficit in the group's current pension
schemes as at 30 September 2009 is shown on the consolidated statement of
financial position and further detail is provided in note 8: "Retirement
benefit obligations".
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 United Utilities.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This half yearly 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 half
yearly financial report and the company undertakes no obligation to update
these forward-looking statements. Nothing in this half yearly financial report
should be construed as a profit forecast.
Certain regulatory performance data contained in this half yearly financial
report is subject to regulatory audit.
Consolidated income statement
Restated Restated
Six months Six months Year ended
ended ended 31 March
30 30 September 2009
September 2008
2009
£m £m £m
Continuing operations
Revenue 1,210.2 1,204.4 2,427.2
------ ------ ------
Other income 2.6 3.7 18.5
Employee benefits expense (181.9) (165.2) (347.2)
Depreciation and amortisation (137.7) (128.6) (261.9)
expense
Infrastructure renewals (58.4) (57.7) (117.8)
expenditure
Other operating costs (475.9) (497.2) (989.3)
------ ------ ------
Total operating expenses (851.3) (845.0) (1,697.7)
------ ------ ------
Operating profit 358.9 359.4 729.5
Investment income (note 2) 10.3 51.2 70.7
Finance expense (note 3) (163.1) (104.8) (270.9)
------ ------ ------
Investment income and finance (152.8) (53.6) (200.2)
expense
------ ------ ------
Profit before taxation 206.1 305.8 529.3
Current taxation charge (19.9) (73.4) (139.1)
Deferred taxation credit/(charge) 11.9 (14.4) (3.5)
Deferred taxation charge - - (213.6) (206.4)
abolition of industrial buildings
allowances
------ ------ ------
Taxation (note 4) (8.0) (301.4) (349.0)
------ ------ ------
Profit for the period from 198.1 4.4 180.3
continuing operations
Discontinued operations
Loss for the period from - - (1.2)
discontinued operations (note 5)
------ ------ ------
Profit for the period 198.1 4.4 179.1
------ ------ ------
Earnings per share
from continuing and discontinued
operations (note 6)*
Basic 29.1p 0.6p 26.3p
Diluted 29.0p 0.6p 26.2p
Earnings per share
from continuing operations (note
6)*
Basic 29.1p 0.6p 26.5p
Diluted 29.0p 0.6p 26.4p
Dividend per ordinary share (note 11.17p 10.64p 32.67p
7)
* The weighted average number of shares for the prior periods has been based
on the 681,381,233 new ordinary shares issued on 28 July 2008 (note 6).
Consolidated statement of comprehensive income
Six months Restated Restated
ended
Six months Year ended
30 September ended 31 March
2009 30 September 2009
2008
£m £m £m
Profit for the period 198.1 4.4 179.1
Other comprehensive income
Actuarial losses on defined benefit (131.0) (166.3) (124.3)
pension schemes (note 8)
Tax on actuarial losses on defined 36.7 46.6 34.8
benefit pension schemes
Revaluation of investments 6.7 4.4 (20.3)
Fair value gains/(losses) on cashflow 1.0 0.2 (1.6)
hedges
Tax on fair value (gains)/losses on (0.3) (0.1) 0.4
cashflow hedges
Foreign exchange adjustments 5.9 0.2 8.3
------ ------ ------
Total comprehensive income/(expense) 117.1 (110.6) 76.4
for the period
------ ------ ------
There is no tax impact on the items of other comprehensive income except where
stated in the table above.
