TIDMUU.
United Utilities Group PLC
27 November 2013
HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2013
Continuing operations Six months ended
30 September 2013 30 September 2012
(Restated*)
Revenue GBP853.3m GBP822.9m
Underlying operating profit** GBP343.2m GBP314.7m
Operating profit GBP341.7m GBP314.1m
Interim dividend per ordinary 12.01p 11.44p
share (pence)
Regulatory capital
expenditure*** GBP407m GBP354m
RCV gearing**** 59% 60%
* In accordance with the revised accounting standard IAS 19 'Employee benefits'
which applies retrospectively, the prior half year has been restated
** Underlying profit measures have been provided to give a more representative
view of business performance and are defined in the underlying profit measure
tables
*** Regulatory capex represents fixed asset additions and infrastructure
renewals expenditure using regulatory accounting guidelines; there is no
equivalent GAAP measure
**** Regulatory capital value or RCV gearing calculated as group net debt/
United Utilities Water's RCV adjusted for actual capex (outturn prices)
* Operational improvement delivering further benefits for customers
- continued improvements in customer satisfaction, with further progress on
Ofwat's SIM scores
- strong operational performance on Ofwat's overall KPIs assessment
- effective delivery of capital investment programme; Time: Cost: Quality index
(TCQi) over 90%
- expect to invest at least GBP800m in 2013/14
* Outperformance continues to benefit customers and shareholders
- reinvesting cGBP240m of capex & financing outperformance for customer &
environmental benefits
- revised tax treatment agreed with HMRC; cGBP75m net cash benefit to be used as
follows:
- cGBP20m special customer discount; offsetting allowed real price increase for
2014/15
- cGBP17m of further support for customers struggling to pay
- cGBP38m balance to be used for future sharing with customers
* Good financial performance
- underlying operating profit up GBP29m to GBP343m, benefiting from tight cost
control
- interim dividend of 12.01 pence per share, in line with policy
* Business plan submission proposes below inflation bills for households
- reflects extensive customer consultation, coupled with significant cost
saving initiatives
- substantial capex programme to maintain & improve services & meet
environmental obligations
- below inflation average household bills for the ten-year period 2010-20
Steve Mogford, Chief Executive Officer, said:
"Customer satisfaction with our service has continued to improve, underpinned
by strong operational and environmental performance, and we remain focused on
delivering further improvements. We are on track to invest at least GBP800
million this year in our network, maintaining and improving services, providing
environmental benefits and supporting the local economy.
"We are discounting prices next year so that customers do not pay the full
allowed price increase, meaning that, on average, bills will go up by no more
than inflation. We are also committing to further support for customers
struggling to pay. This is in addition to the previously announced reinvestment
of GBP240 million of outperformance for the benefit of our customers and the
environment.
"Our business plan for the next five-year period means that customers would
benefit from below inflation average household bills for the decade to 2020. We
have sought the views of over 27,000 customers, as well as consulting with our
regulators, to deliver a plan which we believe strikes the right balance for
all our stakeholders. This includes a substantial capital investment programme
to meet our environmental obligations and deliver further customer and economic
benefits."
For further information on the day, please contact:
Gaynor Kenyon - Corporate Affairs Director +44 (0) 7753 622282
Darren Jameson - Head of Investor Relations +44 (0) 7733 127707
Peter Hewer / Michelle Clarke - Tulchan Communications +44 (0) 20 7353 4200
A presentation to investors and analysts starts at 9.00 am on Wednesday 27
November 2013, 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 938555. A recording of the call will be available for seven days
following Wednesday 27 November 2013 on +44 (0) 20 7031 4064, access code
938555.
This results announcement and the associated presentation will be available on
the day at: http://corporate.unitedutilities.com/investors.aspx
BUSINESS REVIEW
KEY OPERATIONAL PROGRESS
Improving operational performance and delivering benefits for customers and the
environment remain top priorities for United Utilities (UU). Alongside this, we
are on track to outperform our regulatory contract. We have made significant
progress since the start of the 2010-15 regulatory period, as outlined below:
* Significant improvements in customer service - Since 2010, every year we have
continued to improve the customer experience, as demonstrated through Ofwat's
customer service measure the service incentive mechanism (SIM). Over the two
years to 2012/13, we have moved up from last position to joint fifth, among the
ten water and sewerage companies, on Ofwat's combined SIM assessment. In the
first half of 2013/14, we continued our progress and have improved our score on
Ofwat's qualitative SIM measure, as we narrow the gap further to the leading
performers, although recognise that we still have more to do. Following a 40%
reduction in written complaints in 2012/13 (best improvement in sector),
complaints have continued to fall and we are pleased to again have zero
complaints warranting investigation by the Consumer Council for Water in the
first half of 2013/14.
* Strong operational performance - We performed well again across a broad front,
as measured in Ofwat's latest (2012/13) key performance indicators report. The
balance of ratings across the fourteen assessments indicates that UU is again
an above average performer, in respect of the ten water and sewerage companies.
This performance has helped provide benefits for customers, for example in
terms of better customer service and very high levels of reliability and
availability of water supply and wastewater services, alongside a range of
environmental benefits.
* Effective capital delivery drives customer and environmental benefits - We
continue to drive more effective and efficient delivery of our capital
programme. This is reflected in a significant improvement in our Time: Cost:
Quality index (TCQi) score from around 50% in 2010/11 to over 90% for the first
half of 2013/14. We met our water and wastewater asset serviceability standards
in 2012/13 and have confidence that our performance in respect of meeting our
2010-15 regulatory commitments will be much improved, compared with the 2005-10
period. We have now invested just over GBP2.4 billion across the first three and
a half years of this regulatory period, as we have sought to deliver a smoother
investment profile to support efficient delivery of outputs and reduce risk.
* Leakage target - We have met or outperformed our regulatory leakage target
for seven consecutive years and our aim is to meet the target each year.
* Regulatory outperformance on track- We have set clear targets for the 2010-15
period and remain on track or ahead of schedule in delivering these targets. As
outlined previously, we expect to reinvest around GBP240 million of capex and
financing outperformance, over 2010-15, for the benefit of our customers and
the environment.
* Corporate responsibility - We retained a `World Class' rating in the Dow
Jones Sustainability Index for the sixth consecutive year. We also have the
highest `Platinum Big Tick' ranking in Business in the Community's Corporate
Responsibility Index. We are one of only seven FTSE 100 companies to hold both
accolades.
* Extending our presence in the retail water marketfor business customers - We
have been building our capability over the last two years to help ensure we are
in a strong position as the competitive business retail market evolves and are
very active in this expanding market. After attaining a Scottish water supply
licence in 2012 we have already won over 50 customers, covering over 1,500
sites and representing future annual revenue of around GBP6 million. We are now
the second largest water retailer in Scotland. We also have a significant
pipeline of opportunities and are continuing to develop our range of
value-added services.
Financial overview
The group has delivered another good set of financial results for the six
months ended 30 September 2013.
* Revenue - up by GBP30 million to GBP853 million, principally as a result of the
impact of the regulated price increase for 2013/14 of 4.0% nominal (1.0% real
price increase, plus 3.0% RPI inflation). This follows on from real price
decreases of 4.3% in 2010/11 and 0.2% in 2011/12, with an allowed real price
increase of 0.6% in 2012/13.
* Underlying operating profit - increased by GBP29 million to GBP343 million as the
company tightly managed its cost base, keeping total cost increases below 1%.
* Capex - total regulatory capital investment in the half year, including GBP78
million of infrastructure renewals expenditure, was GBP407 million, representing
an increase of 15% compared with the first half of last year, reflecting
continued good progress on the capital investment programme.
* Underlying profit before taxation - up GBP27 million, at GBP216 million,
marginally below the increase in underlying operating profit as net finance
expense increased slightly, mainly due to higher levels of index-linked debt.
* Reported profit after taxation - this benefited from a GBP159 million deferred
taxation credit, which follows the UK Government's announced staged 3%
reduction in the mainstream taxation rate down to 20% by 2015/16. A similar
credit of GBP53 million, reflecting a 1% reduction in the mainstream taxation
rate, was recognised in the first half of 2012/13. Reported profit after
taxation also benefitted from a current taxation credit of GBP122 million and a
deferred taxation credit of GBP3 million, both relating to recently agreed
matters with Her Majesty's Revenue and Customs (HMRC) in relation to prior
years, covering a period of over ten years in total.
