TIDMUU.
RNS Number : 2776H
United Utilities Group PLC
23 November 2022
United Utilities Group PLC
23 November 2022
HALF YEAR RESULTS FOR THE SIX MONTHSED 30 SEPTEMBER 2022
Investment strategy and Systems Thinking delivering for
customers...
-- Investment in sophisticated real time planning and integrated
network has enhanced our water supply resilience
-- Additional investment announced in May driving 21% reduction in water quality contacts
-- Dynamic Network Management investment helping to deliver lowest ever levels of sewer flooding
-- On track to deliver leakage target; helped by early
investment, latest innovations and detection techniques
-- Sector leading customer support package with cGBP280m support
in AMP7 helping more than 200,000 households
-- Strong supporter of the CCW's(1) proposal for a national
social tariff to help customers right across the country
-- Investing in the North West's future, with our biggest ever
intake of graduates and apprentices
...and the environment
-- Awarded highest 4-star environmental rating in the EA's
annual assessment for the fifth time in seven years
-- Progressing with Better Rivers programme; 29% reduction in
spills(2) last year and further improvement this year
-- Supporting the Government's ambitious environmental targets
with investment plans enabling an early start
-- Environmental programmes for AMP8 and beyond expected to
drive significant increases in sector investment
Operational and financial resilience
-- Strong capital programme delivery with 98% of AMP7 base
programme let and 65% already delivered
-- Power commodity prices locked-in on 96% of FY23 forecast
consumption; at an average rate of GBP85/MWh
-- Effective cost management helping to mitigate inflation
impact; RCV and totex allowance indexed to inflation
-- Cash collection remains strong with household bad debt stable
at 1.8% in the first half of the year
-- Lower consumption drives improved PCC performance, and GBP19m
impact on revenue will be recovered in FY25
-- On track to deliver GBP30m ODI reward for FY23; targeting
cGBP200m for AMP7, almost five times our AMP6 reward
-- Earnings mainly impacted by higher inflation on index-linked
debt; underlying EPS(3) of -1.8p, down from 28.4p
-- Inflation supporting AMP7 nominal RCV growth of 27.5%(4) and
FY23 RoRE in excess of 7.9% earned in FY22
-- Strong balance sheet; sector-leading credit rating and
improved gearing(5) at 60% benefitting from RCV inflation
-- Pension position resilient to recent market challenges, with headroom for further de-risking
-- Dividend in line with AMP7 policy, supported by strong operational and financial performance
Key financials
Six months ended
30 September 2022 30 September 2021
------------------ ----------------------
Revenue GBP919.3m GBP932.3m
------------------ ----------------------
Reported and underlying operating GBP258.5m GBP332.8m
profit(3)
------------------ ----------------------
Reported earnings per share
(pence) 51.8p (31.7)p
------------------ ----------------------
Underlying earnings per share(3)
(pence) (1.8)p 28.4p
------------------ ----------------------
Interim dividend per ordinary
share (pence) 15.17p 14.50p
------------------ ----------------------
Net regulatory capital spend GBP334.5m GBP303.2m
------------------ ----------------------
RCV gearing(5) 60% 62%
------------------ ----------------------
(1) Consumer Council for Water
(2) As reported against a 2020 baseline
(3) Underlying measures are defined in the 'underlying profit'
tables
(4) Includes returns to be received as revenues in AMP8 and
inflation assumptions based on a consensus from a selection of
banks and HM Treasury
(5) Regulatory capital value (RCV) gearing calculated as group
net debt/United Utilities Water Limited's shadow (adjusted for
actual spend and timing difference) RCV
Steve Mogford, Chief Executive Officer, said:
"We continue to focus on the areas that matter most to our
stakeholders, delivering sustainable operational improvements for
customers and the environment, demonstrating financial resilience
and improving regulatory performance, all while providing
sector-leading affordability support.
"The North West is home to many of the most deprived communities
across the country, and many people are deeply worried about the
rising cost of living, which is why we work hard to help customers
who are struggling to pay their bills. GBP280 million of
affordability support is being provided to more than 200,000
households between 2020 and 2025, reflecting both customer social
tariffs and company contributions. We believe that affordability
support should not be a postcode lottery, which is why we are a
strong supporter of the Consumer Council for Water's proposal for a
national social tariff to help households with their water
bills.
"During what has been a difficult macro environment we have
shown both operational and financial resilience. While we have not
been immune to the impact of inflation, we are well placed compared
to many as a result of our tight cost management, effective hedging
strategy, and regulatory mechanisms providing further mitigation to
rising costs.
"Our responsible, long term approach to investing and deployment
of Systems Thinking is delivering sustainable improvements and
creating long-term value for our stakeholders. We are improving
water quality, have achieved our lowest ever level of sewer
flooding, and are on track to meet our leakage reduction target.
The Environment Agency has recognised our efforts again by awarding
us the highest 4-star ranking for our performance in its latest
assessment - the fifth time we have received this status in the
last seven years. Storm overflows are a huge area of focus for us,
and for the sector, and our Better Rivers, Better North West
programme sets out a clear plan of action to reduce their use and
improve the environment. It's a big task but we are already making
progress having reduced reported spills by 29% last year and making
further progress this year.
"There is more that we would like to be able to do. The
Environment Agency recently identified new statutory requirements
that companies will be required to deliver in the next regulatory
period, AMP8, and beyond. While we are strong supporters of this
ambitious programme of environmental improvements, the rate of
change must consider affordability and deliverability, and we are
working with regulators to determine the pace of investment. Our
resilient financial position, supported by our Systems Thinking
approach, sees us well placed to deliver more for all our
stakeholders for the long term."
Enquiries
For further information on the day, please contact:
+44 (0) 7753
Gaynor Kenyon - Corporate Affairs Director 622 282
+44 (0) 7435
Anna Oberg - Investor Relations Manager 939 112
+44 (0) 2073
Graeme Wilson - Tulchan Communications 534 200
Presentation webcast and conference call details
We will be hosting a live virtual presentation at 9.00am on
Wednesday 23 November 2022, which can be accessed via the following
link:
http://www.unitedutilitiestv.live/
The presentation slides will be available on our website shortly
before the presentation commences at the following link:
https://www.unitedutilities.com/corporate/investors/results-and-presentations/full-and-half-year-results/
Following conclusion of the presentation a recording will be
available from our website.
OPERATIONAL PERFORMANCE
We have continued to improve operational performance in the
first half of this year, focused on delivering our purpose of
providing great water and more for the North West. Customers and
the environment are benefitting from our operational excellence and
investment in the areas that matter most to our stakeholders, and
these sustainable performance improvements are earning outcome
delivery incentive (ODI) rewards.
We have improved water quality for customers, with a resilient
water supply and our lowest ever level of sewer flooding, whilst
providing sector-leading affordability support. We are consistently
one of the leading companies in the industry on environmental
performance, with the highest four star rating from the Environment
Agency, and we are making good progress against our river pledges
with significant reductions in spills from storm overflows, having
already delivered a 29 per cent reduction in reported spills last
year (from a 2020 baseline), and with further improvement expected
this year.
We, alongside the rest of the country, have been navigating a
backdrop of considerable political and economic uncertainty in
recent months, but our robust financial risk management approach
and tight cost control gives us a strong relative position and we
remain confident that we will continue to deliver long-term value
for all our stakeholders.
Providing great water for customers
We continue to perform well on Ofwat's measure of customer
satisfaction, C-MeX. Our combined score for the first half of the
year sees us in the top half for the industry, the highest of the
listed companies, and fourth out of all water and wastewater
companies. We work hard to resolve any issues that do arise, with
only 3 per cent of complaints reaching stage 2, making us an upper
quartile industry performer.
It is pleasing that so many customers are happy with the service
we are providing, but we continue to strive to do even better. We
are making great progress on water quality, which was one of the
areas targeted by the additional investment we announced in May.
The work we have been doing on mains cleaning to reduce
discolouration at customers' taps has helped us achieve a 21 per
cent reduction in taste, smell and appearance contacts from
customers. This was an area where we incurred an ODI penalty last
year but are currently on track for a reward this year.
During September we ran Water Quality First week, an internal
event highlighting the crucial roles different teams across the
company play in providing great water all the way from source to
tap. We received great employee engagement, all helping to
highlight the important work we are doing and the improvements we
are making in water quality for customers.
We are also working to do more on reducing leakage, building on
a track record of having met our leakage target for 16 consecutive
years. Recognising this as an area of increased importance to
stakeholders in recent years, we committed early start investment
before the beginning of AMP7 and we are on track to deliver our
target to reduce leakage by 15 per cent by 2025, having reduced
leakage by 7 per cent so far this AMP. This has been delivered
using the latest innovations and detection techniques, including
the use of Pressure Management Valves, installation of over 72,000
sensors across our pipe network, and rapid machine-learning
technology that can pinpoint the exact location and size of a leak
with a greater than 85 per cent success rate just based on the
unique sound it makes.
The country experienced particularly dry weather this summer,
and we saw just 63 per cent of the long-term average rainfall
expected in the North West during July and August, with some areas
in our region receiving less than half of the rainfall we would
typically expect.
As a result of ground movement caused by this dry weather, we
experienced three atypically large pipe bursts, resulting in an
increase in the level of supply interruptions, but our teams worked
around the clock to fix the damaged pipes as well as deploying our
tanker fleet and setting up bottled water stations to ensure
customers continued to receive water during the time in which mains
supply was impacted. This has resulted in an GBP8 million increase
in operating costs in the first half of the year, including a GBP1
million provision for net amounts we may be liable to pay in future
periods.
Our water resilience performance through this dry summer was
very good. We avoided the need for any restrictions on water use
for customers in the North West as a result of our proactive
customer engagement activities and the previous investment we have
made to develop a sophisticated real time water production planning
system together with the ability to move large volumes of water
around our integrated network.
Protecting and enhancing the environment
We were awarded the top four star rating in the Environment
Agency's most recent annual performance assessment for 2021, making
us an Industry Leading Company for the fifth time in the last seven
years. This is a great achievement against the backdrop of a
continuously evolving and tougher assessment regime.
We had the lowest overall levels of pollution in the sector,
having delivered a 33 per cent reduction in pollution incidents
since the start of AMP7, and we are on track to improve even
further this year. We also have the lowest levels of serious
pollution incidents in recent years, with only one incident in the
last three years (2019-2021).
River health is an ongoing priority, and our 'Better Rivers,
Better North West' programme detailed our pledges and targets for
kick-starting a river revival across the region, supported by
GBP230 million base investment across AMP7 that will lead to 184
kilometres of improved waterways. In addition to this GBP230
million, part of the reinvestment of outperformance we announced in
May is being used to accelerate these plans and get a head start on
future requirements.
Spills from storm overflows are a big area of focus for the
whole industry as part of improving river health. Following keen
interest from the public and Government, and publication of the new
Environment Act 2021, ambitious targets have been set for a
progressive but substantial reduction in spill frequency across the
country.