Consolidated statement of financial
position Restated Restated
30 September 30 September 31 March
2009 2008 2009
£m £m £m
ASSETS
Non-current assets
Property, plant and equipment 7,975.4 7,665.6 7,866.8
Goodwill 2.5 2.3 2.6
Other intangible assets 209.1 176.1 198.9
Investments 143.3 159.8 136.8
Trade and other receivables 52.6 55.5 44.2
Derivative financial instruments 337.2 65.8 412.6
------ ------ ------
8,720.1 8,125.1 8,661.9
------ ------ ------
Current assets
Inventories 80.2 74.2 73.0
Trade and other receivables 510.9 500.9 491.6
Cash and short-term deposits 331.6 1,080.4 298.6
Derivative financial instruments 152.6 173.5 226.4
------ ------ ------
1,075.3 1,829.0 1,089.6
------ ------ ------
Total assets 9,795.4 9,954.1 9,751.5
------ ------ ------
LIABILITIES
Non-current liabilities
Trade and other payables (143.0) (137.7) (139.8)
Borrowings (5,260.0) (3,872.6) (5,200.1)
Retirement benefit obligations (note 8) (358.6) (253.1) (213.1)
Deferred tax liabilities (1,293.0) (1,348.0) (1,341.3)
Provisions (10.2) (18.0) (17.2)
Derivative financial instruments (3.7) (14.2) (4.5)
------ ------ ------
(7,068.5) (5,643.6) (6,916.0)
------ ------ ------
Current liabilities
Trade and other payables (703.9) (718.6) (672.4)
Borrowings (314.6) (2,039.9) (479.6)
Current income tax liabilities (137.9) (129.5) (67.6)
Provisions (26.2) (25.5) (22.6)
Derivative financial instruments (131.0) (68.4) (148.6)
------ ------ ------
(1,313.6) (2,981.9) (1,390.8)
------ ------ ------
Total liabilities (8,382.1) (8,625.5) (8,306.8)
------ ------ ------
Total net assets 1,413.3 1,328.6 1,444.7
------ ------ ------
EQUITY
Capital and reserves attributable to equity holders
of the company
Share capital 499.8 499.8 499.8
Share premium account 0.9 0.5 0.7
Revaluation reserve 158.8 158.8 158.8
Treasury shares (0.1) (0.3) (0.3)
Cumulative exchange reserve 21.8 7.8 15.9
Merger reserve 329.7 313.0 313.0
Other reserves 44.0 62.6 36.6
Retained earnings 358.4 286.4 420.2
------ ------ ------
Shareholders' equity (note 10) 1,413.3 1,328.6 1,444.7
------ ------ ------
Consolidated statement of changes in
equity
Six months
ended 30
September 2009
Share Share Revaluation Treasury Cumulative Merger Other Retained Total
capital premium reserve shares exchange reserve reserves earnings
account reserve
£m £m £m £m £m £m £m £m £m
At 1 April 499.8 0.7 158.8 (0.3) 15.9 313.0 36.6 420.2 1,444.7
2009
(restated)
Profit for the - - - - - - - 198.1 198.1
period
Other
comprehensive
income
Actuarial - - - - - - - (131.0) (131.0)
losses on
defined
benefit
pension
schemes (note
8)
Tax on - - - - - - - 36.7 36.7
actuarial
losses
on defined
benefit
pension
schemes
Revaluation of - - - - - - 6.7 - 6.7
investments
Fair value - - - - - - 1.0 - 1.0
gains
on cashflow
hedges
Tax on fair - - - - - - (0.3) - (0.3)
value gains
on cashflow
hedges
Foreign - - - - 5.9 - - - 5.9
exchange
adjustments
------ ------ ------ ------ ------ ------ ------ ------ ------
Total - - - - 5.9 - 7.4 103.8 117.1
comprehensive
income for the
period
------ ------ ------ ------ ------ ------ ------ ------ ------
Transactions
with owners
Dividends - - - - - - - (150.1) (150.1)
(note 7)
New share - 0.2 - - - - - - 0.2
capital issued
Shares - - - 0.2 - - - (0.2) -
disposed of
from
employee share
trust
Capital - - - - - 16.7 - (16.7) -
reorganisation
*
Equity-settled - - - - - - - 1.4 1.4
share-based
payments
------ ------ ------ ------ ------ ------ ------ ------ ------
At 30 499.8 0.9 158.8 (0.1) 21.8 329.7 44.0 358.4 1,413.3
September 2009
------ ------ ------ ------ ------ ------ ------ ------ ------
Six months
ended
30 September
2008
Share Share Revaluation Treasury Cumulative Merger Other Retained Total
capital premium reserve shares exchange reserve reserves earnings
account reserve
£m £m £m £m £m £m £m £m £m
Restated
At 1 April 881.6 1,429.3 158.8 (0.3) 7.6 - 58.1 678.1 3,213.2
2008
Profit for the - - - - - - - 4.4 4.4
period
Other
comprehensive
income
Actuarial - - - - - - - (166.3) (166.3)
losses on
defined
benefit
pension
schemes
(note 8)
Tax on - - - - - - - 46.6 46.6
actuarial
losses
on defined
benefit
pension
schemes
Revaluation of - - - - - - 4.4 - 4.4
investments
Fair value - - - - - - 0.2 - 0.2
gains
on cashflow
hedges
Tax on fair - - - - - - (0.1) - (0.1)
value gains
on cashflow
hedges
Foreign - - - - 0.2 - - - 0.2
exchange
adjustments
------ ------ ------ ------ ------ ------ ------ ------ ------
Total - - - - 0.2 - 4.5 (115.3) (110.6)
comprehensive
income/
(expense) for
the period
------ ------ ------ ------ ------ ------ ------ ------ ------
Transactions
with owners
Dividends - - - - - - - (277.4) (277.4)
(note 7)