* Agreement with HMRC - this agreement principally relates to revised taxation
treatment with regard to capital expenditure, particularly in respect of the
abolition of industrial buildings allowances in 2008. The total taxation credit
to the income statement of GBP125 million includes deferred taxation and the
release of an accounting accrual, which are non-cash items. We expect to
receive a cash taxation benefit of around GBP90 million over the next two years
relating to the revised capex taxation treatment, of which a GBP15 million cost
was borne by shareholders in the latter part of the previous regulatory period.
We are proposing to share the GBP75 million net cash benefit with customers. We
are proposing a special customer discount of cGBP20 million to offset the allowed
real price increase for 2014/15 and we are committing to further support of GBP17
million, through additional contributions to our trust fund, for customers who
are struggling to pay. We intend to use the balance of cGBP38 million for future
sharing with customers. In addition, we estimate that there will be taxation
savings of around GBP90 million in the 2015-20 period, all of which will flow
through to customers.
* Capital structure - the group has a robust capital structure and gearing
(measured as group net debt to regulatory capital value) as at 30 September
2013 was 59%, comfortably within Ofwat's assumed range of 55% to 65%,
supporting a solid investment grade credit rating. United Utilities Water PLC
(UUW) has a long-term credit rating of A3 from Moody's with a stable outlook.
* Financing headroom - the group benefits from headroom to cover its projected
financing needs into 2015, with substantially all term debt due in the 2010-15
period already repaid. This provides good flexibility in terms of when and how
further debt finance is raised to help refinance maturing debt and fund the
regulated capital investment programme.
* Dividend - in line with its policy, the board has declared an interim
dividend of 12.01 pence per ordinary share.
PRICE REVIEW 2014 - BUSINESS PLAN
On 2 December 2013, we will submit our business plans, covering the 2015-20
period, to Ofwat. Following a period of extensive consultation with around
27,000 customers and other key stakeholders, we believe our plans strike the
right balance for all parties. Supported by customer research and significant
cost saving initiatives, we are proposing below inflation average household
bills across 2015-20. This would mean that our customers would benefit from
below inflation average household bills for the decade to 2020. Our plan will
include a substantial capital investment programme to help us meet our
environmental obligations, alongside maintaining and improving services for
customers.
OUTLOOK
Our sustained focus on operational performance, combined with continued
substantial investment in our assets, will deliver further benefits for our
customers and the environment. We are encouraged by our progress on Ofwat's
service incentive mechanism and our strong operational performance and believe
we can improve further. We remain confident of delivering our 2010-15
regulatory outperformance targets, where we are ahead of schedule. We intend to
continue with our dividend policy of targeting 2% per annum growth above the
rate of RPI inflation through to at least 2015, underpinned by a robust capital
structure. We are submitting our 2015-20 business plan to Ofwat, which we
believe strikes the right balance for all our stakeholders, and will continue
to actively engage with our regulators as we look forward to the draft and
final determinations from Ofwat next year.
OPERATIONAL PERFORMANCE
United Utilities aims to deliver long-term shareholder value by providing:
* The best service to customers
* At the lowest sustainable cost
* In a responsible manner
Best service to customers
Our continuing strong focus on dealing effectively with customer enquiries has
helped us deliver further improvements in our performance on Ofwat's service
incentive mechanism (SIM). Following on from a 40% reduction in written
complaints in 2012/13 (the biggest improvement in the water sector), complaints
have continued to fall in the first half of 2013/14. In addition, the number of
customer complaints made to the Consumer Council for Water (CCW) in the first
half of 2013/14 has reduced by a further 12%, compared with the first half of
2012/13. We are pleased to report that the total number of escalated complaints
assessed by the CCW was again zero in the first half of 2013/14. This has
helped us improve our SIM performance further, as detailed in the KPIs section
below. This places us in a good position as we aim to avoid a SIM penalty. Our
strong overall operational performance, as measured by Ofwat's latest (2012/13)
KPIs report, has also contributed to improving customer satisfaction.
Our customers continue to benefit from our robust water supply and demand
balance and high levels of water supply reliability. In addition, we continue
to supply a high level of water quality, with mean zonal compliance continuing
to be over 99.9%.
We have continued to invest heavily in schemes designed to mitigate the risk of
flooding of our customers' homes, including incidence based targeting on areas
more likely to experience flooding and defect identification through CCTV sewer
surveys. Our wastewater network will continue to benefit from significant
investment going forward as we adapt to weather patterns likely to result from
climate change.
We have a range of actions to help support the serviceability of our assets. We
are improving the robustness of our water treatment processes, refurbishing
service reservoir assets, continuing with our comprehensive mains cleaning
programme and optimising water treatment to reduce discoloured water events.
Improving customer service remains a significant area of continued management
focus and we see plenty of opportunity to deliver further benefits for our
customers.
Key performance indicators:
* Serviceability - Long-term stewardship of assets is critical and Ofwat
measures this through its serviceability assessment (Ofwat defines
serviceability as the capability of a system of assets to deliver a reference
level of service to customers and to the environment now and in the future). We
are currently assessed as 'improving' for our wastewater non-infrastructure
assets and 'stable' for our water infrastructure, water non-infrastructure and
wastewater infrastructure assets. The aim is to continue to hold at least a
`stable' rating for all four asset classes, which aligns with Ofwat's target.
* Service incentive mechanism (SIM) - UU continued its progress on Ofwat's
combined SIM assessment for 2012/13, moving up a further three places to joint
13th of the 21 water companies, compared with 2011/12. This represents joint
fifth position among the ten water and sewerage companies. Progress has
continued in the first six months of 2013/14, with a further improvement in the
quantitative SIM score, compared with the first half of 2012/13. On the
qualitative measure, UU has improved its 2013/14 average score by 0.10 points
to 4.53 points which represents an above average score and narrows the gap to
the leading performers. From 2013/14, Ofwat assesses SIM out of 19 water
companies and UU's qualitative SIM improvement moves it to 10th position. Our
continued progress is encouraging, as we aim to move to the first quartile in
the medium-term.
Lowest sustainable cost
Our asset optimisation programme continues to provide the benefits of increased
and more effective use of operational site management to optimise power and
chemical use and the development of more combined heat and power assets to
generate renewable energy.
We are implementing a more proactive approach to asset and network management,
with the aim of improving our modelling and forecasting to enable us to address
more asset and network problems before they affect customers, thereby reducing
the level of reactive work and improving efficiency.
We have substantially locked in the cost of our power requirements through to
2015, via hedging, securing outperformance across the 2010-15 period.
We are continuing to enhance our proactive approach to debt collection and are
implementing a detailed action plan. We recognise the financial difficulties
facing many of our customers and provide a range of options to help those who
are struggling to pay their bills and we have helped many customers back onto
manageable payment plans. We have again delivered a good performance and have
sustained bad debts at 2.2% of regulated revenue for the first half of 2013/14,
consistent with the 2012/13 full year position.
UU placed its pension provision on a more sustainable footing in 2010 and has
subsequently taken additional steps to de-risk the pension scheme further.
Further details on the group's pension provision are provided in the pensions
section.
The business is strongly focused on delivering its commitments efficiently and
on time and has a robust commercial capital delivery framework in place for the
2010-15 period. Regulatory capital investment in the half year, including GBP78
million of infrastructure renewals expenditure, was GBP407 million and we expect
to deliver at least GBP800 million in 2013/14. We improved our internal Time:
Cost: Quality index (TCQi) score from around 50% in 2010/11 to approximately
90% in 2012/13 and have delivered over 90% in the first half of 2013/14. We
received a shortfalling revenue penalty of over GBP80 million at the last price
review in 2009 but, with our improved TCQi performance, we aim to avoid, or at
least minimise, any revenue penalties at the 2014 price review. We remain on
track to deliver the five-year programme within the regulatory allowance of
around GBP3.5 billion (excluding costs associated with private sewers and
transitional investment) and we are reinvesting any capex outperformance to
deliver further customer benefits.
The transfer of private sewers around two years ago has gone well and is now
fully embedded within our 'business as usual' activities. In the first half of
2013/14, private sewers opex was GBP5 million and capex was GBP16 million, of which
GBP9 million was IRE. This level of spend is broadly in line with our
expectations and there is no change to our 2011-15 total cost estimate of GBP160
million.