Storm overflows help to minimise the risk of sewer flooding in
periods of heavy rainfall by allowing heavily diluted wastewater to
be released directly to the environment. The North West receives 28
per cent more average annual rainfall than other regions and the
industrial legacy of our region means we have a much higher
proportion of combined sewers, with 55 per cent of our network
taking both waste and surface water compared with the industry
average of 27 per cent. The combined result of these unique
characteristics means that more rain is collected more often in our
region than any other wastewater system in the country. As a result
of these new national requirements and the regional imbalance in
the level of rainfall that enters sewers, new targets to reduce
spill frequency indicate a substantial investment need over the
longer term, with DEFRA comimissioned estimates suggestingthat over
60 per cent of the sector investment necessary to meet their
targets needing to be made in the North of the country. We are
still early in the process of scoping and costing our environmental
programme for AMP8, but as a result of these targets and other
drivers coming out of the Environment Act, early indications point
to an investment that could be significantly higher than the
average level over the last two AMP periods. Given the size of this
potential investment, we are in discussions with regulators about
balancing the pace of investment in light of affordability and
deliverability considerations, and the investment needed to meet
these new environmental requirements is likely to run over
successive AMP periods.
We were an early adopter of spill monitoring and have one of the
largest installed bases in the sector, with 100 per cent coverage
to be achieved by 2023. Our Better Rivers programme is delivering
improvements that support our target of at least a 33 per cent
reduction in spills by 2025, from a 2020 baseline. We have already
made great headway, delivering a 29 per cent reduction last year,
and our progress so far this year suggests that we will exceed this
target. We are conscious that performance can be significantly
influenced by weather and while we are extremely pleased with the
progress delivered so far, we recognise that there is more we could
do, both individually and as a sector. The Government has asked us
to go faster, and we have responded by identifying additional
investment that could be spent in AMP7 but would be fully recovered
in AMP8.
As well as heavy rainfall exceeding sewer capacity, sewer
blockages can result in an eventual spill. This is one of the areas
helped by our GBP100 million investment in Dynamic Network
Management (DNM), a state-of-the-art digital solution that uses a
network of sensors and artificial intelligence that provides a
real-time picture of what's happening in our sewers, allowing
prediction and proactive detection of deviations from expected
levels of performance in our wastewater network. These alerts mean
preventative activities can be taken by our operational teams to
avoid sewer blockages from forming. DNM is now in operation and our
investment is already achieving success, contributing to our best
ever sewer flooding performance as well as helping us to reduce
spills from storm overflows.
Providing sector-leading affordability support
The North West is home to many of the most deprived
neighbourhoods in England, and supporting customers that are
struggling with their bills has long been one of our top
priorities. With many households across our region seriously
impacted by recent cost of living increases, this is now even more
important.
We are helping over 200,000 customers, more than ever before,
through our extensive range of affordability schemes. We monitor
customer payment behaviour to proactively identify customers who
may be struggling to pay and use targeted early intervention
communications to increase awareness of available support and
flexible payment plans, as well as water efficiency advice. We have
revamped our affordability webpages to simplify key messaging and
improve accessibility of support and we use a range of methods,
including social media and our data share arrangement with the DWP,
to ensure we can get help to a wide range of people who need it. We
were the first water company to utilise Open Banking technology,
which gives customers the ability to share their account details so
we can expedite the process of verifying their eligibility for our
support schemes, meaning a process that could take two weeks can be
done in just minutes.
We actively engage with customers to offer advice and awareness
to help deliver reductions in water demand, particularly around dry
weather periods like we saw this summer, and per capita consumption
has reduced by around 11 per cent so far this year. This helps
customers to keep their bills down (both water bills for metered
customers, and energy bills where they are using less heated
water), whilst also improving regional water resource resilience
and ODI performance. We are making significant progress in
eliminating voids, finding properties that are using water but not
being billed, which helps to keep average customer bills lower as
well as earning ODI rewards.
As a result of the cost of living challenges households are
currently facing, there is a higher level of uncertainty around the
potential impact on cash collection. However, it is encouraging to
see that our proactive engagement, innovative solutions and
tailored assistance has meant that we have more customers on direct
debits and payment plans than ever before. Cash collection so far
this year has been particularly strong, remaining on target despite
the challenging current economic environment. This all supports our
lowest ever level of bad debt, at 1.8 per cent of regulated
revenue.
We are strong supporters of the national social tariff proposal
put forward by the Consumer Council for Water. This measure would
level up affordability support so it is not a postcode lottery and
provide much needed help to struggling families across the country
during these challenging times.
Supporting and developing our people
We have delivered over 10,000 days of training over the first
half of this year, with around 45 per cent being delivered remotely
or via e-learning, ensuring a cost efficient and effective delivery
built on adaptations made during the pandemic. In addition to
remote learning, we continue to deliver best-in-class practical
training at our technical training centre, supplemented by our 'on
the road' programme at key satellite sites in the north of our
region to minimise travel time.
As a large employer in the North West with over 6,000 employees,
we are committed to recruiting from all areas of our communities
and have been shortlisted for both the Social Mobility and
Inclusive Culture initiatives in the Inclusive Company Awards 2022.
We are committed to developing younger generations across the
region, having welcomed 90 new apprentices and graduates in
September. Our pipeline of future operational leaders is
strengthened through our Aspiring Manager talent development
programme, in partnership with Manchester Metropolitan University,
which has been completed by over 20 employees graduating with
degrees in Business Management this summer and is preparing to
welcome the next intake. 92 per cent of previous graduates on this
programme have secured promotions or role changes.
We continue to make progress on our diversity and inclusion
strategy, having sponsored the first ever North West Diversity and
Inclusion Summit in April and piloted our 'Stepping Up' programme
to support development of ethnic minority colleagues, as well as
continuing to support the 10,000 Black Interns programme. We held
our inaugural Employee Network AGM and Inclusion Awards,
celebrating colleagues' contributions to championing inclusion in
the workplace and our local communities. We continue to receive
external recognition for our efforts, ranking for the third
consecutive year in the top one per cent of over 850 companies
across Europe in the Financial Times' Statista Diversity
Survey.
We launched a new electric car salary sacrifice scheme in May,
enabling our employees to access benefits that help them play a
part in mitigating climate change. This has received significant
interest with over 120 orders already placed.
Delivering our AMP7 regulatory contract and preparing for
AMP8
We are one of the top performing companies on customer ODI
rewards, on track for our largest annual reward of GBP30 million
this year, and continuing to target a net reward of GBP200 million
for AMP7. This is supported by strong performance in areas such as
minimising pollution incidents, water service resilience, lifting
customers out of water poverty, and eliminating voids, as well as
the investment we have made to improve performance in areas such as
sewer flooding and discolouration of water, where our performance
has been weaker.
We are not immune to widespread macro challenges resulting from
high levels of inflation, but we are relativley well placed. We
have 98 per cent of our base capital programme for AMP7 on
contract, with 65 per cent already delivered at this halfway point
in the five-year period, and we have power commodity prices
locked-in on 96 per cent of our forecast consumption for this
financial year at an average price of GBP85/MWh compared to the
market cap of GBP211/MWh. Meanwhile we continue to seek
efficiencies and exploit technology and innovation to help us
deliver our total expenditure (totex) efficiently.
We are building an ambitious plan for the 2025-30 period, AMP8,
and we are confident that our strong and resilient corporate and
financial structure, supported by our Systems Thinking approach and
a culture that seeks to continually improve, innovate and invest
for sustainable long term performance, sees us well placed to
continue to deliver for all our stakeholders in this regulatory
period and beyond.
Over the last 8 weeks we have released a series of short videos
showcasing a few of the ways we are using innovation and technology
to develop sustainable ESG solutions for some of the modern
challenges water companies face with an increasing population,
urbanisation of the landscape, and a changing climate. We wil
continue to apply this forward-thinking approach in our plans for
AMP8 and beyond, helping us deliver further improvements in
performance and resilience. The videos can be viewed at:
https://www.unitedutilities.com/corporate/responsibility/esg-playlist/
FINANCIAL PERFORMANCE
Revenue for the six months to 30 September 2022 decreased by 1
per cent, mainly driven by lower consumption than predicted which
more than offsets the allowed regulatory revenue increase but will
be recovered in FY25. Household cash collection has remained robust
and bad debt is stable at 1.8 per cent of regulated revenue,
supported by our sector-leading affordability support schemes and
use of innovative tools and techniques. As set out in our trading
update of 27 September 2022, the current difficult
macro-environment has impacted financial performance in the first
half of the year. Operating profit was down GBP74 million, driven
by the decrease in revenue and a combination of inflationary
increases on input costs, increased investment in infrastructure
renewals expenditure (IRE) and the impact of incidents resulting
from dry weather over the summer.
While inflation has impacted both our reported and underlying
financial performance, we continue to focus on tight cost
management, and this, alongside effective power hedging, is helping
to lessen the impact of inflation on our cost base. Furthermore,
our regulatory mechanism provides mitigation through inflationary
uplifts to our totex allowance and the Regulatory Capital Value
(RCV). The regulatory performance of the business remains robust
and we are on track to deliver an improved return on regulatory
equity (RoRE) this year.
We continue to have one of the strongest balance sheets in the
sector, with RCV gearing comfortably within our target range and an
industry-leading, fully funded pension position which has been
resilient to the recent market challenges. Both of these support a
sector-leading stable A3 credit rating with Moody's.
Revenue
GBPm
Six months to 30 September 2021 932.3
-------
Regulatory revenue changes -1.3 per cent real
reduction in allowed wholesale revenues and 4.6
per cent uplift in line with CPIH inflation 29.8
-------
Non-household consumption impact (37.9)
-------
Household consumption impact (17.5)
-------
Other 12.6
-------
Six months to 30 September 2022 919.3
-------
Revenue was down GBP13 million, at GBP919 million, largely
reflecting lower consumption more than offsetting the allowed
regulatory revenue increase.
In the first half of 2022/23 we have had a GBP30 million
increase in the revenue cap, largely incorporating a 4.6 per cent
CPIH-linked increase partly offset by a 1.3 per cent real reduction
in allowed wholesale revenues.
Non-household revenue has decreased by GBP38 million compared
with the first half of last year and household consumption has
decreased by GBP18 million, both largely in reflection of changes
in consumption, which was atypically high in the first half of last
year.
For both domestic and business customers we had predicted a
slower return to the lower, pre-pandemic consumption levels than we
are actually seeing. In part, this has been driven by our active
engagement and awareness campaigns to help deliver reductions in
water demand. This has resulted in a GBP19 million under-recovery
against allowed revenues for the first half of the year. Under the
revenue control, this consumption impact is recoverable in two
years' time.
Operating profit
GBPm
Underlying and Reported - six months to 30 September
2021 332.8
-------
Revenue decrease (13.0)
-------
Inflationary increases (36.2)
-------
Costs driving ODI performance (8.8)
-------
Dry weather costs (8.4)
-------
SaaS costs (3.0)
-------
Other (4.9)
-------
Underlying and Reported - six months to 30 September
2022 258.5
-------
Operating profit at GBP259 million was GBP74 million lower than
the first half of last year, largely reflecting the decrease in
revenue and the combination of inflationary increases in our core
costs, alongside the impact of one-off incidents resulting from dry
weather over the summer.
As expected, inflationary pressures have impacted input costs
resulting in a GBP36 million increase. The largest increases have
been to power and chemical costs while we have experienced smaller
inflationary increases to labour and other contract costs.
The GBP9 million of additional infrastructure renewals
expenditure driving ODI performance is targeted at improving
performance against specific customer ODIs. This is primarily spend
associated with investments in Dynamic Network Management and
improving water quality.
The drier summer months led to ground movement and resulted in
three atypically large pipe bursts in our water network, resulting
in a GBP8 million cost to repair our network, support customers and
pay appropriate compensation.