New share 499.8 0.5 - - - - - - 500.3
capital issued
Capital (881.6) (1,429.3) - - - 313.0 - - (1,997.9)
reorganisation
*
Equity-settled - - - - - - - 1.0 1.0
share-based
payments
------ ------ ------ ------ ------ ------ ------ ------ ------
At 30 499.8 0.5 158.8 (0.3) 7.8 313.0 62.6 286.4 1,328.6
September 2008
------ ------ ------ ------ ------ ------ ------ ------ ------
Year ended 31
March 2009
Share Share Revaluation Treasury Cumulative Merger Other Retained Total
capital premium reserve shares exchange reserve reserves earnings
account reserve
£m £m £m £m £m £m £m £m £m
Restated
At 1 April 881.6 1,429.3 158.8 (0.3) 7.6 - 58.1 678.1 3,213.2
2008
Profit for the - - - - - - - 179.1 179.1
year
Other
comprehensive
income
Actuarial - - - - - - - (124.3) (124.3)
losses on
defined
benefit
pension
schemes
(note 8)
Tax on - - - - - - - 34.8 34.8
actuarial
losses
on defined
benefit
pension
schemes
Revaluation of - - - - - - (20.3) - (20.3)
investments
Fair value - - - - - - (1.6) - (1.6)
losses
on cashflow
hedges
Tax on fair - - - - - - 0.4 - 0.4
value losses
on cashflow
hedges
Foreign - - - - 8.3 - - - 8.3
exchange
adjustments
------ ------ ------ ------ ------ ------ ------ ------ ------
Total - - - - 8.3 - (21.5) 89.6 76.4
comprehensive
income/
(expense) for
the year
------ ------ ------ ------ ------ ------ ------ ------ ------
Transactions
with owners
Dividends - - - - - - - (349.9) (349.9)
(note 7)
New share 499.8 0.7 - - - - - - 500.5
capital issued
Capital (881.6) (1,429.3) - - - 313.0 - - (1,997.9)
reorganisation
*
Equity-settled - - - - - - - 2.4 2.4
share-based
payments
------ ------ ------ ------ ------ ------ ------ ------ ------
At 31 March 499.8 0.7 158.8 (0.3) 15.9 313.0 36.6 420.2 1,444.7
2009
------ ------ ------ ------ ------ ------ ------ ------ ------
* September 2008 and March 2009 include £1,499.0 million return of capital to
shareholders (note 10).
Consolidated statement of cashflows
Restated Restated
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008
£m £m £m
Continuing operations
Operating activities
Cash generated from operations 496.9 431.0 911.4
Interest paid (86.8) (112.4) (232.3)
Interest received and similar income 4.1 75.3 90.4
Tax paid (0.1) (12.2) (32.8)
Tax received 50.5 - -
------ ------ ------
Net cash generated from operating 464.6 381.7 736.7
activities
------ ------ ------
Investing activities
Purchase of property, plant and (283.3) (385.0) (668.2)
equipment
Purchase of other intangible assets (19.8) (15.8) (45.9)
Proceeds from sale of property, plant 2.7 4.6 3.8
and equipment
------ ------ ------
Net cash used in investing activities (300.4) (396.2) (710.3)
------ ------ ------
Financing activities
Proceeds from issue of ordinary shares 0.2 1.3 1.6
Cash used in structured financing - (41.3) (163.9)
Proceeds from borrowings 241.7 1,893.6 3,784.7
Repayment of borrowings (173.4) (771.4) (3,310.9)
Dividends paid to equity holders of the (150.1) (277.4) (349.9)
company
Return to shareholders on capital (16.7) (1,482.2) (1,482.3)
reorganisation
------ ------ ------
Net cash used in financing activities (98.3) (677.4) (1,520.7)
------ ------ ------
Effects of exchange rate changes 10.2 13.7 (1.8)
------ ------ ------
Net increase/(decrease) in cash and 76.1 (678.2) (1,496.1)
cash equivalents
------ ------ ------
Cash and cash equivalents at beginning 209.1 1,705.2 1,705.2
of the period
------ ------ ------
Cash and cash equivalents at end of the 285.2 1,027.0 209.1
period
------ ------ ------
Cash generated from operations
Restated Restated
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008
£m £m £m
Continuing operations
Profit before taxation 206.1 305.8 529.3
Adjustment for investment income and 152.8 53.6 200.2
finance expense
------ ------ ------
Operating profit 358.9 359.4 729.5
Adjustments for:
Depreciation of property, plant and 122.7 114.3 238.0
equipment
Amortisation of other intangible assets 15.0 14.3 23.9
(Profit)/loss on disposal of property, - (0.4) 0.8
plant and equipment
Equity-settled share-based payments 1.4 0.3 1.9
charge
Changes in working capital:
Increase in inventories (7.2) (10.9) (9.7)
Increase in trade and other receivables (25.8) (49.6) (22.9)
Increase/(decrease) in provisions and 31.9 3.6 (50.1)
payables
------ ------ ------
Cash generated from continuing 496.9 431.0 911.4
operations
------ ------ ------
Segment reporting
The group is organised into two principal operating divisions for management
purposes, being regulated and non-regulated activities. These divisions form
the basis on which the operating segment information, presented in accordance
with IFRS 8 (see note 1), is reported.