Key performance indicators:
*Financing outperformance - UU has secured over GBP300 million of financing
outperformance across the 2010-15 period, when compared with Ofwat's allowed
cost of debt of 3.6% real, based on an average RPI inflation rate of 2.5% per
annum. As outlined previously, we expect to reinvest around GBP40 million of our
financing outperformance in unfunded private sewers costs.
* Operating expenditure outperformance - The business is targeting total
operating expenditure outperformance over the 2010-15 period of at least GBP50
million, or approximately 2%, compared with the regulatory allowance. This is
in addition to the base operating expenditure efficiency targets set by Ofwat,
which equate to a total of approximately GBP150 million over the five years. We
have now delivered cumulative operating expenditure outperformance of over GBP50
million in the first three and a half years of the regulatory period and are
ahead of schedule.
* Capital expenditure outperformance - UU is continuing to deliver significant
efficiencies in the area of capital expenditure and expects to meet Ofwat's
allowance after adjusting, through the regulatory methodology, for the impact
of lower construction output prices. As outlined previously, we expect to
reinvest around GBP200 million of capital expenditure outperformance for the
benefit of our customers and the environment.
Responsible manner
Acting responsibly is fundamental to the manner in which we undertake our
business and the group has for many years included corporate responsibility
factors in its strategic decision making. Our environmental and sustainability
performance across a broad front has received external recognition. UU
continues to be rated 'World Class' in the Dow Jones Sustainability Index and
has retained the highest ranking, 'Platinum Big Tick', in Business in the
Community's Corporate Responsibility Index. UU is one of only seven FTSE 100
companies (and the only water company) to hold both accolades.
Our strong, year round, operational focus on leakage and the implementation of
a range of initiatives, such as active pressure management, enabled us to again
beat our leakage target for 2012/13. Our aim is meet our leakage target each
year.
Environmental performance is a high priority for UU and we are pleased to again
deliver a strong performance as assessed through Ofwat's published KPIs for
2012/13. Across Ofwat's five 'Environmental Impact' KPIs, UU's performance was
above average, with three areas assessed as 'Green', two as 'Amber' and no
areas assessed as 'Red', on the traffic light reporting matrix.
Our GBP100 million+ project in Preston, which is designed to improve river and
bathing quality, is nearing completion. The project involved building a 3.5
kilometre storm water storage tunnel and the construction of shafts to divert
storm water flows, which will be retained in the new storage tunnel. It will
reduce the number of spills to the River Ribble from combined sewers and should
deliver significant improvements to the Fylde Coast bathing waters and the
Ribble Estuary.
We are committed to reducing our carbon footprint and increasing our generation
of renewable energy. We remain on track to meet our plan target of a 21%
reduction in carbon emissions by 2015 (measured from a 2005/06 baseline). We
have consistently generated around 100 GWh of renewable electricity annually
for the past four years, principally from sludge processing, and expect this to
increase with the completion of our GBP100 million+ recycling and energy plant at
our Davyhulme wastewater site in 2014.
We continue to be successful in attracting and retaining people and have
continued to expand our apprentice and graduate programmes, having recruited a
further 24 graduates and 32 apprentices in 2013/14. We remain firmly focussed
on our health and safety improvement programme, as we strive for continuous
improvement.
Key performance indicators:
* Leakage - UU met its economic level of leakage rolling target for the seventh
consecutive year in 2012/13. The aim is to meet our regulatory leakage target
each year.
* Environmental performance - The Environment Agency's 2012/13 assessment,
covering a broad range of operational metrics, is due to be published shortly.
UU's good performance on Ofwat's KPIs, within the `Environmental Impact'
category, should positively impact the EA's overall assessment. For the EA's
2011/12 assessment, based on the balance of 'Green', 'Amber' and 'Red'
categories, UU would rank third out of the ten water and sewerage companies.
The medium-term goal is to be a first quartile company on a consistent basis.
* Corporate responsibility - UU has a strong focus on corporate responsibility
and is the only UK water company to have a 'World Class' rating as measured by
the Dow Jones Sustainability Index. The group recently retained its 'World
Class' rating and aims to retain this rating each year.
FINANCIAL PERFORMANCE
Revenue
UU has delivered a good set of financial results for the six months ended 30
September 2013. Revenue increased by GBP30 million to GBP853 million, principally
reflecting a 4.0% nominal (1.0% real price increase plus 3.0% RPI inflation)
allowed regulated price increase.
Operating profit
Underlying operating profit increased by 9% to GBP343 million, primarily as a
result of an increase in revenue and benefiting from tight cost control with
total operating expenses up GBP3 million, representing an increase of less than
1%. Reported operating profit increased by 9% to GBP342 million.
Investment income and finance expense
The underlying net finance expense of GBP128 million was GBP2 million higher than
the first half of last year, reflecting an increase in index-linked debt. The
indexation of the principal on index-linked debt amounted to a net charge in
the income statement of GBP45 million, compared with a net charge of GBP43 million
in the first half of last year. The group had approximately GBP2.9 billion of
index-linked debt as at 30 September 2013. The group's average underlying
interest rate of 4.8% was slightly lower than the rate of 5.0% for the
corresponding prior year period, mainly reflecting a reduction in cash.
Reported investment income and finance expense of GBP7 million was significantly
lower than the GBP175 million expense in the first half of 2012/13. This GBP168
million reduction principally reflects a change in the fair value gains and
losses on debt and derivative instruments, from a GBP49 million loss in the first
half of last year to a GBP100 million gain in the first half of 2013/14. The GBP100
million fair value gain in the half year is largely due to gains on the
regulatory swap portfolio, resulting from a significant increase in sterling
interest rates during the period. The group uses these swaps to fix interest
rates on a substantial proportion of its debt to better match the financing
cash flows allowed by the regulator at each price review. The group fixed the
majority of its non index-linked debt for the 2010-15 financial period,
providing a net effective nominal interest rate of approximately 5%.
Profit before taxation
Underlying profit before taxation was GBP216 million, GBP27 million higher than the
corresponding period last year, due to the GBP29 million increase in underlying
operating profit slightly offset by the GBP2 million increase in underlying net
finance expense. This underlying measure adjusts for the impact of one-off
items, principally from restructuring and reorganisation within the business,
and fair value movements in respect of debt and derivative instruments.
Reported profit before taxation increased by GBP196 million to GBP335 million.
Taxation
The current taxation charge is GBP49 million in the half year, compared with GBP33
million in the corresponding period last year. In addition, there was a current
taxation credit of GBP122 million relating to recently agreed matters with HMRC
in relation to prior years. We expect this to result in a one-off cash taxation
inflow of around GBP75 million to be received in this or the next financial year.
The group has a deferred taxation charge of GBP23 million in the first half of
2013/14, compared with a charge of GBP3 million in the first half of 2012/13. The
group has recognised a deferred taxation credit of GBP159 million in the first
half of 2013/14 which relates to the 3% staged reduction in the mainstream rate
of corporation taxation, substantively enacted on 2 July 2013, to reduce
taxation to 20% by 2015/16. A deferred taxation credit of GBP53m relating to a
similar 1% reduction in the mainstream rate of corporation taxation was
included in the first half of 2012/13. The group also recognised a deferred
taxation credit of GBP3 million relating to recently agreed matters in relation
to prior years.
An overall taxation credit of GBP212 million has been recognised for the six
months ended 30 September 2013. Excluding the deferred taxation impact of the
future reduction in the corporation taxation rate and the adjustments relating
to recently agreed matters in relation to prior years, the total taxation
charge would have been GBP72 million or 21% compared with a GBP35 million charge or
25% in the first half of last year. This reduction in total taxation rate is
due to the decrease in the mainstream rate of corporation taxation from 24% for
2012/13 to the current rate of 23%, together with the period-on-period movement
in taxation disallowable items.
The group made cash taxation payments during the half year of GBP27 million. This
was higher than the group's net taxation payment of GBP17 million in the first
half of last year, primarily due to the high levels of pension contributions
relating to the previous year.
Profit after taxation
Underlying profit after taxation of GBP168 million was GBP27 million higher than
the first half of last year, principally reflecting the increase in underlying
profit before taxation. Reported profit after taxation was GBP547 million,
compared with GBP157 million in the first half of last year, impacted by the GBP149
million improvement in fair value gains on debt and derivative instruments and
the GBP194 million increase in the net taxation credit between the two periods.