The IFRS Interpretations Committee decision during the prior
year in respect of configuration costs associated with Software as
a Service means that costs of GBP3m in the first half of the year
are treated as operating costs whereas previously they were
accounted for as fixed asset additions.
Our bad debt position has remained strong, stable at our lowest
ever level of household bad debt of 1.8 per cent of regulated
revenue.
Profit before tax
GBPm
Underlying - six months to 30 September 2021 196.8
--------
Underlying operating profit decrease (74.3)
--------
Underlying net finance expense increase (132.4)
--------
Share of JVs profits increase 2.0
--------
Underlying loss before tax - six months to 30
September 2022 (8.0)
--------
Adjusted items including fair value gains * 434.2
--------
Reported profit before tax - six months to 30
September 2022 426.3
--------
* Adjusted items are set out in the 'underlying profit'
tables.
Underlying loss before tax was GBP 8 million, GBP205 million
lower than the underlying profit before tax in the first half of
last year. This reflects the GBP74 million decrease in underlying
operating profit and an increase in underlying net finance expense
of GBP132 million, slightly offset by a reduction in share of
losses of joint ventures of GBP2 million, from a GBP1.8 million
share of losses in the first half of last year to a small GBP0.2
million share of profits. Underlying profit before tax reflects
consistently applied presentational adjustments as set out in the
'underlying profit' tables .
Reported profit before tax increased by GBP214 million to GBP426
million reflecting a GBP255 million decrease in reported net
finance expense (including fair value movements), from a GBP119
million net finance expense in the first half of last year to a
GBP136 million net finance income, GBP2 million reduction in share
of losses of joint ventures and a GBP31 million profit on disposal
of our subsidiary United Utilities Renewable Energy Limited, partly
offset by the GBP74 million decrease in reported operating
profit.
The allowed inflationary increase in the current financial year
is based on CPIH in November of the previous financial year. This
means that rising inflation is reflected in core costs and the cost
of index-linked debt sooner than it is reflected in increased
revenue. We therefore are reporting a reduction in earnings in the
current year with the uplift to revenue based on current inflation
expected to follow in revenues in 2023/24.
-- Net finance expense/income
GBPm
Underlying net finance expense- six months to
30 September 2021 134.2
--------
Indexation (including the impact of inflation
swaps) increase 186.2
--------
Capitalised borrowing costs increase (41.5)
--------
Net pension interest income increase (7.1)
--------
Interest on index linked debt and derivatives
decrease (3.5)
--------
Interest receivable on short-term bank deposits
and loans to JVs increase (2.8)
--------
Interest on non-index linked debt and derivatives
increase 1.1
--------
Underlying net finance expense - six months
to 30 September 2022 266.6
--------
Adjusted items - fair value gains * (403.0)
--------
Reported net finance income- six months to 30
September 2022 (136.4)
--------
* Adjusted items are set out in the 'underlying profit'
tables.
The underlying net finance expense of GBP267 million was GBP132
million higher than the first half of last year, mainly due to the
non-cash impact of significantly higher inflation on our
index-linked debt.
The indexation of principal on index-linked debt, including the
impact of inflation swaps, amounted to a net charge in the income
statement of GBP290 million, compared with a net charge of GBP103
million in the first half of last year, resulting in an increase of
GBP187 million. Offsetting this increase are GBP42 million higher
capitalised borrowing cost and GBP7 million higher net pension
interest income. Interest payable on index-linked debt (including
the impact of inflation swaps) of GBP13 million is GBP4 million
lower than the first half of last year. Interest receivable on
short-term bank deposits and loans to JVs is GBP3 million higher
than the first half of last year and interest payable on non-index
linked debt and derivatives is GBP1 million higher than the first
half of last year.
The GBP267 million underlying net finance expense included in
the income statement for the year compares with GBP54 million net
cash interest paid included in the statement of cash flows. This
GBP213 million difference is due to non-cash inflation uplifts on
index linked debt and derivatives of GBP290 million, less
capitalised borrowing costs of GBP63 million and net pension
interest income of GBP14 million, both of which are also non-cash
items.
Reported net finance income of GBP136 million was GBP254 million
higher than the GBP118 million net finance expense in the first
half of last year, reflecting the GBP387m increase in net fair
value gains on our debt and derivative instruments excluding
interest on derivatives and debt under fair value option, from
GBP16 million in the first half of last year to GBP403 million in
the first half of this year. This is partially offset by the GBP132
million increase in underlying finance expense.
-- Joint ventures
For the six months to 30 September 2022, we recognised a GBP0.2
million profit in the income statement relating to our joint
venture Water Plus, compared with a GBP1.8 million net share of
losses from joint ventures in the first half of last year. Further
details can be found in note 11 of these condensed consolidated
financial statements.
Profit/(loss) after tax and earnings per share
PAT Earnings
GBPm per share
Pence/share
Underlying - six months to 30 September
2021 193.9 28.4p
-------- -------------
Underlying profit before tax decrease (204.7)
-------- -------------
Underlying tax increase, including the
impact of capital allowance 'super deductions' (1.4)
-------- -------------
Underlying - six months to 30 September
2022 (12.2) (1.8)p
-------- -------------
Adjusted items * 365.2
-------- -------------
Reported - six months to 30 September
2022 353.0 51.8p
-------- -------------
* Adjusted items are set out in the 'underlying profit'
tables.
Underlying loss after tax of GBP12 million was GBP206 million
lower than the first half of last year, and underlying earnings per
share decreased from 28.4 pence to (1.8) pence, as the GBP205
million reduction in underlying profit before tax is increased
slightly by a GBP1 million increase in underlying tax.
The group has a reported profit after tax of GBP353 million for
the first half of this year, compared with a GBP216 million
reported loss after tax in the first half of last year. This GBP569
million difference reflects the GBP214 million increase in reported
profit before tax, and a GBP355 million decrease in deferred tax
largely due to a one-off charge in the first half of last year to
restate the brought forward deferred tax liability at the new 25
per cent future headline rate. Reported basic earnings per share
increased from (31.7) pence to 51.8 pence.
-- Tax
We continue to be fully committed to paying our fair share of
tax and acting in an open and transparent manner in relation to our
tax affairs, and are delighted to have been accredited with the
Fair Tax Mark again in 2022 for the fourth year running.
In addition to corporation tax, the group makes further
contributions to the public finances, typically of around GBP200
million per annum, in the form of business rates, employer's
national insurance contributions, environmental taxes, other
regulatory service fees such as water abstraction charges as well
as employment taxes on behalf of our 6,000 strong workforce.
We paid corporation tax of GBP2 million in the period and also
received a provisional repayment of corporation tax of GBP18
million which relates to prior years' UK tax matters. The key
reconciling item to the headline rate of corporation tax continues
to be allowable tax deductions on capital investment, these being
deductions put in place by successive governments to encourage such
investment and thus reflecting responsible corporate behaviour in
relation to taxation. For the current period, the cash tax paid is
low due to the impact of the capital allowances super deductions,
announced in the March 2021 Chancellor's Budget and affecting our
eligible plant and machinery additions in 2022 and 2023.
The current tax charge was GBP4 million in the six months to 30
September 2022, compared with GBP5 million in the previous half
year.
For the six months to 30 September 2022, we recognised a
deferred tax charge of GBP69 million, compared with GBP42 million
for the same period last year. The prior year figure excludes the
GBP382 million one-off deferred tax charge reflecting the 25 per
cent future headline rate.
The total effective tax rate, was 17 per cent for the six months
to 30 September 2022, compared with 22 per cent in the previous
half year; the decrease being mainly due to the non-taxable profit
on the disposal of United Utilities Renewable Energy Ltd and an
increase in capital allowances "super-deductions".
In the period, there were GBP21 million of tax adjustments taken
to equity, primarily relating to remeasurement movements on the
group's defined benefit pension schemes and on hedge
effectiveness.
Dividend per share
The Board has proposed an interim dividend of 15.17 pence per
ordinary share in respect of the six months ended 30 September 2022
. This is an increase of 4.6 per cent compared with the interim
dividend relating to last year, in line with the group's dividend
policy of targeting a growth rate of CPIH inflation each year
through to 2025. The 4.6 per cent increase is based on the CPIH
element included within allowed regulated revenue for the 2022/23
financial year (i.e. the movement in CPIH between November 2020 and
November 2021).
The interim dividend is expected to be paid on 1 February 2023
to shareholders on the register at the close of business on 23
December 2022. The ex-dividend date is 22 December 2022. The
election date for the Dividend Reinvestment Plan is 11 January
2023.
Cash flow
Net cash generated from continuing operating activities for the
six months to 30 September 2022 was GBP401 million, GBP70 million
lower than GBP471 million in the first half of last year, but
continuing to facilitate ongoing investments and helping to support
our dividend policy.
The group's net capital expenditure was GBP331 million,
principally in the regulated water and wastewater investment
programmes. This excludes infrastructure renewals expenditure,
which is treated as an operating cost.
Pensions
As at 30 September 2022, the group had an IAS 19 net pension
surplus of GBP824 million, compared with a surplus of GBP1,017
million at 31 March 2022. This GBP193 million decrease has
principally resulted from experience losses recognised in the
period due to actual inflation being higher than assumed at 1 April
2022, as well as increases in discount rate assumptions more than
offset by increases in net yields reducing the schemes assets by a
greater amount that the liabilities. A significant rise in yields
occurred following the Government's "mini-budget" announced on 23
September 2022 and had wider implications for many UK pension
schemes. As a result of our clear and robust policies, our schemes
were able to successfully navigate what was an extremely
challenging set of market conditions.
Further detail on pensions is provided in note 12 ('Retirement
benefit surplus') of these consolidated financial statements.
Financing
Net debt GBPm
At 31 March 2022 7,570.0
--------
Cash generated from operations (439.0
--------
Net capital expenditure 330.7
--------
Indexation including the impact of inflation
swaps 289.5
--------
Dividends 197.7
--------
Interest 53.7
--------
Net proceeds from disposal of subsidiary (90.5)
--------
Other 83.4
--------
At 30 September 2022 7,828.7
--------
Net debt at 30 September 2022 was GBP7,829 million, compared
with GBP7,570 million at 31 March 2022. This comprises gross
borrowings with a carrying value of GBP8,264 million, net
derivative liabilities hedging specific debt instruments of GBP30
million and indexation in inflation swaps of GBP67m, net of cash
and short-term deposits of GBP532 million.
Underlying movements in net debt are largely a result of net
operating cash inflows offset by our net capital expenditure,
dividends, indexation and cash interest.
Gearing, measured as group net debt divided by UUW's shadow
(adjusted for actual spend and timing difference) regulatory
capital value of GBP13.1 billion, was 60 per cent at 30 September
2022. This is slightly lower than gearing of 61 per cent as at 31
March 2022, and remains comfortably within our target range of 55
to 65 per cent.
-- Cost of debt
As at 30 September 2022, the group had approximately GBP3.3
billion of RPI-linked instruments and GBP0.4 billion of CPI or
CPIH-linked instruments held as debt. In recent years, in response
to Ofwat's decision to transition away from RPI inflation linkage,
the group has entered into a number of transactions swapping
RPI-linked cash flows to CPI-linked cash flows or swapping floating
rate cash flows to CPI-linked cash flows. As a result, including
these swaps, the group has RPI-linked debt exposure of GBP3.3
billion at an average real rate of 1.3 per cent, and GBP1.2 billion
of CPI or CPIH-linked debt exposure at an average real rate of -0.6
per cent.