The regulated activities segment is as previously reported and includes the
regulated results of United Utilities Water PLC.
The non-regulated activities segment is as previously reported and includes the
group's utility outsourcing contracts in the United Kingdom and overseas.
The 'all other segments' category was previously reported as the group's other
activities segment. This category includes the results of United Utilities
Property Solutions Limited, United Utilities Group PLC and other group holding
companies.
The disclosure correlates with the information provided to the United Utilities
Group PLC board of directors (the "board") for the purposes of assessing
performance and allocating resources. The board reviews revenue and operating
profit by segment, but assets and liabilities are reviewed at a consolidated
level. Investment income and finance expense and taxation are managed on a
group basis and are not allocated to operating segments.
Total assets have not changed materially from the amount disclosed in the
financial statements of United Utilities Group PLC for the year ended 31 March
2009 and are therefore not disclosed by segment.
Regulated Non-regulated All other
activities activities segments Group
£m £m £m £m
Six months ended 30 September
2009
Continuing operations
Total revenue 769.2 436.9 6.6 1,212.7
Inter-segment revenue (0.3) - (2.2) (2.5)
------ ------ ------ ------
External revenue 768.9 436.9 4.4 1,210.2
------ ------ ------ ------
Underlying segmental 348.4 27.9 (6.4) 369.9
operating profit/(loss)
Restructuring costs (3.5) (2.3) (5.2) (11.0)
------ ------ ------ ------
Segmental operating profit/ 344.9 25.6 (11.6) 358.9
(loss)
------ ------ ------
Investment income 10.3
Finance expense (163.1)
------
Profit before taxation 206.1
------
Regulated Non-regulated All other
activities activities segments Group
£m £m £m £m
Restated
Six months ended 30 September
2008
Continuing operations
Total revenue 756.9 443.7 7.2 1,207.8
Inter-segment revenue (0.8) - (2.6) (3.4)
------ ------ ------ ------
External revenue 756.1 443.7 4.6 1,204.4
------ ------ ------ ------
Underlying segmental 347.4 23.3 (4.8) 365.9
operating profit/(loss)
Restructuring costs - - (6.5) (6.5)
------ ------ ------ ------
Segmental operating profit/ 347.4 23.3 (11.3) 359.4
(loss)
------ ------ ------
Investment income 51.2
Finance expense (104.8)
------
Profit before taxation 305.8
------
Regulated Non-regulated All other
activities activities segments Group
£m £m £m £m
Restated
Year ended 31 March 2009
Continuing operations
Total revenue 1,499.5 911.8 22.4 2,433.7
Inter-segment revenue (0.9) (0.1) (5.5) (6.5)
------ ------ ------ ------
External revenue 1,498.6 911.7 16.9 2,427.2
------ ------ ------ ------
Underlying segmental 679.4 62.4 (5.7) 736.1
operating profit/(loss)
Restructuring costs (1.0) 1.0 (6.6) (6.6)
------ ------ ------ ------
Segmental operating profit/ 678.4 63.4 (12.3) 729.5
(loss)
------ ------ ------
Investment income 70.7
Finance expense (270.9)
------
Profit before taxation 529.3
------
NOTES
1. Basis of preparation and accounting policies
The condensed consolidated half yearly financial statements for the six months
ended 30 September 2009, which are unaudited, have been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Services Authority
and International Accounting Standard 34 'Interim Financial Reporting' (IAS
34).
The accounting policies, presentation and methods of computation are consistent
with those set out in the audited consolidated financial statements of United
Utilities Group PLC for the year ended 31 March 2009, which have been prepared
in accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union (EU), except for the adoption of the standards
and interpretations referred to below.