Earnings per share
Underlying earnings per share increased from 20.8 pence to 24.7 pence. This
underlying measure is derived from underlying profit after taxation. This
includes the adjustments for the deferred taxation credits in both the first
half of 2013/14 and 2012/13, associated with the reductions in the corporation
taxation rate and an adjustment for the taxation credit arising from agreement
of prior years' taxation matters in the first half of 2013/14. Basic earnings
per share increased from 23.0 pence to 80.2 pence.
Dividend per share
The board has declared an interim dividend of 12.01 pence per ordinary share in
respect of the six months ended 30 September 2013. This is an increase of 5.0%,
compared with the dividend relating to the first half of last year, in line
with group's dividend policy of targeting a growth rate of RPI+2% per annum
through to at least 2015. The inflationary increase of 3.0% is based on the RPI
element included within the allowed regulated price increase for the 2013/14
financial year (i.e. the movement in RPI between November 2011 and November
2012).
The interim dividend is expected to be paid on 3 February 2014 to shareholders
on the register at the close of business on 20 December 2013. The ex-dividend
date is 18 December 2013.
Cash flow
Net cash generated from continuing operating activities for the six months
ended 30 September 2013 was GBP383 million, compared with GBP265 million in the
first half of last year. This mainly reflected an improvement in working
capital cash flows, impacted by the reduction in the total pension contribution
payments between the two periods, as well as an increase in operating profit.
The group's net capital expenditure was GBP335 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 (IFRS).
Net debt including derivatives at 30 September 2013 was GBP5,485 million,
compared with GBP5,451 million at 31 March 2013. This slight increase reflects
expenditure on the regulatory capital expenditure programmes and payments of
dividends, interest and taxation, alongside an increase in the principal of our
index-linked debt, largely offset by operating cash flows and fair value gains
on our debt and derivative instruments.
Debt financing and interest rate management
Gearing (measured as group net debt divided by UUW's regulatory capital value
adjusted for actual capital expenditure) decreased marginally to 59% at 30
September 2013, compared with 60% at 31 March 2013, remaining comfortably
within Ofwat's 55% to 65% assumed gearing range. The group's pension accounting
position has moved to a deficit of GBP184 million at 30 September 2013, on an
IFRS basis, compared with a small pension surplus of GBP15 million as at 31 March
2013. Taking account of the group's pension deficit, and treating it as debt,
gearing would be 61%.
At 30 September 2013, UUW had long-term credit ratings of A3/BBB+ and United
Utilities PLC had long-term credit ratings of Baa1/BBB- from Moody's Investors
Service and Standard & Poor's Ratings Services respectively. The split rating
reflects differing methodologies used by the credit rating agencies. Standard &
Poor's currently have both the group's ratings on positive outlook, citing
improving financial metrics and operational performance.
Cash and short-term deposits at 30 September 2013 amounted to GBP53 million and,
taken together with medium-term committed bank facilities, the group has
headroom to cover its projected financing needs into 2015.
The group has access to the international debt capital markets through its EUR7
billion euro medium-term note programme which provides for the periodic
issuance by United Utilities PLC and UUW 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 assets and earnings,
which are largely in sterling, indexed to UK retail price inflation and subject
to regulatory price reviews every five years.
Long-term sterling inflation index-linked debt provides a natural hedge to
assets and earnings. At 30 September 2013, approximately 53% of the group's net
debt was in index-linked form, representing around 31% of UUW's regulatory
capital value, with an average real interest rate of 1.7%. The long-term nature
of this funding also provides a good match to the company's long-life
infrastructure assets and is a key contributor to the group's average term debt
maturity which is approximately 25 years.
Where nominal debt is raised in a currency other than sterling and/or with a
fixed interest rate, to manage exposure to long-term interest rates, the debt
is generally swapped to create a floating rate sterling liability for the term
of the liability. To manage exposure to medium-term interest rates, the group
fixed interest costs for a substantial proportion of the group's debt for the
duration of the 2010-15 regulatory period at around the time of the 2009 price
review.
Following the 2009 price review, the group reassessed its interest rate hedging
policy with a view to further reducing regulatory risk. To help address the
uncertainty as to how Ofwat may approach the setting of the cost of debt
allowance at the next price review in 2014, UU revised its interest rate
management strategy to extend its fixed interest rate hedge out to a ten-year
maturity on a reducing balance basis. The intention is that the effective
interest rate, on the group's nominal debt, in any given year will, over time,
be a ten-year rolling average interest rate. UU believes that this revised
interest rate hedging policy, which provides for a longer fixing of interest
rates, will help mitigate the risk of the group being materially misaligned
with whatever approach Ofwat adopts to the industry cost of debt in future.
Liquidity
Short-term liquidity requirements are met from the group's normal operating
cash flow and its short-term bank deposits and supported by committed but
undrawn credit facilities. In addition to its EUR7 billion euro medium-term note
programme, the group has a EUR2 billion euro-commercial paper programme, both of
which do not represent funding commitments.
In line with the board's treasury policy, UU aims to maintain a robust headroom
position. Available headroom at 30 September 2013 was GBP273 million based on
cash, short-term deposits and medium-term committed bank facilities, net of
short-term debt.
UU believes that it operates a prudent approach to managing banking
counterparty risk. Counterparty risk, in relation to both cash deposits and
derivatives, is controlled through the use of counterparty credit limits. UU's
cash is held in the form of short-term (generally no longer than three months)
money market deposits with either prime commercial banks or with triple A rated
money market funds.
UU operates a bilateral, rather than a syndicated, approach to its core
relationship banking facilities. This approach spreads maturities more evenly
over a longer time period, thereby reducing refinancing risk and providing the
benefit of several renewal points rather than a large single refinancing
requirement.
Pensions
As at 30 September 2013, the group had an IAS 19 net retirement benefit, or
pension, deficit of GBP184 million, compared with a net pension surplus of GBP15
million at 31 March 2013. This GBP199 million adverse movement principally
reflects the movement of market rates during the period, particularly
influenced by the significant reduction in corporate credit spreads. In
contrast, the scheme specific funding basis does not suffer from volatility due
to credit spread movements as it uses a conservative, fixed credit spread
assumption. Therefore, the recent credit spread movements have not had a
material impact on the scheme specific funding and the level of deficit repair
contributions.
The triennial actuarial valuations of the group's defined benefit pension
schemes were carried out as at 31 March 2013 and the overall funding position
has improved since March 2010. Following the de-risking measures we have
implemented over recent years, our pension funding position remains well placed
and in line with our expectations. There has been no material change to the
scheduled cash contributions as assessed at the previous valuations in 2010.
The group has already completed early all scheduled deficit repair payments
through to March 2015.
Further detail is provided in note 9 ("Retirement benefit (obligations)/
surplus") of these condensed consolidated financial statements.
Underlying profit
In considering the underlying results for the period, the directors have
adjusted for the items outlined in the table below to provide a more
representative view of business performance. Reported operating profit and
profit before taxation from continuing operations are reconciled to underlying
operating profit, underlying profit before taxation and underlying profit after
taxation (non-GAAP measures) as follows:
Continuing operations Restated*
Operating profit Six months ended Six months ended
30 September 30 September
2013 2012
GBPm GBPm
Operating profit per published results 341.7 314.1
One-off items** 1.5 0.6
----- -----
Underlying operating profit 343.2 314.7
----- -----
Net finance expense
GBPm GBPm
Finance expense (7.9) (176.0)
Investment income 1.2 1.3
----- -----
Net finance expense per published results (6.7) (174.7)
Net fair value (gains)/losses on debt and (100.0) 49.4
derivative instruments
Adjustment for interest on swaps and debt 4.5 3.0
under fair value option
Adjustment for net pension interest (income)/ (0.5) 1.7
expense
Adjustment for capitalised borrowing costs (11.5) (5.4)
Adjustment for release of tax interest accrual (13.3) -
----- -----
Underlying net finance expense (127.5) (126.0)
----- -----
Profit before taxation
GBPm GBPm
Profit before taxation per published results 335.0 139.4
One-off items** 1.5 0.6
Net fair value (gains)/losses on debt and (100.0) 49.4
derivative instruments
Adjustment for interest on swaps and debt 4.5 3.0
under fair value option
Adjustment for net pension interest (income)/ (0.5) 1.7
expense
Adjustment for capitalised borrowing costs (11.5) (5.4)
Adjustment for release of tax interest accrual (13.3) -
----- -----
Underlying profit before taxation 215.7 188.7
----- -----
Profit after taxation
GBPm GBPm
Underlying profit before taxation 215.7 188.7
Reported taxation 211.8 17.4
Deferred taxation credit - change in taxation (158.6) (52.8)
rate
Agreement of prior years' UK taxation matters (125.0) -
Taxation in respect of adjustments to 24.4 (11.8)
underlying profit before taxation
----- -----
Underlying profit after taxation 168.3 141.5
----- -----
Earnings per share
GBPm GBPm
Profit after taxation per published 546.8 156.8
results (a)
Underlying profit after taxation (b) 168.3 141.5
Weighted average number of shares in issue, in 681.9m 681.8m
millions (c)
Earnings per share per published results, in 80.2p 23.0p
pence (a/c)
Underlying earnings per share, in pence (b/c) 24.7p 20.8p
* In accordance with the revised accounting standard IAS 19 'Employee benefits'
which applies retrospectively, the first half of 2012/13 has been restated
** Principally relates to restructuring costs within the business
PRINCIPAL RISKS AND UNCERTAINTIES
We manage risk through line management supported by our corporate risk
management framework which aims for continuous improvement. With an overarching
mandate from and commitment by the group board, the framework consists of four
key areas: governance; approach; guidance; and process.