A significantly higher inflation charge compared with the same
period last year contributed to the group's average effective
interest rate of 9.0 per cent being higher than the rate of 4.5 per
cent for the six months to 30 September 2021. The average
underlying interest rate represents the underlying net finance
expense adjusted for capitalised borrowing costs and net pension
interest income, divided by average notional debt. More information
on this can be found in the average effective interest rate
reconciliation table
The group has fixed the interest rates on its non index-linked
debt in line with its 10-year reducing balance basis at a net
effective nominal interest rate of 2.2 to 2.4 per cent for the
remainder of the AMP7 regulatory period.
-- Credit ratings
UUW's senior unsecured debt obligations are rated A3 with
Moody's Investors Service (Moody's), A- with Fitch Ratings (Fitch)
and BBB+ with Standard & Poor's Ratings Services (S&P) and
all on stable outlook. United Utilities PLC's (UU PLC's) senior
unsecured debt obligations are rated Baa1 with Moody's, A- with
Fitch and BBB- with S&P, all on stable outlook.
-- Debt financing
The group has access to the international debt capital markets
through its GBP10 billion medium-term note (MTN) programme. The MTN
programme is updated at least annually and this year's update is
expected to be completed shortly. The MTN programme does not
represent a funding commitment, with funding dependent on the
successful issue of the notes.
In total over 2020-25, the group had a term funding requirement
of around GBP2.7 billion to cover refinancing and incremental debt,
supporting our five-year investment programme. Coming into this AMP
the group was already pre-funded for the first two years, and so
far in AMP7, we have raised around GBP1.7 billion, taking advantage
of attractive rates available and extending our liquidity position
out to February 2025. Through combined financing and liquidity, the
group has sufficient funding through to almost the end of AMP7.
In the six months to 30 September 2022 we raised GBP385 million
of term funding. GBP235m was raised through two bilateral loans
with Export Development Canada (EDC) both with 8-year maturities.
AAA-rated EDC is a financial Crown Corporation and Canada's Export
Credit Agency that looks to promote trade with Canadian firms
worldwide. This followed collaboration with EDC in relation to some
of the innovation activities that we have undertaken. A further
GBP150m bilateral loan with a 10 year maturity was entered into
with one of the group's relationship banks.
Since March 2022, we have renewed GBP50 million of revolving
credit facilities for a further 5-year term and entered into GBP50
million of new revolving credit facilities for a 5-year term.
-- Interest rate management
Long-term borrowings are structured or hedged to match assets
and earnings, which are largely in sterling, indexed to UK 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 2022,
approximately 42 per cent of the group's net debt was in RPI-linked
form, representing around 25 per cent of UUW's regulatory capital
value, with an average real interest rate of 1.3 per cent. A
further 16 per cent of the group's net debt was in CPI or
CPIH-linked form, representing around nine per cent of UUW's RCV,
with an average real rate of -0.6 per cent. The long-term nature of
this funding also provides a good match to the company's long-life
infrastructure assets and is a key contributor to the group's
average term debt maturity profile, which is around 18 years.
Our inflation hedging policy is to target around 50 per cent of
net debt to be maintained in index-linked form. This reflects a
balanced assessment across a range of factors.
Where nominal debt is raised in a currency other than sterling
and/or with a fixed interest rate, the debt is generally swapped to
create a floating rate sterling liability for the term of the debt.
To manage exposure to medium-term interest rates, the group fixes
underlying interest costs on nominal debt out to ten years on a
reducing balance basis.
-- 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. Our MTN
programme provides further support.
At 30 September 2022, the group had liquidity out to February
2025, comprising cash and short-term deposits, plus committed
undrawn revolving credit facilities. This gives us flexibility in
terms of when and how further debt finance is raised to help
refinance maturing debt and support the delivery of our regulatory
capital investment programme.
We consider that we operate 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. Our cash is held in the form of
short-term money market deposits with prime commercial banks.
We operate a bilateral rather than a syndicated approach to our
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.
OUTLOOK
Our investment strategy and Systems Thinking approach is
delivering value through sustainable operational excellence,
driving improvements to what matters most to our stakeholders.
While the current challenging macro environment is impacting
financial performance, the economic performance of our business
remains robust, supported by our strong balance sheet, effective
hedging policies and tight cost control. We continue to target a
cumulative net outperformance of around GBP200 million against our
customer ODIs for AMP7, almost five times the reward earned in
AMP6.
2022/23 FULL YEAR GUIDANCE
Revenue is expected to be around 1 per cent lower than 2021/22,
largely reflecting the November 2021 CPIH inflation of 4.6 per
cent, offset by the regulatory revenue reduction of 1.3 per cent
and under-recovery in the current year due to lower than expected
consumption. A GBP34 million expected impact from lower consumption
will be recovered through increased revenue in FY25.
Underlying operating costs are expected to be around GBP130
million higher year-on-year. Approximately GBP80 million reflects
inflationary pressures on operating costs, principally power,
chemicals, labour and other contract costs. Around GBP30 million
reflects increases in scope and includes the FY23 element of
incremental infrastructure renewals expenditure in relation to the
additional investment we previously announced. The remaining GBP20
million reflects atypical cost increases including dry weather
costs incurred in the first half.
Underlying finance expense is expected to be around GBP165
million higher year-on-year based on our latest, market based
inflation forecast. As at 31 March 2022, we had GBP4.3 billion of
index-linked debt exposure, therefore every 1 per cent increase in
inflation equates to an around GBP43 million higher interest
charge. Our cash interest in 2021/22 was GBP118 million and we
expect this to be broadly the same in 2022/23, with the overall
increase in underlying net finance expense largely relating to the
non-cash indexation of our index-linked debt.
Underlying tax is expected to be between a GBP5 million and
GBP10 million charge for the year, as we continue to optimise the
use of capital allowance 'super deductions' and efficiently manage
the group's tax position.
Capital expenditure (capex) in 2022/23 is expected to be in the
range of GBP660 million to GBP715 million, including the 2022/23
element of incremental capital expenditure in relation to the
GBP765 million additional investment.
We are on track to deliver a net customer ODI reward of around
GBP30 million, consistent with our investment plans and AMP7 target
of around GBP200 million reward. With higher expected financing
performance this year alongside our improving ODI performance, RoRE
is expected to be higher than the 7.9% reported in FY22.
Our AMP7 dividend policy is to grow the dividend in line with
CPIH inflation out to 2025, which for 2022/23 equates to an
increase of 4.6 per cent based on November 2021 CPIH inflation.
Underlying profit
The underlying profit measures in the following table represent
alternative performance measures (APMs) as defined by the European
Securities and Markets Authority (ESMA). These measures are linked
to the group's financial performance as reported in accordance with
UK-adopted international accounting standards and the requirements
of the Companies Act 2006 in the group's consolidated income
statement. As such, they represent non-GAAP measures.
These APMs have been presented in order to provide a more
representative view of business performance. The group determines
adjusted items in the calculation of its underlying measures
against a framework which considers significance by reference to
profit before tax, in addition to other qualitative factors such as
whether the item is deemed to be within the normal course of
business, its assessed frequency of reoccurrence and its volatility
which is either outside the control of management and/or not
representative of current year performance.
In addition, a reconciliation of the group's average effective
interest rate has been presented, together with a prior period
comparison. In arriving at net finance expense used in calculating
the group's effective interest rate, underlying net finance expense
is adjusted to add back net pension interest income and capitalised
borrowing costs in order to provide a view of the group's cost of
debt that is better aligned to the return on capital it earns
through revenue.
Adjusted Rationale
item
Adjustments not expected to recur
Profit on This relates to the disposal of the group's subsidiary
disposal of United Utilities Renewable Energy Limited, which
subsidiary represents a significant, atypical event and as
such is not considered to be part of the normal
course of business.
--------------------------------------------------------
Consistently applied presentational adjustments
Fair value Fair value movements on debt and derivative instruments
(gains)/losses can be both very significant and volatile from
on debt and one period to the next, and are therefore excluded
derivative in arriving at underlying net finance expense
instruments, as they are determined by macro-economic factors
excluding which are outside of the control of management
interest on and relate to instruments that are purely held
derivatives for funding and hedging purposes (not for trading
and debt under purposes). Included within fair value movement
fair value on debt and derivatives is interest on derivatives
option and debt under fair value option. In making this
adjustment it is appropriate to add back interest
on derivatives and debt under fair value option,
which is set out in note 6 to the interim condensed
consolidated financial statements, to provide
a view of the group's cost of debt which is better
aligned to the return on capital it earns through
revenue. Taking these factors into account, management
believes it is useful to adjust for these fair
value movements to provide a more representative
view of performance.
--------------------------------------------------------
Deferred tax Management adjusts to exclude the impact of deferred
adjustment tax in order to provide a more representative
view of the group's profit after tax and tax charge
for the year given that the regulatory model allows
for cash tax to be recovered through revenues,
with future revenues allowing for cash tax including
the unwinding of any deferred tax balance as it
becomes current. By making this adjustment, the
group's underlying tax charge does not include
tax that will be recovered through revenues in
future periods, thus reducing the impact of timing
differences.
--------------------------------------------------------
Tax in respect Management adjusts for the tax impacts of the
of adjustments above adjusted items to provide a more representative
to underlying view of current year performance.
profit before
tax
--------------------------------------------------------
6 months 6 months
ended ended Year ended
30 September 30 September 31 March
Underlying profit 2022 2021 2022
GBPm GBPm GBPm
Operating profit per published results 258.5 332.8 610.0
Underlying operating profit 258.5 332.8 610.0
-------------- -------------- -----------
GBPm GBPm GBPm
Finance expense 117.3 (127.5) (187.7)
Investment income 19.1 9.2 19.4
-------------- -------------- -----------
Net finance (income)/expense per published
results 136.4 (118.3) (168.3)
-------------- -------------- -----------
Adjustments:
Fair value (gains) on debt and derivative
instruments, excluding interest on derivatives
and debt under fair value option (403.0) (15.9) (138.0)
Underlying net finance expense (266.6) (134.2) (306.3)
-------------- -------------- -----------
Profit on disposal of subsidiary 31.2 - -
Share of profits/(losses) of joint ventures 0.2 (1.8) (1.8)
Profit before tax per published results 426.3 212.7 439.9
Adjustments:
In respect of operating profit - - -
In respect of net finance expense (403.0) (15.9) (138.0)
In respect of profit on disposal of subsidiary (31.2) - -
-------------- -------------- -----------
Underlying (loss)/profit before tax (7.9) 196.8 301.9
-------------- -------------- -----------
Profit/(loss) after tax per published
results 353.0 (216.2) (56.8)
Adjustments:
In respect of profit before tax (434.2) (15.9) (138.0)
Deferred tax adjustment 69.0 423.9 562.5
Tax in respect of adjustments to underlying
profit before tax - 2.1 (0.7)
Underlying (loss)/profit after tax (12.2) 193.9 367.0
-------------- -------------- -----------
Earnings per share
GBPm GBPm GBPm
Profit/(loss) after tax per published
results (a) 353.0 (216.2) (56.8)
Underlying (loss)/profit after tax (b) (12.2) 193.9 367.0
Weighted average number of shares in
issue, in millions (c) 681.9m 681.9m 681.9m
Earnings per share per published results,
in pence (a/c) 51.8 (31.7) (8.3)
Underlying earnings per share, in pence
(b/c) (1.8) 28.4 53.8
Dividend per share, in pence 15.17p 14.50p 43.50p
In arriving at net finance expense used in calculating the
group's effective interest rate, management adjusts underlying net
finance expense to add back pension income and capitalised
borrowing costs in order to provide a view of the group's cost of
debt that is better aligned to the return on capital it earns
through revenue.