The adoption of the following standards and interpretations, at 1 April 2009,
has had no material impact on the group's half yearly financial statements:
IFRIC 12 'Service Concession Arrangements'
The interpretation addresses accounting by private sector operators involved in
the provision of public sector infrastructure assets and services. Relevant
assets within its scope have been reclassified from property, plant and
equipment to financial assets, intangible assets or a combination of both. Its
application requires the restatement of the comparative periods ended 30
September 2008 and 31 March 2009. Operating profit has reduced by £3.7 million
in the period ended 30 September 2009 (30 September 2008: £2.7 million, 31
March 2009: £5.7 million), broadly offset by a corresponding increase in
investment income of £2.9 million (30 September 2008: £2.6 million, 31 March
2009: £5.2 million).
IAS 1 'Presentation of Financial Statements (September 2007)'
The application of this standard has resulted in the consolidated balance sheet
and consolidated cashflow statement being renamed the 'consolidated statement
of financial position' and the 'consolidated statement of cashflows'
respectively. The shareholders' equity note is presented as a primary statement
and is renamed the 'consolidated statement of changes in equity'. The
consolidated statement of recognised income and expense is also presented as a
primary statement and is renamed the 'consolidated statement of comprehensive
income'. Taxation on each item within the consolidated statement of
comprehensive income is shown separately.
IAS 23 'Borrowing costs (March 2007)'
Borrowing costs directly attributable to the acquisition, construction or
production of a qualifying asset have been capitalised as part of the cost of
that asset. Qualifying assets include property, plant and equipment,
inventories and intangible assets developed in projects that take a significant
period of time to complete. The standard has been adopted as a prospective
change and borrowing costs have been capitalised on projects commencing from 1
April 2009. No changes have been made for borrowing costs incurred prior to
this date that have been expensed. During the six months to 30 September 2009,
borrowing costs of £0.3 million have been capitalised.
IFRS 8 'Operating Segments'
The application of this standard requires disclosure of information about the
group's operating segments on the same basis as that used for internal
reporting, and replaces the requirement to determine the primary (business) and
secondary (geographical) reporting segments. The group determined that its
operating segments were the same as the business segments previously identified
under IAS 14 'Segment Reporting', except that the 'other activities' segment
has been renamed 'all other segments'. Additional disclosures about each of
these segments are provided on page 22.
At the date of authorisation of these condensed consolidated half yearly
financial statements, the following relevant interpretation was in issue but
not yet effective.
IFRIC 18 'Transfers of Assets from Customers'
The interpretation has not been applied in the condensed consolidated half
yearly financial statements as it has not yet been endorsed by the EU and its
effective date is uncertain.
The group updated the valuation of its defined benefit pension schemes in the
half yearly financial statements for the first time for the six months ended 30
September 2008, due to fluctuations in financial markets. As the financial
markets continue to be volatile, the group has again updated the valuation of
its defined benefit pension schemes for the six months ended 30 September 2009.
The condensed consolidated half yearly 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
435 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
2009.
The comparative figures for the year ended 31 March 2009 do not comprise the
group's statutory accounts for that financial year. Those accounts have been
reported upon by the group's auditors and delivered to the registrar of
companies. The report of the auditors was unqualified, did not include a
reference to any matters to which the auditors drew attention by way of
emphasis without qualifying their report and did not contain statements 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. Investment income
Restated Restated
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008 £m
£m £m
Interest receivable 10.3 15.7 27.8
Foreign exchange gains on forward - 31.9 36.1
contracts
------ ------ ------
10.3 47.6 63.9
------ ------ ------
Expected return on pension schemes' - 61.6 124.3
assets (note 8)
Interest cost on pension schemes' - (58.0) (117.5)
obligations (note 8)
------ ------ ------
Net pension interest income - 3.6 6.8
------ ------ ------
10.3 51.2 70.7
------ ------ ------
3. Finance expense
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008 £m
£m £m
Interest payable (88.8) (135.6) (246.6)
Fair value (losses)/gains on debt and (62.8) 30.8 (24.3)
derivative instruments
------ ------ ------
(151.6) (104.8) (270.9)
Expected return on pension schemes' 46.6 - -
assets (note 8)
Interest cost on pension schemes' (58.1) - -
obligations (note 8)
------ ------ ------
Net pension interest expense (11.5) - -
------ ------ ------
(163.1) (104.8) (270.9)
------ ------ ------
The group follows a policy of economic hedging of its interest rate and
currency exposures, with particular regard to the five-year regulatory period.