The application of our framework involves regular review of internal and
external risk environments, the assessment of factors that will limit or
prevent the achievement of the group's objectives and the prioritised
implementation of controls and mitigation to manage the exposure and build
resilience.
The audit committee regularly reviews the framework's effectiveness and our
compliance with it. There is also twice yearly formal reporting of the most
significant risks and profile summary to the executive and the group board.
These activities facilitate the determination of the nature and extent of those
risks we are willing to take in pursuing our objectives and accord with good
corporate governance practice.
The group's anticipated principal risks and uncertainties over the second half
of the financial year and beyond remain as stated in its 2013 Annual Report and
Financial Statements, with the additional development of elevated political and
public focus in relation to the cost of utility bills to household customers as
explained in the paragraph below. The principal risks and uncertainties were
set out in full on pages 32-37 of the 2013 Annual Report and Financial
Statements, namely (a) government market reform agenda; (b) future price limits
and the price control review 2014; (c) failure to comply with applicable law or
regulations; (d) material litigation; (e) pension deficit risk; (f)
counterparty risk; (g) customer service risk; (h) bad debt risk; (i)
operational service risk; (j) capital delivery risk; (k) secure supply of safe
clean drinking water risk; and (l) significant and catastrophic events.
There is currently an elevated political and public focus on the cost to
households of bills, especially in relation to certain utilities including the
regulated water industry. The Secretary of State for Environment, Food and
Rural Affairs has recently written to industry CEOs supporting the work being
done by Ofwat and the industry to ensure a fair deal for customers and
stressing the need to keep bills for customers as low as possible, while
ensuring that low-cost investment in the sector continues. It is unclear
whether the broader political and public focus on utilities will ultimately
impact Government policy, legislation or regulatory outcomes affecting the
sector.
There has been no change to the nature of related party transactions in the
first six months of the financial year which has materially affected the
financial position or performance of UU.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This financial report contains certain forward-looking statements with respect
to the operations, performance and financial condition of the group. By their
nature, these statements involve uncertainty since future events and
circumstances can cause results and developments to differ materially from
those anticipated. The forward-looking statements reflect knowledge and
information available at the date of preparation of this financial report and
the company undertakes no obligation to update these forward-looking
statements. Nothing in this financial report should be construed as a profit
forecast.
Certain regulatory performance data contained in this financial report is
subject to regulatory audit.
Consolidated income statement
Restated* Restated*
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Continuing operations
----- ----- -----
Revenue 853.3 822.9 1,636.0
----- ----- -----
Employee benefits expense:
- excluding restructuring costs (65.9) (70.7) (130.4)
- restructuring costs (1.5) (0.6) (2.6)
----- ----- -----
Total employee benefits expense (67.4) (71.3) (133.0)
Other operating costs (204.4) (199.8) (414.1)
Other income 1.5 1.3 3.1
Depreciation and amortisation expense (163.3) (160.2) (329.2)
Infrastructure renewals expenditure (78.0) (78.8) (161.2)
----- ----- -----
Total operating expenses (511.6) (508.8) (1,034.4)
----- ----- -----
Operating profit 341.7 314.1 601.6
Investment income (note 3) 1.2 1.3 2.3
Finance expense (note 4) (7.9) (176.0) (292.1)
----- ----- -----
Investment income and finance expense (6.7) (174.7) (289.8)
----- ----- -----
Profit before taxation 335.0 139.4 311.8
Current taxation charge (48.7) (32.6) (80.7)
Current taxation credit - prior years' 122.0 - 6.5
adjustments
Deferred taxation (charge)/credit (23.1) (2.8) 3.0
Deferred taxation credit/(charge) - 3.0 - (5.8)
prior years' adjustments
Deferred taxation credit - change in 158.6 52.8 53.0
taxation rate
----- ----- -----
Taxation (note 5) 211.8 17.4 (24.0)
----- ----- -----
Profit after taxation from continuing 546.8 156.8 287.8
operations
Discontinued operations
Profit after taxation from discontinued 0.5 3.0 14.6
operations (note 6)
----- ----- -----
Profit after taxation 547.3 159.8 302.4
----- ----- -----
Earnings per share
from continuing and discontinued
operations (note 7)
Basic 80.3p 23.4p 44.3p
Diluted 80.1p 23.4p 44.3p
Earnings per share
from continuing operations (note 7)
Basic 80.2p 23.0p 42.2p
Diluted 80.1p 23.0p 42.2p
Dividend per ordinary share (note 8) 12.01p 11.44p 34.32p
* The comparatives have been restated to reflect the requirements of IAS 19
(Revised) 'Employee Benefits'. See note 1 for details.
Consolidated statement of comprehensive income
Restated* Restated*
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Profit after taxation 547.3 159.8 302.4
Other comprehensive income
Actuarial (losses)/gains on defined (207.5) 58.4 35.0
benefit pension schemes (note 9)
Taxation on items taken directly to 42.1 (14.2) (8.4)
equity (note 5)
Foreign exchange adjustments (0.6) (1.7) 0.6
----- ----- -----
Total comprehensive income 381.3 202.3 329.6
----- ----- -----
* The comparatives have been restated to reflect the requirements of IAS 19
(Revised) 'Employee Benefits'. See note 1 for details.