6 months 6 months Year ended
ended ended
Average effective interest rate 30 September 30 September 31 March
2022 2021 2022
------------- ------------- -----------
GBPm GBPm GBPm
------------- ------------- -----------
Underlying net finance expense (266.6) (134.2) (306.3)
------------- ------------- -----------
Adjustments:
------------- ------------- -----------
Net pension interest income (14.4) (7.3) (14.3)
------------- ------------- -----------
Adjustment for capitalised borrowing
costs (62.9) (21.4) (52.7)
------------- ------------- -----------
Net finance expense for effective
interest rate (343.9) (162.9) (373.3)
------------- ------------- -----------
Average notional net debt(1) (7,679) (7,290) (7,368)
------------- ------------- -----------
Average effective interest rate 9.0% 4.4% 5.1%
------------- ------------- -----------
Effective interest rate on index-linked
debt 13.7% 6.8% 7.0%
------------- ------------- -----------
Effective interest rate on other debt 2.5% 2.6% 2.5%
------------- ------------- -----------
(1) Notional net debt is calculated as the principal amount of
debt to be repaid, net of cash and short-term deposits, taking: the
face value issued of any nominal sterling debt, the inflation
accreted principal on the group's index linked debt, and the
sterling principal amount of the cross currency swaps relating to
the group's foreign currency debt.
PRINCIPAL RISKS AND UNCERTAINTIES
Our approach to risk management
Our approach to risk management, including how we identify and
assess risk, the oversight and governance process, and focus on
continual improvement remains unchanged from that detailed in our
Annual Report for the year ended 31 March 2022.
Risk profile
The business risk profile is based on the value chain of the
company, with the ten principal risks representing inherent risk
areas (primary and supportive) where value can be gained, preserved
or lost relative to the performance, future prospects or reputation
of the company. Underpinning the principal risks, the profile
consists of approximately 100 event-based risks, each of which is
allocated to one of the ten inherent risk areas based on the
context of the event, enabling the company to consider
interdependency and correlation of common themes and control
effectiveness. Although the profile remains relatively static in
terms of its headline inherent risk factors, risk assessments
remains dynamic by reflecting new and emerging circumstances.
The common themes are under continuous review, however at
present they are:
-- Causal factor themes : Extreme weather/climate change;
Demographic change; Legislative and regulatory change; Economic
conditions; Asset health; and Culture.
-- Consequence themes : Customers; Environment; Investors; and Employees.
The company's most significant event-based ri sks
The most significant event-based risks represent the ten
highest-ranked risks by exposure (likelihood of occurrence of the
event multiplied by the most likely financial impact) and those
risks which have been assessed as having a significantly high
impact, but low likelihood. Depending on the circumstances,
financial impacts will include loss of revenue, additional or extra
cost, fines, regulatory penalties and compensation. Reputational
impact relative to our multiple stakeholders is also assessed,
reported and considered as part of the mitigation.
Summarised below are the top ten ranking risks (1 - 10), and
those assessed as having high impact, but low likelihood (A -
F):
1. Price Review 2024 outcome
Risk exposure: This risk focuses on the ability to secure an
adequately funded business plan that allows delivery for customers,
communities, and the environment that is sustainable and resilient
for the long term relative to the unique characteristics of the
region we serve, in light of multiple influencing factors - notably
changing demographics, climate change and asset health.
Control/mitigation: We have established cross-cutting work
streams and theme owners to identify the products and evidence
required for the submission and we will maintain a close dialogue
with Ofwat throughout the process.
Assurance: Extensive customer research and several external
providers have been commissioned for technical optioneering. Second
line assurance is provided through a dedicated price review team
and a PR24 programme board. An internal audit is scheduled and
external assurance is currently under procurement.
2. Failure of the Haweswater Aqueduct
Risk exposure: The Haweswater Aqueduct is a key asset with
current low resilience due to deterioration, with failure
potentially resulting in water quality issues and/or supply
interruptions to a large proportion of the United Utilities
customer base.
Control/mitigation: A capital project to replace the tunnel
sections of the aqueduct has already commenced with the completion
in November 2020 of one section. The remaining sections are due to
be replaced as part of Haweswater Aqueduct Resilience Programme
(HARP) by 2032/33.
Assurance: Technical and geological advice and modelling have
been sought throughout the programme development, with second line
assurance including engineering technical governance. Independent
assurance is provided by cyclical internal audits and external
assurance over the competitively appointed provider.
3. Wastewater network failure
Risk exposure: Equipment failure, collapses/ bursts or
inadequate hydraulic/operational capacity to cope with extreme
weather and population growth, resulting in sewer flooding and
non-compliant discharges from combined sewer overflows.
Control/mitigation: Preventative maintenance and inspection
regimes, customer campaigns and sewer rehabilitation programmes and
improved monitoring.
Assurance: Second line assurance provided by wholesale
assurance, engineering technical governance and flood review panel.
Subject to regular internal audits and external assurance of
regulatory reporting.
4. Failure to meet the Totex efficiency challenge
Risk exposure: Totex efficiencies designed for AMP7 are under
significant challenge through a combination of factors including
supply chain issues, inflationary pressure on labour costs, and
additional investment to deliver performance improvements.
Control/mitigation: We have further developed our approach to
Integrated Business Planning (IBP) with the inclusion of a
Strategic Programme Board and the development of an agreed
prioritisation framework across the business including detailed
efficiency tracking with sponsors assigned to each strategic
project.
Assurance: Assurance is provided through the Quarterly Business
Reviews, Integrated Business Planning (IBP), Strategic Programme
Board and monthly monitoring against the Company Business Plan.
Internal Audit undertake cyclical third line assurance over the
business planning process.
5. Cyber
Risk exposure: Data and technology assets compromised due to
malicious or accidental activity, leading to a major impact to key
business processes and operations.
Control/mitigation: Multiple layers of control, including a
secure perimeter, segmented internal network zones, access
controls, constant monitoring and forensic response capability.
Assurance: Security stance reflects multiple sources of threat
intelligence. The security steering group provides second line
assurance, with independent assurance provided by cyclical internal
audits and various technical audits by external specialists.
6. Water sufficiency event
Risk exposure: Water sufficiency is one of the most sensitive
risks to climate change, with the frequency of recent periods of
extended hot, dry weather being evidence of changing circumstance
and the potential for implementation of water use restrictions on
customers.
Control/mitigation: We produce a Water Resources Management Plan
(WRMP) every five years, which forecasts future demand and water
availability under repeats of historic droughts, adjusted for
climate change. A statutory Drought Plan is also developed every
five years, setting out the actions we will take in a drought
situation.
Assurance: The WRMP and Drought Plan are subject to various
second and third line assurance activities prior to
publication.
7. Carbon commitments
Risk exposure: This risk focuses on the capacity and capability
to decarbonise water and wastewater activity relevant to the Public
Interest Commitments (PIC) to achieve net zero by 2030 in light of
the growth pressures, lack of technological advances or innovation
and the fundamental change of approach required.
Control/mitigation: We will continue to develop near-term
initiatives to address process and energy emissions, and create
woodland and restore peatland, while responding to an evolving
policy and technological landscape. We are also developing a
long-term strategy to reduce emissions and to fully understand and
optimise potential decarbonisation initiatives and pathways.
Assurance: Water industry research and technical support
combined with a climate change mitigation steering group provides
second line assurance. An internal audit is scheduled and external
assurance of emissions, regulatory reporting lines and
science-based targets has been established.
8. Recycling of biosolids to agriculture
Risk exposure: This risk represents various impact scenarios
including operational failures, increased restrictions or total ban
of recycling biosolids to agriculture. Referencing the EA's
interpretation of the Farming Rules for Water (FRfW) regulations
and the increasing threat to recycling a large proportion of
biosolids.
Control/mitigation: United Utilities is accredited to the UK
Biosolids Assurance Scheme (BAS), which certifies that our
treatment and recycling activities meet regulatory requirements and
best practice. We also work closely with farmers and landowners and
have robust standard operating procedures established with
contractors.
Assurance: Wholesale assurance and engineering technical
governance provide second line assurance. Subject to both cyclical
internal and external audit.
9. Failure to treat sludge
Risk exposure: This risk relates to the interdependency between
wastewater and bioresource treatment activity in light of changing
demographics, asset health and legislative/regulatory change.
Industrial Emissions Directive (IED) now applying to biological
treatment of sewage sludge within AMP 7, with no investment
assigned to this requirement is a key factor.
Control/mitigation: The Throughput, Reliability, Availability,
and Maintainability (T-RAM) of our facilities is a key area of
mitigation, with formal service level agreements between the two
core activities. In relation to IEDs, discussions at national level
are being held to move the high capital cost improvements into
PR24.
Assurance: Wholesale assurance and engineering technical
governance provide second line assurance. Subject to cyclical
internal audit and ad-hoc external strategic reviews.
10. Price Volatility
Risk exposure: This risk reflects the inflationary pressures
across all commodities, notably energy, associated with the post
Brexit effects in the supply chain, the COVID-19 economic
bounceback and the ongoing conflict in Ukraine.
Control/mitigation: Contract provision with suppliers, hedging
policies, and supply arrangements manage volatility and minimise
vulnerability in the contract and price risk with the suppliers
including periods of fixed pricing and negotiation of CPI/H uplift
on an annual basis. Operational optimisation programmes also seek
to reduce exposure to price through efficient use.
Assurance: Market analysis and supplier engagement, combined
with quarterly business reviews provide second line assurance. Due
to the scale of procurement, an energy governance panel has
oversight over procurement and use.
High impact, low likelihood risks
A. Erosion of Pension Scheme Surplus
Risk exposure: The potential for the pension scheme surplus to
be eroded due l ife expectancy rates increasing, defaults on
corporate bond investments and/or insufficient collateral being
available to support the interest rate hedge.
Control/mitigation: Constant monitoring combined with hedging
against interest rates, inflation and growth asset risk.
Notwithstanding the above, the recent volatility in gilt yields has
highlighted systemic issues with the use of Liability Driven
Investment portfolios in pension schemes, and the ability to
provide collateral under stressed market conditions. Immediate
steps have been taken to mitigate risks in the short-term, however
a full review of investment strategy will follow.
Assurance: Policy and oversight is led by the pensions review
management group, taking into account advice from accountancy and
pension specialists, and law firms. Pension governance is subject
to periodic internal audits.
B. Financial Outperformance
Risk exposure: Failure to achieve financial outperformance due
to macro economic conditions and efficiency challenges, impacting
the cost of debt and delivery of the company business plan.
Control/mitigation: Interest rate and inflation management,
ongoing monitoring of markets and regulatory developments, and
company business planning.
Assurance: Second line assurance and oversight is provided by
the board and treasury committee in addition to executive quarterly
business reviews. Subject to cyclical internal audit reviews.