Including the interest element of swaps and interest on debt under the fair
value option within interest payable, as opposed to within the fair value
(losses)/gains, adjusting for the reclassification of interest income and
expenditure associated with the group's defined benefit pension schemes and
adjusting for the reclassification of financing income relating to the group's
service concession arrangements, would give an economic underlying cost of net
borrowings of £93.1 million (30 September 2008: £98.9 million, 31 March 2009: £
196.2 million):
Restated Restated
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008 £m
£m £m
Finance expense (163.1) (104.8) (270.9)
Fair value losses/(gains) on debt and 62.8 (30.8) 24.3
derivative instruments
Add back interest on swaps and debt (11.7) (8.3) (8.3)
under fair value option
------ ------ ------
Underlying interest payable (112.0) (143.9) (254.9)
Investment income 10.3 51.2 70.7
Adjustment for net pension interest 11.5 (3.6) (6.8)
expense/(income)
Adjustment for service concession (2.9) (2.6) (5.2)
financing income (note 1)
------ ------ ------
Underlying cost of net borrowings (93.1) (98.9) (196.2)
------ ------ ------
4. Taxation
Restated Restated
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008 £m
£m £m
Current taxation
UK corporation tax (53.1) (72.4) (147.0)
Foreign tax (1.8) (1.0) (2.1)
Prior year adjustments 35.0 - 10.0
------ ------ ------
(19.9) (73.4) (139.1)
------ ------ ------
Deferred taxation
Current period (4.2) (14.4) 0.7
Prior year adjustments 16.1 - (4.2)
------ ------ ------
11.9 (14.4) (3.5)
Abolition of industrial buildings - (213.6) (206.4)
allowances
------ ------ ------
11.9 (228.0) (209.9)
------ ------ ------
Total tax charge for the period (8.0) (301.4) (349.0)
------ ------ ------
The prior year adjustments relate to agreement of prior years' UK tax returns.
Following Royal Assent of the 2008 Finance Act on 21 July 2008, the abolition
of industrial buildings allowances was formally enacted. The financial impact
as a consequence of this legislation was a one-off deferred tax charge of £
213.6 million, which was included in the deferred tax charge for the six months
ended 30 September 2008 (31 March 2009: £206.4 million); however the cash
impact will be spread over a period of approximately 20 years.
5. Discontinued operations
The group announced the disposal of its 11.7 per cent economic interest in
Manila Water Company (MWC) to Ayala Corporation and Philwater Holdings Company
Inc, both existing shareholders of MWC, for a cash consideration of USD73
million on 12 November 2009. On completion of the transaction, expected by the
end of 2009, the group will reinvest approximately USD1.2 million in new
preference shares in Philwater Holdings Company Inc.
The group announced the disposal of its 15.0 per cent economic interest in
Northern Gas Networks Holdings Limited (NGN) to Cheung Kong Infrastructure
Holdings Limited (CKI) and SAS Trustee Corporation (managed by RREEF
Alternative Investments), both existing shareholders of NGN, for a cash
consideration of £85.75 million on 16 November 2009.
The contributions from the group's investments in MWC and NGN have been
included in continuing operations, within the non-regulated segment, in the
group's results for the six months ended 30 September 2009.
The group has previously reported the disposal of United Utilities Electricity,
which took place on 19 December 2007. A loss on disposal of £1.2 million was
disclosed as discontinued operations in the group's results for the year ended
31 March 2009.
6. Earnings per share
Basic and diluted earnings per share are calculated by dividing profit for the
period by the following weighted average number of shares in issue:
Basic Diluted
million million
Six months ended 30 September 2009 681.5 682.0
Six months ended 30 September 2008 681.4 681.6
Year ended 31 March 2009 681.4 682.3
To enable a meaningful comparison and in compliance with IAS 33 'Earnings per
Share', the weighted average number of shares for the comparative periods has
been based on the 681,381,233 new ordinary shares in United Utilities Group PLC
issued on 28 July 2008.
The difference between the weighted average number of shares used in the basic
and diluted earnings per share calculations represents those ordinary shares
deemed to have been issued for no consideration on the conversion of all
potential dilutive ordinary shares in accordance with IAS 33 'Earnings per
Share'.