Consolidated statement of financial position
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
ASSETS
Non-current assets
Property, plant and equipment 9,176.0 8,785.4 8,990.7
Goodwill 4.9 4.7 5.0
Other intangible assets 110.9 90.9 99.9
Investments 6.7 4.5 5.7
Trade and other receivables 1.1 1.2 2.2
Retirement benefit surplus (note 9) - 39.3 15.1
Derivative financial instruments 525.7 612.8 659.2
----- ----- -----
9,825.3 9,538.8 9,777.8
----- ----- -----
Current assets
Inventories 42.1 47.7 39.6
Trade and other receivables 358.8 360.8 326.9
Current income taxation assets 30.2 - -
53.0 152.5 201.7
Cash and short-term deposits
Derivative financial instruments 54.5 99.7 62.0
----- ----- -----
538.6 660.7 630.2
----- ----- -----
Total assets 10,363.9 10,199.5 10,408.0
----- ----- -----
LIABILITIES
Non-current liabilities
Trade and other payables (434.0) (397.0) (419.8)
Borrowings (5,861.3) (5,821.2) (6,007.4)
Retirement benefit obligations (note 9) (183.9) - -
Deferred taxation liabilities (1,040.3) (1,211.5) (1,219.0)
Provisions (3.4) (2.5) (3.4)
Derivative financial instruments (125.0) (207.2) (196.2)
----- ----- -----
(7,647.9) (7,639.4) (7,845.8)
----- ----- -----
Current liabilities
Trade and other payables (482.5) (481.2) (440.1)
Borrowings (129.9) (158.1) (166.1)
Current income taxation liabilities - (91.5) (71.5)
Provisions (3.5) (6.4) (8.8)
Derivative financial instruments (1.5) (1.3) (3.8)
----- ----- -----
(617.4) (738.5) (690.3)
----- ----- -----
Total liabilities (8,265.3) (8,377.9) (8,536.1)
----- ----- -----
Total net assets 2,098.6 1,821.6 1,871.9
----- ----- -----
EQUITY
Share capital 499.8 499.8 499.8
Share premium account 2.9 2.9 2.9
Revaluation reserve 158.8 158.8 158.8
Cumulative exchange reserve (5.0) (6.7) (4.4)
Merger reserve 329.7 329.7 329.7
Retained earnings 1,112.4 837.1 885.1
----- ----- -----
Shareholders' equity 2,098.6 1,821.6 1,871.9
----- ----- -----
Consolidated statement of changes in equity
Six months ended 30 September 2013
Share Share Revaluation Cumulative Merger Retained Total
capital premium reserve exchange reserve earnings
account reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2013 499.8 2.9 158.8 (4.4) 329.7 885.1 1,871.9
Profit after - - - - - 547.3 547.3
taxation
Other comprehensive
income
Actuarial losses on - - - - - (207.5) (207.5)
defined benefit
pension schemes
(note 9)
Taxation on items - - - - - 42.1 42.1
taken directly to
equity (note 5)
Foreign exchange - - - (0.6) - - (0.6)
adjustments
----- ----- ----- ----- ----- ----- -----
Total comprehensive - - - (0.6) - 381.9 381.3
(expense)/income
----- ----- ----- ----- ----- ----- -----
Transactions with
owners
Dividends (note 8) - - - - - (156.0) (156.0)
Equity-settled - - - - - 2.2 2.2
share-based payments
Exercise of share - - - - - (0.8) (0.8)
options - purchase
of shares
----- ----- ----- ----- ----- ----- -----
At 30 September 2013 499.8 2.9 158.8 (5.0) 329.7 1,112.4 2,098.6
----- ----- ----- ----- ----- ----- -----
Six months ended 30 September 2012 (Restated*)
Share Share Revaluation Cumulative Merger Retained Total
capital premium reserve exchange reserve earnings
account reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2012 499.8 2.4 158.8 (5.0) 329.7 778.9 1,764.6
Profit after taxation - - - - - 159.8 159.8
Other comprehensive
income
Actuarial gains on - - - - - 58.4 58.4
defined benefit
pension schemes (note
9)
Taxation on items - - - - - (14.2) (14.2)
taken directly to
equity (note 5)
Foreign exchange - - - (1.7) - - (1.7)
adjustments
----- ----- ----- ----- ----- ----- -----
Total comprehensive - - - (1.7) - 204.0 202.3
(expense)/income
----- ----- ----- ----- ----- ----- -----
Transactions with
owners
Dividends (note 8) - - - - - (145.5) (145.5)
New share capital - 0.5 - - - - 0.5
issued
Equity-settled - - - - - 0.7 0.7
share-based payments
Exercise of share - - - - - (1.0) (1.0)
options - purchase of
shares
----- ----- ----- ----- ----- ----- -----
At 30 September 2012 499.8 2.9 158.8 (6.7) 329.7 837.1 1,821.6
----- ----- ----- ----- ----- ----- -----
* The comparatives have been restated to reflect the requirements of IAS 19
(Revised) 'Employee Benefits'. See note 1 for details.
Consolidated statement of changes in equity
Year ended 31 March 2013 (Restated*)
Share Share Revaluation Cumulative Merger Retained Total
capital premium reserve exchange reserve earnings
account reserve
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2012 499.8 2.4 158.8 (5.0) 329.7 778.9 1,764.6
Profit after taxation - - - - - 302.4 302.4
Other comprehensive
income
Actuarial gains on - - - - - 35.0 35.0
defined benefit
pension schemes (note
9)
Taxation on items - - - - - (8.4) (8.4)
taken directly to
equity (note 5)
Foreign exchange - - - 0.6 - - 0.6
adjustments
----- ----- ----- ----- ----- ----- -----
Total comprehensive - - - 0.6 - 329.0 329.6
income
----- ----- ----- ----- ----- ----- -----
Transactions with
owners
Dividends (note 8) - - - - - (223.5) (223.5)
New share capital - 0.5 - - - - 0.5
issued
Equity-settled - - - - - 1.7 1.7
share-based payments
Exercise of share - - - - - (1.0) (1.0)
options - purchase of
shares
----- ----- ----- ----- ----- ----- -----
At 31 March 2013 499.8 2.9 158.8 (4.4) 329.7 885.1 1,871.9
----- ----- ----- ----- ----- ----- -----
* The comparatives have been restated to reflect the requirements of IAS 19
(Revised) 'Employee Benefits'. See note 1 for details.
Consolidated statement of cash flows
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Operating activities
Cash generated from continuing 476.7 347.5 852.2
operations
Interest paid (67.8) (66.6) (168.3)
Interest received and similar income 0.7 1.3 2.4
Tax paid (26.5) (17.1) (55.2)
----- ----- -----
Net cash generated from operating
activities (continuing operations) 383.1 265.1 631.1
----- ----- -----
Net cash used in operating activities
(discontinued operations) (0.8) - (1.4)
----- ----- -----
Investing activities
Purchase of property, plant and (321.4) (285.4) (625.6)
equipment
Purchase of other intangible assets (21.7) (14.8) (35.3)
Proceeds from sale of property, plant 1.4 0.7 2.9
and equipment
Grants and contributions received 6.5 5.6 16.3
Purchase of investments (1.4) (1.1) (3.0)
Proceeds from sale of investments - - 0.9
----- ----- -----
Net cash used in investing activities (336.6) (295.0) (643.8)
(continuing operations)
----- ----- -----
Financing activities
Proceeds from issue of ordinary shares - 0.5 0.5
Proceeds from borrowings 45.4 26.3 147.9
Repayment of borrowings (67.6) (31.2) (39.4)
Exercise of share options - purchase (0.8) (1.0) (1.0)
of shares
Dividends paid to equity holders of (156.0) (145.5) (223.5)
the company
----- ----- -----
Net cash used in financing activities (179.0) (150.9) (115.5)
(continuing operations)
----- ----- -----
Effects of exchange rate changes (0.1) (0.3) -
(continuing operations)
----- ----- -----
Net decrease in cash and cash (132.6) (181.1) (128.2)
equivalents (continuing operations)
----- ----- -----
Net decrease in cash and cash (0.8) - (1.4)
equivalents (discontinued operations)
----- ----- -----
Cash and cash equivalents at beginning 182.5 312.1 312.1
of the period
----- ----- -----
Cash and cash equivalents at end of 49.1 131.0 182.5
the period
----- ----- -----
Cash generated from continuing operations
Restated* Restated*
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Operating profit 341.7 314.1 601.6
Adjustments for:
Depreciation of property, plant and 151.8 148.4 305.9
equipment
Amortisation of other intangible assets 11.5 11.8 23.3
Loss on disposal of property, plant and 1.8 2.2 6.6
equipment
Loss on disposal of other intangible - 2.7 3.2
assets
Amortisation of deferred grants and (3.5) (3.5) (7.1)
contributions
Equity-settled share-based payments 2.2 0.7 1.7
charge
Other non-cash movements (1.0) (0.8) (1.9)
Changes in working capital:
(Increase)/decrease in inventories (2.4) (0.3) 7.8
Increase in trade and other receivables (30.7) (59.8) (26.5)
Increase in trade and other payables 18.6 8.0 9.3
(Decrease)/increase in provisions (5.3) (1.4) 1.9
Pension contributions paid less pension (8.0) (74.6) (73.6)
expense charged to operating profit
----- ----- -----
Cash generated from continuing 476.7 347.5 852.2
operations
----- ----- -----
* The comparatives have been restated to reflect the requirements of IAS 19
(Revised) 'Employee Benefits'. See note 1 for details.
NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the six months ended 30
September 2013 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 2013, with the exception of the
adoptions detailed below, and are prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union (EU),
including International Accounting Standards (IAS) and Interpretations issued
by the International Financial Reporting Interpretations Committee (IFRIC).
The adoption of the following standards and interpretations, at 1 April 2013,
has had no material impact on the group's financial statements.
IAS 19 (Revised) 'Employee Benefits'
The impact of the changes in this standard is to replace interest cost and
expected return on plan assets with a net interest amount that is calculated by
applying the discount rate to the net defined benefit (obligations)/surplus. In
addition, the standard clarifies that administration costs relating to the
administration of benefits should be recognised as an employee benefits expense
through the income statement, rather than as a deduction from the return on
plan assets which was previously recognised through other comprehensive income.