C. Dam failure
Risk exposure: Uncontrolled release of a significant volume of
water from reservoirs due to flood damage, overtopping, earthquake
or erosion leading to catastrophic impacts downstream.
Control/mitigation: Each reservoir is regularly inspected by
engineers. Where appropriate, risk reduction interventions are
implemented through a prioritised investment programme.
Assurance: Various sources of second line assurance, including
supervising engineers, dam safety group, wholesale assurance and
regular board reviews. Independent assurance is provided by panel
engineers and internal audit.
D. Disease pandemic
Risk exposure: Serious illness in a large proportion of the UK
population and consequences to our workforce, the wider supply
chain and macro economy.
Control/mitigation: The incident management process would be
invoked, supported by the Pandemic Response Plan. This includes the
implementation of multi-channel communication with
non-pharmaceutical interventions as per government guidance.
Assurance: Wholesale assurance provides second line assurance,
with internal audit undertaking various reviews.
E. Terrorism
Risk exposure: A significant asset to be compromised by
terrorist activity leading to loss of supply, contamination and/or
pollution.
Control/mitigation: A risk-based protection of assets in line
with the Security and Emergency Measures Direction (SEMD) and close
liaison with the Centre for the Protection of National
Infrastructure (CPNI), regional counter terrorist units, local
agencies and emergency services.
Assurance: Security posture is based on various threat advisors.
Second line assurance is provided by the security steering group.
In addition, internal audit undertakes cyclical audits with
external technical assurance being delivered by specialists.
Material litigation
In relation to the Manchester Ship Canal Company matter reported
in previous years, a hearing was held in the Court of Appeal at the
end of March 2022. The Court of Appeal has dismissed the main
additional points raised by MSCC, although MSCC have now been
granted leave to appeal to the Supreme Court. The final appeal is
scheduled to be held in early March 2023 which may provide further
clarity in relation to the rights and remedies afforded to the
parties and others in relation to discharges by water companies
into the canal and other watercourses.
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. These forward-looking statements include without
limitation any projections or guidance relating to the results of
operations and financial conditions of the group as well as plans
and objectives for future operations, expected future revenues,
financing plans, expected expenditure and any strategic initiatives
relating to the group, as well as discussions of our business plan
and our assumptions, expectations, objectives and resilience with
respect to climate scenarios. 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.
This announcement contains inside information, disclosed in
accordance with the Market Abuse Regulation which came into effect
on 3 July 2016 and for UK Regulatory purposes the person
responsible for making the announcement is Simon Gardiner, Company
Secretary.
LEI 2138002IEYQAOC88ZJ59
Classification - Half Year Results
Consolidated income statement
Six months Six months
ended ended Year ended
30 September 30 September 31 March
2022 2021 2022
GBPm GBPm GBPm
Revenue (note 3) 919.3 932.3 1,862.7
--------------- --------------- ------------
Staff costs (note 4) (95.2) (89.1) (184.3)
Other operating costs (note 4) (257.6) (210.6) (461.7)
Allowance for expected credit losses
- trade and other receivables (11.2) (12.1) (23.4)
Other income 2.2 2.5 4.4
Depreciation and amortisation expense (206.8) (207.6) (418.2)
Infrastructure renewals expenditure (92.2) (82.6) (169.5)
--------------- --------------- ------------
Total operating expenses (660.8) (599.5) (1,252.7)
--------------- --------------- ------------
Operating profit 258.5 332.8 610.0
Investment income (note 5) 19.1 9.2 19.4
Interest payable (note 6) (262.6) (147.6) (330.7)
Net fair value gains on debt and derivatives
(note 6) 379.9 20.1 142.9
Allowance for expected credit losses
- loans to joint ventures - - 0.1
--------------- --------------- ------------
Investment income and finance expense 136.4 (118.3) (168.3)
--------------- --------------- ------------
Profit on disposal of subsidiary (note
7) 31.2 - -
Share of profits / (losses) of joint
ventures (note 11) 0.2 (1.8) (1.8)
Profit before tax 426.3 212.7 439.9
Current tax charge (4.3) (5.0) 65.8
Deferred tax charge (69.0) (42.3) (159.8)
Deferred tax charge - change in tax
rate - (381.6) (402.7)
Tax (note 8) (73.3) (428.9) (496.7)
Profit/(loss) after tax 353.0 (216.2) (56.8)
--------------- --------------- ------------
All of the results shown above relate to continuing operations.
Earnings per share (note 9)
Basic 51.8p (31.7)p (8.3)p
Diluted 51.6p (31.7)p (8.3)p
Dividend per ordinary share (note 10) 15.17p 14.50p 43.50p
Consolidated statement of comprehensive income
Six months Six months
ended ended Year ended
30 September 30 September 31 March
2022 2021 2022
GBPm GBPm GBPm
Profit/(loss) after tax 353.0 (216.2) (56.8)
------------- ------------- ------------
Other comprehensive income
Items that may be reclassified to profit
or loss in subsequent periods:
Cash flow hedge effectiveness 207.0 43.8 107.5
Tax on hedge effectiveness taken directly
to equity (51.8) (10.9) (26.9)
Reclassification of cash flow hedge effectiveness
to consolidated income statement (24.0) (0.9) (0.9)
Tax on reclassification to consolidated
income statement 4.6 0.2 0.2
Other comprehensive income that may be
reclassified to profit or loss 135.8 32.2 79.9
------------- ------------- ------------
Items that will not be reclassified to
profit or loss in subsequent periods:
Remeasurement (losses)/gains on defined
benefit pension
schemes (note 12) (208.2) 123.4 313.6
Change in credit assumptions for debt
reported at fair value through profit
or loss 16.4 (7.5) (4.1)
Cost of hedging - cross currency basis
spread adjustment 0.1 1.8 -
Tax on items taken directly to equity 68.5 (44.8) (109.4)
------------- ------------- ------------
Other comprehensive income that will
not be reclassified to profit or loss (123.2) 72.9 200.1
------------- ------------- ------------
Total comprehensive income 365.6 (111.1) 223.2
------------- ------------- ------------
Consolidated statement of financial position
30 September 30 September 31 March
2022 2021 2022
GBPm GBPm GBPm
ASSETS
Non-current assets
Property, plant and equipment 12,321.2 11,956.3 12,147.5
Intangible assets 149.0 170.4 160.8
Interests in joint ventures and other
investments (note 11) 16.8 16.6 16.6
Inventories 0.7 - 0.4
Trade and other receivables 73.7 68.6 81.7
Retirement benefit surplus (note
12) 823.5 821.1 1,016.8
Derivative financial instruments 754.2 458.3 399.4
--------------- ---------------
14,139.1 13,491.3 13,823.2
--------------- --------------- -----------
Current assets
Inventories 24.0 18.9 17.8
Trade and other receivables 231.1 244.4 222.7
Current tax asset 60.7 8.6 74.4
Cash and short-term deposits 532.2 655.9 240.9
Derivative financial instruments 156.8 23.0 58.0
-----------
1,004.8 950.8 613.8
--------------- --------------- -----------
Total assets 15,143.9 14,442.1 14,437.0
--------------- --------------- -----------
LIABILITIES
Non-current liabilities
Trade and other payables (868.0) (825.5) (835.2)
Borrowings (note 13) (7,943.2) (7,802.1) (7,671.0)
Deferred tax liabilities (2,190.4) (1,928.9) (2,148.1)
Derivative financial instruments (290.8) (106.3) (136.7)
-----------
(11,292.4) (10,662.8) (10,791.0)
--------------- --------------- -----------
Current liabilities
Trade and other payables (395.3) (380.6) (365.8)
Borrowings (note 13) (320.6) (660.7) (308.8)
Provisions (12.8) (13.1) (13.5)
Derivative financial instruments - (3.2) (0.5)
-----------
(728.7) (1,057.6) (688.6)
--------------- --------------- -----------
Total liabilities (12,021.1) (11,720.4) (11,479.6)
--------------- --------------- -----------
Total net assets 3,122.8 2,721.7 2,957.4
--------------- --------------- -----------
EQUITY
Share capital 499.8 499.8 499.8
Share premium account 2.9 2.9 2.9
Other reserves (note 17) 552.1 369.8 416.2
Retained earnings 2,068.0 1,849.2 2,038.5
--------------- --------------- -----------
Shareholders' equity 3,122.8 2,721.7 2,957.4
--------------- --------------- -----------
Consolidated statement of changes in equity
Six months ended 30 September 2022
Share
Share premium (1) Other
capital account reserves Retained earnings Total
GBPm GBPm GBPm GBPm GBPm
----------------------------------------- --------- --------- ------------ ------------------ -----------
At 1 April 2022 499.8 2.9 416.2 2,038.5 2,957.4
----------------------------------------- --------- --------- ------------ ---------------------- ----------
Profit after tax - - - 353.0 353.0
Other comprehensive income/(expense)
Remeasurement losses on defined benefit
pension schemes (note 12) - - - (208.2) (208.2)
Change in credit assumption for debt
reported at fair value through profit
or loss - - - 16.4 16.4
Cash flow hedge effectiveness - - 207.0 - 207.0
Cost of hedging - cross currency basis
spread adjustment - - 0.1 - 0.1
Tax on items taken directly to equity - - (51.8) 68.5 16.7
Reclassification to income statement - - (24.0) - (24.0)
Tax on reclassification to income
statement - - 4.6 - 4.6
Total comprehensive income - - 135.9 229.7 365.6
----------------------------------------- --------- --------- ------------ ---------------------- ----------
Dividends (note 10) - - - (197.7) (197.7)
Equity-settled share-based payments - - - 2.8 2.8
Exercise of share options - purchase
of shares - - - (5.3) (5.3)
----------------------------------------- --------- --------- ------------ ---------------------- ----------
At 30 September 2022 499.8 2.9 552.1 2,068.0 3,122.8
----------------------------------------- --------- --------- ------------ ---------------------- ----------
Six months ended 30 September 2021
Share
Share premium (1) Other Retained
capital account reserves earnings Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------------- --------- --------- ------------ ---------- --------
At 1 April 2021 499.8 2.9 336.3 2,192.0 3,031.0
---------------------------------------- --------- --------- ------------ ---------- --------
Loss after tax - - - (216.2) (216.2)
Other comprehensive income/(expense)
Remeasurement gains on defined benefit
pension schemes (note 12) - - - 123.4 123.4
Change in credit assumption for debt
reported at fair value through profit
or loss - - - (7.5) (7.5)
Cash flow hedge effectiveness - - 43.8 - 43.8
Cost of hedging - cross currency basis
spread adjustment - - 1.8 - 1.8
Tax on items taken directly to equity - - (11.4) (44.3) (55.7)
Reclassification to income statement - - (0.9) - (0.9)
Tax on reclassification to income
statement - - 0.2 - 0.2
Total comprehensive income - - 33.5 (144.6) (111.1)
---------------------------------------- --------- --------- ------------ ---------- --------
Dividends (note 10) - - - (196.6) (196.6)
Equity-settled share-based payments - - - 2.6 2.6
Exercise of share options - purchase
of shares - - - (4.2) (4.2)
---------------------------------------- --------- --------- ------------ ---------- --------
At 30 September 2021 499.8 2.9 369.8 1,849.2 2,721.7
---------------------------------------- --------- --------- ------------ ---------- --------
Year ended 31 March 2022
Share
Share premium (1) Other Retained
capital account reserves earnings Total
GBPm GBPm GBPm GBPm GBPm
---------------------------------------- --------- --------- ---------- ---------- --------
At 1 April 2021 499.8 2.9 336.3 2,192.0 3,031.0
---------------------------------------- --------- --------- ---------- ---------- --------
Loss after tax - - - (56.8) (56.8)
Other comprehensive income/(expense)
Remeasurement gains on defined benefit
pension schemes (note 12) - - - 313.6 313.6
Change in credit assumption for debt
reported at fair value through profit
or loss - - - (4.1) (4.1)
Cash flow hedge effectiveness - - 107.5 - 107.5
Tax on items taken directly to equity - - (26.9) (109.4) (136.3)
Reclassification to income statement - - (0.9) - (0.9)
Tax on reclassification to income
statement - - 0.2 - 0.2
Total comprehensive income - - 79.9 143.3 223.2
---------------------------------------- --------- --------- ---------- ---------- --------
Dividends (note 10) - - - (295.5) (295.5)
Equity-settled share-based payments - - - 4.8 4.8
Exercise of share options - purchase
of shares - - - (6.1) (6.1)
---------------------------------------- --------- --------- ---------- ---------- --------
At 31 March 2022 499.8 2.9 416.2 2,038.5 2,957.4
---------------------------------------- --------- --------- ---------- ---------- --------
(1) Other reserves comprise the group's cumulative exchange
reserve, merger reserve, cost of hedging reserve, and cash flow
hedging reserve. Further detail of movements in these reserves is
included in note 17.