The basic and diluted earnings per share for the current and comparative
periods are as follows:
Restated Restated
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008
From continuing and discontinued
operations
Basic 29.1p 0.6p 26.3p
Diluted 29.0p 0.6p 26.2p
From continuing
operations
Basic 29.1p 0.6p 26.5p
Diluted 29.0p 0.6p 26.4p
7. Dividends
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008 £m
£m £m
Dividends relating to the period
comprise:
Interim dividend 76.1 72.5 72.5
Final dividend - - 150.1
------ ------ ------
76.1 72.5 222.6
------ ------ ------
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008 £m
£m £m
Dividends deducted from shareholders'
equity comprise:
Interim dividend - - 72.5
Final dividend 150.1 277.4 277.4
------ ------ ------
150.1 277.4 349.9
------ ------ ------
The proposed interim dividends for the six months ended 30 September 2009 and
30 September 2008 and the final dividend for the year ended 31 March 2009 have
not been included as liabilities in the condensed consolidated half yearly
financial statements at 30 September 2009, 30 September 2008 or the
consolidated financial statements at 31 March 2009 respectively.
The interim dividend of 11.17 pence per ordinary share (2009: interim dividend
of 10.64 pence per ordinary share; final dividend of 22.03 pence per ordinary
share) is expected to be paid on 3 February 2010 to shareholders on the
register at close of business on 18 December 2009. The ex-dividend date for the
interim dividend is 16 December 2009.
8. Retirement benefit obligations
The main financial assumptions used by the actuary were as follows:
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008 %
% %
Discount rate - United Utilities 5.60 6.20 7.00
Pension Scheme (UUPS)
Discount rate - United Utilities
Group of the Electricity Supply 5.60 6.40 7.00
Pension Scheme (ESPS)
Discount rate - Northern Gas Networks
Pension Scheme (NGNPS) 5.60 6.00 6.90
Expected return on assets - UUPS 6.60 6.80 6.60
Expected return on assets - ESPS 6.20 6.50 6.20
Expected return on assets - NGNPS 5.90 6.20 5.90
Pensionable salary growth - UUPS 4.15 4.45 4.15
Pensionable salary growth - ESPS 4.20 4.50 4.20
Pensionable salary growth - NGNPS 4.20 4.50 4.20
Pension increases 3.20 3.50 3.20
Price inflation 3.20 3.50 3.20
The net pension expense before taxation recognised in the income statement in
respect of the defined benefit schemes is summarised as follows:
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008 £m
£m £m
Current service cost (13.5) (19.3) (36.7)
Past service cost (8.8) (1.3) (3.1)
------ ------ ------
Pension expense charged to operating (22.3) (20.6) (39.8)
profit
------ ------ ------
Expected return on schemes' assets 46.6 61.6 124.3
Interest on schemes' obligations (58.1) (58.0) (117.5)
------ ------ ------
Pension (expense)/income (charged)/
credited to (11.5) 3.6 6.8
investment income and finance expense
(note 2, 3)
------ ------ ------
Net pension charged before taxation (33.8) (17.0) (33.0)
------ ------ ------
The reconciliation of the opening and closing financial position is as follows:
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008 £m
£m £m
At the start of the period (213.1) (101.2) (101.2)
Expenses recognised in the income (33.8) (17.0) (33.0)
statement
Contributions paid 19.3 31.4 45.4
Actuarial losses gross of taxation (131.0) (166.3) (124.3)
------ ------ ------
At the end of the period (358.6) (253.1) (213.1)
------ ------ ------
The closing obligation at each period end is analysed as follows:
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008
£m £m £m
Present value of defined benefit (2,210.9) (1,974.8) (1,696.9)
obligations
Fair value of schemes' assets 1,852.3 1,721.7 1,483.8
------ ------ ------
Net retirement benefit obligations (358.6) (253.1) (213.1)
------ ------ ------
9. Additional disclosures
The following items are considered material in size or nature and are therefore
disclosed separately in accordance with IAS 1 'Presentation of Financial
Statements':
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008 £m
£m £m
Operating profit items:
Restructuring costs 11.0 6.5 6.6
Finance expense items:
Fair value losses/(gains) on debt and 62.8 (30.8) 24.3
derivative instruments
Interest on swaps and debt under fair (11.7) (8.3) (8.3)
value option
Interest associated with cash proceeds - (20.6) (20.6)
from UUE sale
10. Shareholders' equity - capital reorganisation
The movements on the accounts within shareholders' equity of the group which
are affected by the capital reorganisation which took place during the prior
period are shown below:
Share Merger
Share premium reserve Total
capital account
£m £m £m £m
At 1 April 2008 881.6 1,429.3 - 2,310.9
New share capital issued 499.8 0.7 - 500.5
Capital reorganisation (881.6) (1,429.3) 313.0 (1,997.9)
------ ------ ------ ------
At 31 March 2009 499.8 0.7 313.0 813.5
New share capital issued - 0.2 - 0.2
Capital reorganisation - - 16.7 16.7
------ ------ ------ ------
At 30 September 2009 499.8 0.9 329.7 830.4
------ ------ ------ ------
In July 2008 the High Court (the "Court") approved a scheme of arrangement (the
"Scheme") of United Utilities PLC to establish a new listed company, United
Utilities Group PLC, as the holding company of United Utilities PLC. United
Utilities PLC shareholders received 17 United Utilities Group PLC ordinary
shares for every 22 United Utilities PLC shares, together with one United
Utilities Group PLC B share of 170.0 pence for each United Utilities PLC share.