The standard's application is retrospective and hence requires the restatement
of the comparative periods ended 30 September 2012 and 31 March 2013.
The impact in the period to 30 September 2013 has been an increase in employee
benefit expense of GBP1.2 million (30 September 2012: GBP1.0 million, 31 March
2013: GBP2.9 million), a decrease in finance expense of GBPnil million (30
September 2012: GBP4.8 million, 31 March 2013: GBP10.0 million) and an offsetting
gain to actuarial gains and losses within other comprehensive income of GBP1.2
million (30 September 2012: GBP3.8 million loss, 31 March 2013: GBP7.1 million
loss). These amendments have had no overall impact on the retirement benefit
(obligations)/surplus in the statement of financial position.
The impact on taxation in the period to 30 September 2013 has been a deferred
taxation credit of GBP0.2 million (30 September 2012: GBP0.9 million charge, 31
March 2013: GBP1.6 million charge) and an offsetting charge to actuarial gains
and losses within other comprehensive income of GBP0.2 million (30 September
2012: GBP0.9 million credit, 31 March 2013: GBP1.6 million credit).
IFRS 13 'Fair Value Measurement'
The standard provides guidance on the measurement of fair value where required
by existing accounting standards. The standard's application is prospective in
line with the transitional provisions of the standard. The impact on the period
to 30 September 2013 has been a GBP0.3 million credit to finance expense and a
corresponding reduction in non-current derivative liabilities, due to the
inclusion of the group's own credit risk in measuring the fair value of its
liabilities.
The condensed consolidated financial statements do not include all of the
information and disclosures required for full annual financial statements, do
not comprise statutory accounts within the meaning of section 434 of the
Companies Act 2006 and should be read in conjunction with the group's annual
report and financial statements for the year ended 31 March 2013.
The comparative figures for the year ended 31 March 2013 do not comprise the
group's statutory accounts for that financial year. Those accounts have been
reported upon by the group's auditor and delivered to the registrar of
companies. The report of the auditor was unqualified and did not include a
reference to any matters to which the auditor drew attention by way of emphasis
without qualifying their report and did not contain a statement under section
498(2) or (3) of the Companies Act 2006.
Going concern
The directors have a reasonable expectation that the group has adequate
resources available to it to continue in operational existence for the
foreseeable future and have therefore continued to adopt the going concern
policy in preparing the financial statements. 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 as well as consideration of the group's capital adequacy. In addition,
the directors also considered the primary legal duty of United Utilities Water
PLC's economic regulator, to ensure that the companies can finance their
functions.
2. Segmental reporting
The board of directors of United Utilities Group PLC (the board) is provided
with information on a single segment basis for the purposes of assessing
performance and allocating resources. The board reviews revenue, underlying
operating profit, operating profit, assets and liabilities, regulatory capital
expenditure and RCV gearing at a consolidated level. In light of this, the
group has a single segment for financial reporting purposes and therefore no
further detailed segmental information is provided in this note.
3. Investment income
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Continuing operations
Interest receivable 0.7 1.3 2.3
Net pension interest income (note 9) 0.5 - -
----- ----- -----
1.2 1.3 2.3
----- ----- -----
4. Finance expense
Restated Restated
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Continuing operations
Interest payable (107.9) (124.9) (249.1)
Net fair value gains/(losses) on
debt and derivative instruments 100.0 (49.4) (41.5)
----- ----- -----
(7.9) (174.3) (290.6)
Net pension interest expense (note 9) - (1.7) (1.5)
----- ----- -----
(7.9) (176.0) (292.1)
----- ----- -----
The group has fixed interest costs for a substantial proportion of the group's
net debt for the duration of the regulatory pricing period. Following the
revision to its interest rate management strategy in the year ended 31 March
2012, the group has continued to extend the fixing of interest rates out to a
ten year maturity on a reducing balance basis, seeking to lock in a 10-year
rolling average of 10-year interest rates, on the group's nominal liabilities.
In addition, the group has hedged currency exposures for the term of each
relevant debt instrument. The group has hedged its position through the use of
interest rate and cross currency swap contracts where applicable.
The underlying net finance expense for the continuing group of GBP127.5 million
(30 September 2012: GBP126.0 million, 31 March 2013: GBP252.8 million) is derived
as shown in the table below.
Restated Restated
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Continuing operations
Finance expense (7.9) (176.0) (292.1)
Investment income 1.2 1.3 2.3
Net fair value (gains)/losses on
debt and derivative instruments (100.0) 49.4 41.5
Interest on swaps and debt under 4.5 3.0 8.3
fair value option
Adjustment for net pension interest
(income)/expense (note 9) (0.5) 1.7 1.5
Adjustment for capitalised borrowing (11.5) (5.4) (14.3)
costs
Adjustment for release of tax (13.3) - -
interest accrual
----- ----- -----
Underlying net finance expense (127.5) (126.0) (252.8)
----- ----- -----
5. Taxation
Restated Restated
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Continuing operations
Current taxation
UK corporation taxation 47.3 31.3 79.4
Foreign taxation 1.4 1.3 1.3
Adjustments in respect of prior (122.0) - (6.5)
years
----- ----- -----
Total current taxation (credit)/ (73.3) 32.6 74.2
charge for the period
----- ----- -----
Deferred taxation
Current period 23.1 2.8 (3.0)
Adjustments in respect of prior (3.0) - 5.8
years
----- ----- -----
20.1 2.8 2.8
Change in taxation rate (158.6) (52.8) (53.0)
----- ----- -----
Total deferred taxation credit for (138.5) (50.0) (50.2)
the period
----- ----- -----
----- ----- -----
Total taxation (credit)/charge for (211.8) (17.4) 24.0
the period
----- ----- -----
The current taxation charge is GBP48.7 million for the period ended 30 September
2013 representing a current taxation effective rate of 15 per cent compared
with 23 per cent in the corresponding period last year and 26 per cent for the
year ended 31 March 2013. The reduction is principally due to fair value
movements which give rise to a corresponding current period deferred taxation
charge. In addition, there is a current taxation credit of GBP122.0 million, and
an associated deferred tax credit of GBP3.0 million relating to recently agreed
matters in relation to prior years.
The deferred taxation credits for the periods ended 30 September 2013, 30
September 2012 and 31 March 2013 include a credit of GBP158.6 million, GBP52.8
million and GBP53.0 million respectively to reflect the staged reductions in the
mainstream rate of corporation tax from 24 per cent in the year ended 31 March
2013 to 20 per cent effective from 1 April 2015.
Taxation on items taken directly to equity
The taxation (credit)/charge relating to items taken directly to equity is as
follows:
Restated Restated
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Continuing operations
Current taxation
Relating to other pension movements (1.9) (2.1) (15.6)
----- ----- -----
Deferred taxation
On actuarial (losses)/gains on
defined benefit pension schemes (41.5) 13.4 8.1
Relating to other pension movements 1.7 2.0 15.0
Change in taxation rate (0.4) 0.9 0.9
----- ----- -----
(40.2) 16.3 24.0
----- ----- -----
----- ----- -----
Total taxation (credit)/charge on
items taken directly to equity (42.1) 14.2 8.4
----- ----- -----
6. Discontinued operations
Discontinued operations represent the retained obligations in respect of
businesses sold in prior years. In accordance with IFRS 5 `Non-current assets
held for sale and discontinued operations,' the post-tax results of
discontinued operations are disclosed separately in the consolidated income
statement and consolidated statement of cash flows.
The profit after taxation from discontinued operations is analysed as follows:
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Transaction and other costs of 0.5 3.0 14.6
disposal
----- ----- -----
Profit after taxation from 0.5 3.0 14.6
discontinued operations
----- ----- -----
The profit after taxation from discontinued operations for the period ended 30
September 2013 relates primarily to the release of accrued costs of disposal in
respect of certain elements of the group's non-regulated disposal programme.