Consolidated statement of cash flows
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2022
2022 2021
GBPm GBPm GBPm
Operating activities
Cash generated from operations (note
15) 439.0 535.5 1,061.6
Interest paid (57.7) (73.1) (121.9)
Interest received and similar income 4.0 14.9 3.6
Tax paid (2.3) (6.7) (8.9)
Tax received 17.6 - -
-------------- --------------
Net cash generated from operating
activities 400.6 470.6 934.4
-------------- -------------- ------------
Investing activities
Purchase of property, plant and
equipment (323.4) (278.7) (609.0)
Purchase of intangible assets (8.3) (9.8) (19.5)
Grants and contributions received 1.0 0.6 1.8
Loans repaid by/(extended to) joint
ventures 7.8 - (13.0)
Net cash income on disposal of subsidiary
(note 7) 90.5 - -
-------------- --------------
Net cash used in investing activities (232.4) (287.9) (639.7)
-------------- --------------
Financing activities
Proceeds from borrowings net of
issuance costs 396.3 72.7 173.7
Repayment of borrowings (61.5) (152.6) (681.8)
Dividends paid to equity holders
of the company (note 10) (197.7) (196.6) (295.5)
Exercise of share options - purchase
of shares (5.3) (4.2) (6.1)
-------------- --------------
Net cash (used in)/generated from
financing activities 131.8 (280.7) (809.7)
-------------- -------------- ------------
Effects of exchange rate changes - - 1.5
-------------- --------------
Net (decrease)/increase in cash
and cash equivalents 300.0 (98.0) (513.5)
-------------- --------------
Cash and cash equivalents at beginning
of the period(1) 220.1 733.6 733.6
-------------- -------------- ------------
Cash and cash equivalents at end
of the period (1) 520.1 635.6 220.1
-------------- -------------- ------------
(1) Cash and cash equivalent is stated net of GBP12.1 million
(30 September 2021: GBP20.3 million; 31 March 2022: GBP20.8
million; 1 April 2021: GBP10.5m) of book overdrafts, which are
included in borrowings in the statement of financial position. Book
overdrafts, which result from normal cash management practices,
represent the value of cheques issued and payments initiated that
had not cleared as at the reporting date.
NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the six
months ended 30 September 2022 have been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Conduct
Authority and International Accounting Standard 34 'Interim
Financial Reporting' (IAS 34) as published by the International
Accounting Standards Board (IASB) and adopted by the UK.
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 2022.
The comparative figures for the year ended 31 March 2022 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, 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.
The annual financial statements for the year ended 31 March 2022
were prepared in accordance with the requirements of the Companies
Act 2006, and with UK-adopted international accounting standards.
They were prepared on the going concern basis under the historical
cost convention, except for the revaluation of financial
instruments, accounting for the transfer of assets from customers
and the revaluation of infrastructure assets to fair value on
transition to IFRS.
The accounting policies, presentation and methods of computation
used in these condensed consolidated interim financial statements
are the same as those used in the audited financial statement of
United Utilities Group PLC for the year ended 31 March 2022.
Going concern
The interim condensed consolidated financial statements for the
six months ended 30 September 2022 have been prepared on the going
concern basis as the directors have a reasonable expectation that
the group has adequate resources for a period of at least 12 months
from the date of their approval, and that there are no material
uncertainties to disclose.
In assessing the appropriateness of the going concern basis of
accounting, the directors have reviewed the resources available to
the group in the form of cash and committed bank facilities, as
well as considering the group's capital adequacy, along with a
baseline plan reflecting current best estimates of forecasted
future business performance. Liquidity forecasts used in the
directors' going concern assessment reflect best estimates of the
impact of high levels of inflation and interest (and volatility
thereon) currently being experienced, and how this would be
expected to impact the resources available to the group.
The directors have considered the magnitude of potential impacts
resulting from uncertain future events or changes in conditions,
and the likely effectiveness of mitigating actions that the
directors would consider undertaking.
The baseline position has been subjected to a number of severe
but plausible downside scenarios in order to assess the group's
ability to operate within the amounts and terms (including relevant
covenants) of existing facilities. These scenarios consider: the
potential impacts of increased totex costs, including a significant
one-off totex impact arising in the assessment period; lower CPIH
inflation; elevated levels of bad debt; outcome delivery incentive
penalties; and the impact of these factors materialising on a
combined basis. Mitigating actions were considered to include
deferral of capital expenditure; a reduction in other discretionary
totex spend; the close out of derivative asset balances; and the
deferral or suspension of dividend payments.
Consequently, the directors are satisfied that the group will
have sufficient funds to continue to meet its liabilities as they
fall due for at least 12 months from the date of approval of the
interim condensed consolidated financial statements, and that the
severe but plausible downside scenarios indicate that the group
will be able to operate within the amounts and terms (including
relevant covenants) of existing facilities. The interim condensed
consolidated financial statements have therefore been prepared on a
going concern basis.
Update on critical accounting judgements and key sources of
estimation uncertainty
As the impact of the Ukraine war and the broader associated
inflationary pressures continue to be felt, there remains a great
deal of uncertainty in the current political and economic
environment. We are mindful that unprecedented inflation levels are
likely to drive further increases to the cost of living and may
have a significant impact on many of the group's customers. The
following are the critical accounting judgements and key sources of
estimation uncertainty considered most likely to have an impact in
the next 12 months, or that have been significant in recent years
and may be impacted by ongoing developments:
Accounting estimate - retirement benefit obligations:*
The group operates two defined benefit pension schemes which are
independent of the group's finances. Actuarial valuations of the
schemes are carried out as determined by the trustees at intervals
of not more than three years. Profit before tax and net assets are
affected by the actuarial assumptions used. The key assumptions
include: discount rates, pay growth, mortality, and increases to
pensions in payment and deferred pensions. It should be noted that
actual rates may differ from the assumptions used due to changing
market and economic conditions and longer or shorter lives of
participants and, as such, this represents a key source of
estimation uncertainty.
In the immediate period leading up to 30 September 2022, there
was significant volatility in UK bond markets following the
government's "mini-budget". The significant rise in corporate bond
yields relative to the start of the year has led to a materially
higher IAS 19 discount rate. As required by IAS 19, we have
reflected market conditions as at the balance sheet date. In
addition, broader economic volatility has increased the level of
estimation uncertainty associated with assets classified as 'level
3' within the IFRS 13 fair value hierarchy at 30 September 2022.
Details of the assumptions used in calculating the schemes' assets
and liabilities are set out in note 12.
Accounting estimate - non-household credit note
provisioning:**
In accordance with IFRS 15 'Revenue from contracts with
customers', revenue is only recognised where it is deemed probable
of recovery. Any gross debt that is not expected to be recovered
through future cash collection must be provided against through
either an allowance for expected credit losses (non-collection) or
credit note provision (incorrectly billed).
For any period, the credit note provision is built up across two
types of loss which can be incurred against non-household revenue:
allowances pending payment, and future pre-market allowances. The
former relate to data changes following the final bill issued for a
period (received approximately 16 months after the initial estimate
for the period), while the latter relate to data changes resulting
in a reduction in revenue recognised in a period pre-dating the
non-household market.
At 30 September 2022 the total credit note provision in respect
of non-household revenue was GBP18.0 million, compared with GBP21.0
million at 31 March 2022 and GBP24.5 million at 30 September 2021.
While the provision has fallen by GBP3.0 million since 31 March
2022, this includes the impact of payments to non-household
retailers of GBP7.5 million during the period in respect of
allowances relating to periods from November 2018 to December 2020.
The size of payments made in respect of these periods and
additional claims received in respect of historic periods has
therefore increased the average daily allowance values that are now
reflected in the credit note provision. This increase offsets the
reduction that might have been expected based on payments made in
the year.
To forecast future pre-market allowances, historic information
has been used. Determining the ageing analysis of allowances raised
since the opening of the non-household market is not
straightforward, and work is ongoing between wholesalers and
retailers to improve the quality of market data. Notwithstanding
the increases seen in the average daily allowance values, it is
therefore reasonable to expect that the value of allowances
relating to final bills for a period (referred to as 'RF' within
the market mechanisms and received around 16 months after the
initial estimate) to reduce over time, as data for more recent
periods since the opening of the water retail market should not be
subject to the same legacy issues as earlier periods. Had it been
assumed that future average daily allowances continue at the
current daily average, the credit note provision recorded at 30
September would have been GBP2.2 million higher than that
recorded.
The forecast does not consider the impact of any large one-off
allowances that could be received in the future, but we have no
evidence from the data available to suggest that this would be
probable.
Accounting estimate - allowance for expected credit losses in
respect of household trade receivables:**
As a result of the Covid-19 pandemic and more recently ongoing
cost of living pressures, recent years have seen a higher level of
uncertainty around how economic conditions may impact the
recoverability of household receivables for a significant
proportion of the group's customer base. A range of collection
scenarios have been used to inform the allowance for expected
credit losses charged to the income statement during the period.
These take account of cash collection rates in the current year as
well as in recent years incorporating the onset of the Covid-19
pandemic, periods of lockdown, and periods of recovery, as well as
current levels of economic uncertainty in order to provide a range
of views as to how recoverability of household receivables may be
impacted by different conditions.
The group has historically used the average collection evidenced
in the previous two years as a basis for estimating future
collection, however cash collection during the current year has
been particularly strong whereas in contrast the two year look-back
period has also included periods impacted by the Covid-19 pandemic
where collection was below what is typically seen. Accordingly,
this approach used historically may not provide a representative
view of future cash collection, particularly in light of current
levels of economic uncertainty. Accordingly, we have taken a
similar approach to that used as at 31 March 2022 and have
calculated the allowance for expected credit losses based on the
average cash collection history over the last four years, which is
considered to give a more balanced position. This supports a charge
equivalent to around 1.8 per cent of household revenue recorded
during the period, which is broadly consistent with the position at
31 March 2022 and 30 September 2021.
Had average cash collection rates for the last two years been
used instead of the last four years, the charge would have
decreased by GBP1.1 million to 1.6 per cent of household revenue,
however as at 30 September 2022 a charge of 1.8 per cent is
considered to be appropriate given prevailing levels of uncertainty
and recognising the level of estimation uncertainty associated with
the assumptions made in forecasting the year end debt position upon
which the allowance for expected credit losses is based.