The Court then approved the reduction of the capital of United Utilities Group
PLC, whereby the nominal value of each ordinary share was reduced from 500.0
pence to five pence.
In addition, a merger reserve was created in the United Utilities Group PLC
company, which was capitalised into A shares that were cancelled as part of the
reduction of capital.
The Scheme and the subsequent reduction in capital increased the distributable
reserves of United Utilities Group PLC by £4.8 billion enabling the return of £
1,499.0 million capital and allowing future dividends.
On 14 April 2009, the remaining B shares were redeemed. This has been recorded
as an adjustment to equity and has eliminated the outstanding financial
liability. This transaction concluded the capital reorganisation.
The merger reserve, as shown above, arises on consolidation and represents the
capital adjustment required to effect the reverse acquisition, being the
difference between the existing share capital and share premium of United
Utilities PLC at the date of the reverse acquisition and the share capital of
United Utilities Group PLC following the reduction of capital of United
Utilities Group PLC.
The share capital balance at 30 September 2008 has been restated to reflect the
status of the capital reorganisation at that date.
11. 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 Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008
£m £m £m
Sales of services 48.3 55.6 109.8
Purchases of goods and services 1.6 1.7 11.4
Amounts owed by and to the group's joint ventures are as follows:
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2009
2009 2008
£m £m £m
Amounts owed by related parties 13.1 17.7 12.8
Amounts owed to related parties (0.1) - (1.9)
Sales of services to related parties were on the group's normal trading terms.
The amounts outstanding are unsecured and will be settled in accordance with
normal credit terms. No guarantees have been given or received. A £0.1 million
provision has been made for doubtful receivables in respect of the amounts owed
by related parties (30 September 2008: £0.1 million, 31 March 2009: £0.1
million).
12. Contingent liabilities
The group has entered into performance guarantees as at 30 September 2009,
where a financial limit has been specified of £193.5 million (30 September
2008: £122.6 million, 31 March 2009: £119.8 million).
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.
We confirm that to the best of our knowledge:
* The condensed set of financial statements has been prepared in accordance
with IAS 34 'Interim Financial Reporting' as adopted by the EU; and
* The interim management report includes a fair review of the information
required by:
* DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of
important events during the first six months of the current financial year
and their impact on the condensed set of financial statements; and a
description of principal risks and uncertainties for the remaining six
months of the year; and
* DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the entity during that period; and any changes in the
related party transactions described in the last annual report that could
do so.
The directors of United Utilities Group PLC at the date of this announcement
are listed below:
Dr John McAdam
Philip Green
Tim Weller
Charlie Cornish
Dr Catherine Bell CB
Paul Heiden
David Jones CBE
Andrew Pinder CBE
Nick Salmon
By order of the Board
……………………….. ……………………….
Philip Green Tim Weller
24 November 2009 24 November 2009
Chief Executive Officer Chief Financial Officer
INDEPENDENT REVIEW REPORT TO UNITED UTILITIES GROUP PLC
We have been engaged by the company to review the condensed set of financial
statements in the half yearly financial report for the six months ended 30
September 2009 which comprises the consolidated income statement, the
consolidated statement of comprehensive income, the consolidated statement of
financial position, the consolidated statement of changes in equity, the
consolidated statement of cashflows, cash generated from operations, segment
reporting and related notes 1 to 12. We have read the other information
contained in the half yearly financial report and considered whether it
contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the company in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim
Financial Information Performed by the Independent Auditor of the Entity"
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the company those matters we are required to state to them in an
independent review 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, for our review work, for this report, or for the conclusions
we have formed.
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.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with IFRSs as adopted by the European Union. The
condensed set of financial statements included in this half yearly financial
report has been prepared in accordance with International Accounting Standard
34, "Interim Financial Reporting", as adopted by the European Union.
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 Standard on Review
Engagements (UK and Ireland) 2410 "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware
of 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 2009 is not prepared, in
all material respects, in accordance with International Accounting Standard 34
as adopted by the European Union and the Disclosure and Transparency Rules of
the United Kingdom's Financial Services Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditors
Manchester, United Kingdom
24 November 2009
ENDUNITED UTILITIES GROUP PLC