7. Earnings per share
Basic and diluted earnings per share are calculated by dividing profit after
taxation by the following weighted average number of shares in issue:
Basic Diluted
million million
Six months ended 30 September 2013 681.9 682.9
Six months ended 30 September 2012 681.8 682.6
Year ended 31 March 2013 681.9 682.8
The difference between the weighted average number of shares used in the basic
and diluted earnings per share calculations arises due to the group's operation
of share-based payment compensation arrangements. The difference 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 prior periods are
as follows:
Restated Restated
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
From continuing and discontinued
operations
Basic 80.3p 23.4p 44.3p
Diluted 80.1p 23.4p 44.3p
From continuing operations
Basic 80.2p 23.0p 42.2p
Diluted 80.1p 23.0p 42.2p
8. Dividends
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Dividends relating to the period
comprise:
Interim dividend 81.9 78.0 78.0
Final dividend - - 156.0
----- ----- -----
81.9 78.0 234.0
----- ----- -----
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Dividends deducted from shareholders' equity
comprise:
Interim dividend - - 78.0
Final dividend 156.0 145.5 145.5
----- ----- -----
156.0 145.5 223.5
----- ----- -----
The interim dividends for the six months ended 30 September 2013 and 30
September 2012 and the final dividend for the year ended 31 March 2013 have not
been included as liabilities in the consolidated half yearly financial
statements at 30 September 2013, 30 September 2012 and the consolidated
financial statements at 31 March 2013 respectively.
The interim dividend of 12.01 pence per ordinary share (2013: interim dividend
of 11.44 pence per ordinary share; final dividend of 22.88 pence per ordinary
share) is expected to be paid on 3 February 2014 to shareholders on the
register at the close of business on 20 December 2013. The ex-dividend date for
the interim dividend is 18 December 2013.
9. Retirement benefit (obligations)/surplus
The main financial assumptions used by the company's actuary to calculate the
defined benefit obligations of the United Utilities Pension Scheme (UUPS) and
the United Utilities PLC Group of the Electricity Supply Pension Scheme (ESPS)
were as follows:
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
%pa %pa %pa
Discount rate 4.40 4.40 4.60
Pensionable salary growth and 3.30 2.85 3.30
pension increases
Price inflation 3.30 2.85 3.30
The net pension expense before taxation for continuing operations in the income
statement in respect of the defined benefit schemes is summarised as follows:
Restated Restated
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Continuing operations
Current service cost (9.2) (8.0) (15.9)
Curtailments/settlements arising on (1.1) - (0.6)
reorganisation
Administrative expenses (1.2) (1.0) (2.9)
----- ----- -----
Pension expense charged to operating (11.5) (9.0) (19.4)
profit
----- ----- -----
Net pension interest income (note 3)
/(expense) (note 4) 0.5 (1.7) (1.5)
----- ----- -----
Net pension expense charged before (11.0) (10.7) (20.9)
taxation
----- ----- -----
The reconciliation of the opening and closing net pension (obligations)/surplus
included in the statement of financial position is as follows:
Restated Restated
Six months Six months Year
ended ended ended
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
At the start of the period 15.1 (92.0) (92.0)
Expense recognised in the income (11.0) (10.7) (20.9)
statement
Contributions paid 19.5 83.6 93.0
Actuarial (losses)/gains gross of (207.5) 58.4 35.0
taxation
----- ----- -----
At the end of the period (183.9) 39.3 15.1
----- ----- -----
Under the prescribed IAS19 basis, pension scheme liabilities are calculated
based on current accrued benefits. These are then projected forwards and
inflated by forecast RPI for the relevant time period based on current member
mortality assumptions. These projected cash flows are then discounted by a AA
corporate bond rate which comprises both an underlying interest rate and a
credit spread.
In de-risking our pension scheme, we have largely hedged: (1) the underlying
interest rate through external market swaps, the value of which is included in
scheme assets; and (2) the forecast RPI through the Inflation Funding Mechanism
(IFM), which is treated as an additional schedule of deficit contributions and
is not included in the value of scheme assets until contributions are actually
paid into the pension scheme.
As a consequence the reported statement of financial position under IAS19
remains volatile due to changes in: (1) credit spread (because hedging credit
spreads over long durations is difficult); (2) inflation (because inflation is
hedged via the IFM and is treated as a schedule of contributions, not as a
scheme asset); and to a lesser extent (3) mortality (it was decided not to
hedge this risk due to its lower volatility in the short term).
In contrast the scheme specific funding basis (which forms the basis for
deficit repair contributions) is unlikely to suffer from volatility due to
credit spread (as it uses a conservative, fixed credit spread assumption) or
inflation (as it includes the value of the IFM).
In the IAS19 assessment of financial position at 30 September 2013, although
the discount rate has fallen by 0.2% this masks a rise in underlying interest
rates offset by a credit spread reduction of 0.4%. This credit spread reduction
results in substantially all of the reported GBP199.0m deterioration. During the
six months ended 30 September 2013, there has not been any material change in
the scheme specific funding basis and therefore the level of deficit repair
contributions.
The closing (obligations)/surplus at each reporting date are analysed as
follows:
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Present value of defined benefit (2,499.6) (2,313.3) (2,426.9)
obligations
Fair value of schemes' assets 2,315.7 2,352.6 2,442.0
----- ----- -----
Net retirement benefit (obligations) (183.9) 39.3 15.1
/surplus
----- ----- -----
10. Related party transactions
Transactions between the company and its subsidiaries, which are 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
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Sales of services 0.7 0.5 1.3
Purchases of goods and services 0.4 0.4 0.7
----- ----- -----
Amounts owed by the group's joint ventures are as follows:
30 September 30 September 31 March
2013 2012 2013
GBPm GBPm GBPm
Amounts owed by related parties - 1.1 1.0
----- ----- -----
Sales of services to related parties were on the group's normal trading terms.
The amounts outstanding are unsecured and will be settled in accordance with
normal credit terms. The group has issued guarantees of GBP5.2 million (30
September 2012: GBP5.0 million; 31 March 2013: GBP5.2 million) in support of its
joint ventures.
No provision has been made for doubtful receivables in respect of the amounts
owed by related parties (30 September 2012: GBPnil; 31 March 2013: GBPnil).
11. Contingent liabilities
The group has entered into performance guarantees as at 30 September 2013 where
a financial limit has been specified of GBP47.3 million (30 September 2012: GBP85.3
million; 31 March 2013: GBP72.1 million).
12. Changes in circumstances significantly affecting the fair value of
financial assets and financial liabilities
From 1 April 2013 to 30 September 2013 market interest rates have increased,
decreasing the fair value of the group's borrowings and derivative assets.
The group's borrowings have a carrying amount of GBP5,991.2 million (31 March
2013: GBP6,173.5 million). The fair value of these borrowings is GBP6,270.1 million
(31 March 2013: GBP6,470.0 million). The group's derivatives measured at fair
value are a net asset of GBP453.7 million (31 March 2013: GBP521.2 million).
13. Events after the reporting period
There were no events arising after the reporting date that required recognition
or disclosure in the financial statements for the six months ended 30 September
2013.
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 DTR of the UK FCA.
Responsibilities Statement
We confirm that to the best of our knowledge:
- the condensed set of financial statements has been prepared in accordance
with IAS 34 Interim Financial Reporting as adopted by the EU
- 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 that have occurred during the first six months of the
financial year and their impact on the condensed set of financial statements;
and a description of the 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
Steve Mogford
Dr Catherine Bell CB
Mark Clare (appointed 1 November 2013)
Russ Houlden
Brian May
Nick Salmon
Sara Weller
This responsibility statement was approved by the board and signed on its
behalf by:
............................. ...........................
Steve Mogford Russ Houlden
26 November 2013 26 November 2013
Chief Executive Officer Chief Financial Officer
INDEPENDENT REVIEW REPORT TO UNITED UTILITIES GROUP PLC
Introduction
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
September 2013 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, he
consolidated statement of cash flows and the related explanatory notes. 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 the terms of our
engagement to assist the company in meeting the requirements of the Disclosure
and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority
("the UK FCA"). Our review has been undertaken so that we might state to the
company those matters we are required to state to it in this 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 reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 1, annual financial statements of the group are prepared
in accordance with IFRSs as adopted by the EU. The condensed set of financial
statements included in this half-yearly financial report has been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on the 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 UK. A review of interim financial information
consists of making enquiries, 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 2013 is not prepared, in
all material respects, in accordance with IAS 34 as adopted by the EU and the
DTR of the UK FCA.
John Luke
For and on behalf of KPMG LLP
Chartered Accountants
St James' Square
Manchester
M2 6DS
26 November 2013
END
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