*Judgements/estimates that could reasonably give rise to a
material adjustment to the carrying value of assets or liabilities
in the short term.
**Other judgements/estimates considered less likely to give rise
to a material adjustment to the carrying value of assets or
liabilities in the short term.
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
group's performance is measured against financial and operational
key performance indicators, underlying operating profit, operating
profit, assets and liabilities, regulatory capital expenditure, and
regulatory capital value 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. Revenue
30 September 30 September 31 March
2022 2021 2022
GBPm GBPm GBPm
Wholesale water charges 381.4 393.6 776.5
Wholesale wastewater charges 459.8 477.0 946.3
Household retail charges 43.4 35.0 68.9
Other 34.7 26.7 71.0
------------- -------------
919.3 932.3 1,862.7
------------- ------------- ---------
The GBP13.0 million decrease in revenue for the half year ended
30 September 2022 compared with the same period in the prior year
is largely attributable to lower consumption more than offsetting
the allowed inflationary increase.
Residential retail charges relate solely to the margin applied
to the wholesale amounts charged to residential customers. The
wholesale charges and retail margin are combined in arriving at the
total revenues relating to water and wastewater services provided
to household customers.
Other revenues comprise a number of smaller non-core income
streams including those relating to property sales, energy
generation and export, and those associated with activities,
typically performed opposite property developers, which impact the
group's capital network assets including diversions works to
relocate water and wastewater assets, and activities that
facilitate the creation of an authorised connection through which
properties can obtain water and wastewater services.
4. Other operating costs
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2022
2022 2021 GBPm
GBPm GBPm
Materials 61.7 40.7 90.8
Power 54.7 38.2 99.6
Hired and contracted services 48.7 43.4 95.4
Materials 61.7 40.7 90.8
Property rates 45.7 46.5 90.5
Regulatory fees 18.3 14.5 28.4
Insurance 9.6 9.8 16.9
Loss on disposal of property,
plant and equipment 1.9 3.0 3.9
Cost of properties disposed 1.2 0.1 3.0
Other expenses 15.8 14.4 33.2
-------------- -------------- -----------
257.6 210.6 461.7
-------------- -----------
Other operating costs have increased compared with the same
period in the prior year predominantly due to inflationary
pressures, in particular on the cost of energy which has increased
our power costs, as well as our materials costs for consumables
such as chemicals, and inflationary pressures experienced by
subcontractors that have been passed on to us, which are included
within hired and contracted services.
In order to give a clearer view of the group's total staff
costs, since 31 March 2022 wages and salaries and amounts charged
to other areas including regulatory capital schemes have included
the costs of non-permanent staff who have worked for the group,
whose costs were previously included within hired and contracted
services presented within other operating costs. Accordingly, these
amounts for the six months to 30 September 2021 have been
re-presented to show this information on a consistent basis, which
has resulted in an increase in staff costs and reduction in the
costs of hired and contracted services of GBP6.7 million compared
with what was presented in the interim condensed consolidated
financial statements for that period.
5. Investment income
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2022
2022 2021 GBPm
GBPm GBPm
Interest receivable 4.7 1.9 5.1
Net pension interest income (note
12) 14.4 7.3 14.3
--------------- ---------------
19.1 9.2 19.4
--------------- --------------- -------------
6. Finance expense
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2022
2022 2021 GBPm
GBPm GBPm
Interest payable 262.6 147.6 330.7
Net fair value gains on debt and
derivatives (379.9) (20.1) (142.9)
--------------- --------------- -------------
(117.3) 127.5 187.8
--------------- --------------- -------------
Interest payable is stated net of GBP62.9 million (30 September
2021: GBP21.4 million; 31 March 2022: GBP52.7 million) of borrowing
costs capitalised in the cost of qualifying assets within property,
plant and equipment and intangible assets during the period.
Interest payable includes a GBP251.7 million (30 September 2021:
GBP92.8 million; 31 March 2022: GBP227.9 million) non-cash
inflation expense in relation to the group's index-linked debt.
Net fair value gains on debt and derivative instruments includes
GBP14.7 million income (30 September 2021: GBP14.6 million income;
31 March 2022: GBP4.9 million income) due to net interest on
derivatives and debt held under fair value option, and GBP37.8
million expense (30 September 2021: GBP10.3 million expense; 31
March 2022: GBP28.3 million expense) due to non-cash inflation
uplift on the group's index-linked derivatives.
7. Profit on disposal of subsidiary
On 29 September 2022 the group sold the entire issued share
capital of its wholly owned subsidiary United Utilities Renewable
Energy Limited (UURE) to SEEIT Holdco Limited.
Profit on disposal is shown below and included within the
group's consolidated income statement:
30 September
2022
GBPm
Total consideration received 98.5
Total net assets disposed (63.8)
Fees and transaction costs (3.5)
Profit on disposal of subsidiary 31.2
-------------
Management does not consider UURE to meet the definition of a
discontinued operation as set out in IFRS 5 'Non-current assets
held for sale and discontinued operations' as it is not considered
a separate major line of business for the group, accounting for
around GBP3.5 million of external revenue included in the group's
consolidated financial statements for the six months to 30
September 2022 (six months to 30 September 2021: GBP2.3 million;
year to 31 March 2022: GBP3.5 million), with the majority of UURE's
revenue relating to a long-term power purchase agreement with UUW
that continues in place following the disposal. As such, no
separate disclosures relating to discontinued operations have been
included in the group's income statement or the notes to the
interim financial statements.
The total consideration received in relation to the disposal of
UURE is reconciled to the net cash income on disposal of the
subsidiary per the consolidated statement of cash flows as
follows:
GBPm
Total consideration received 98.5
Cash and cash equivalents held by UURE
disposed of (4.5)
Fees and transaction costs (3.5)
Net cash income on disposal of subsidiary 90.5
------
8. Tax
The total effective tax rate for the six months to 30 September
2022 was 17 per cent, compared with 22 per cent for the same period
in the prior year, the decrease being mainly due to the non-taxable
profit on the disposal of United Utilities Renewable Energy Limited
and an increase in capital allowances "super-deductions". The split
of the total tax charge between current and deferred tax was due to
ongoing timing differences in relation to tax deductions on capital
investment and unrealised gains and losses on treasury
derivatives.
The current tax charge of GBP4.3 million for the six months to
30 September 2022 reflects the impact of the capital allowances
"super deductions", announced in the March 2021 Chancellor's Budget
and affecting our eligible plant and machinery additions in 2022
and 2023.
The tax adjustments taken to equity primarily relate to
remeasurement movements on the group's defined benefit pension
schemes and on hedge effectiveness.
9. Earnings per share
Basic and diluted earnings per share are calculated by dividing
profit/(loss) after tax by the weighted average number of shares in
issue during the period.
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2022
2022 2021 GBPm
GBPm GBPm
Profit/(loss) after tax attributable
to equity holders of the company -
continuing operations 353.0 (216.2) (56.8)
Weighted average number of shares
in issue in millions
Basic 681.9 681.9 681.9
Diluted 684.2 683.5 683.5
Earnings per share in pence
-------------- -------------- -----------
Basic 51.8 (31.7) (8.3)
-------------- -------------- -----------
Diluted 51.6 (31.7) (8.3)
-------------- -------------- -----------
As per paragraph 43 in IAS33 'Earnings per share', when
potential ordinary shares increase earnings per share, or decrease
loss per share upon their conversion to ordinary shares, they are
considered antidilutive. In line with the standard, antidilutive
potential ordinary shares are excluded from the calculation of
diluted earnings per share.
10. Dividends
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2022
2022 2021 GBPm
GBPm GBPm
Dividends relating to the period
comprise:
Interim dividend 103.4 98.9 98.9
Final dividend - - 197.7
-------------- -------------- ------------
103.4 98.9 296.6
-------------- -------------- ------------
Dividends deducted from shareholders' equity
comprise:
Interim dividend - - 98.9
Final dividend 197.7 196.6 196.6
-------------- -------------- ------------
197.7 196.6 295.5
-------------- -------------- ------------
The interim dividends for the six months ended 30 September 2022
and 30 September 2021, and the final dividend for the year ended 31
March 2022, have not been included as liabilities in the respective
condensed consolidated financial statements at 30 September 2022
and 30 September 2021, and the consolidated financial statements at
31 March 2022, because they were approved after the reporting
date.
The interim dividend of 15.17 pence per ordinary share (year
ended 31 March 2022: interim dividend of 14.50 pence per ordinary
share, final dividend of 29.00 pence per ordinary share) is
expected to be paid on 1 February 2023 to shareholders on the
register at the close of business on 23 December 2022. The
ex-dividend date for the interim dividend is 22 December 2022.
11. Interests in joint ventures and other investments
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2022
2022 2021 GBPm
GBPm GBPm
Joint ventures at the start of the - -
period 16.5
Additions - 18.3 18.3
Share of profits/(losses) of joint
ventures 0.2 (1.8) (1.8)
Joint ventures at the end of the period 16.7 16.5 16.5
-------------- -------------- ------------
Other investments 0.1 0.1 0.1
-------------- -------------- ------------
Interests in joint ventures and other
investments 16.8 16.6 16.6
-------------- -------------- ------------
The group's interests in joint ventures mainly comprises its 50
per cent interest in Water Plus Group Limited (Water Plus), which
is jointly owned and controlled by the group and Severn Trent PLC
under a joint venture agreement.
The group's total share of Water Plus profits for the six months
ended 30 September 2022 was GBP0.2 million (six months ended 30
September 2021: GBP1.8 million share of losses; year ended 31 March
2022: GBP1.8 million share of losses), all of which has been
recognised in the income statement.
As reported in the group's annual report for the year ended 31
March 2021, at that date a fully drawn GBP32.5 million revolving
credit facility extended to Water Plus by United Utilities PLC,
which was presented within amounts owed by related parties included
within trade and other receivables, was considered to form part of
the group's long-term interest in the Water Plus joint venture as
there was a clear expectation that it would be converted to
additional equity share capital. As such, the group's GBP14.2
million share of losses recognised in the income statement for the
year then ended (comprising the groups share of Water Plus losses
for the year of GBP8.9 million and GBP5.3 million of the group's
previously unrecognised share of losses relating to prior years)
was allocated against this fully drawn facility resulting in a net
reported balance of GBP18.3 million at 31 March 2021. The
conversion of this facility to equity share capital was executed on
23 April 2021 and therefore the brought forward balance of GBP18.3
million was included as an addition to the group's joint ventures
balance during the prior period.
Details of transactions between the group and its joint ventures
and other investments are disclosed in note 19.
12. Retirement benefit surplus
The main financial assumptions used by the group's actuary to
calculate the defined benefit surplus 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
2022 2021 2022
% p.a. % p.a. % p.a.
Discount rate 5.35 2.05 2.80
Pension increases 3.80 3.50 3.75
Pensionable salary growth: (pre-2018
service):
ESPS 3.80 3.50 3.75
UUPS 3.80 3.50 3.75
Pensionable salary growth (post-2018
service):
ESPS 3.80 3.50 3.75
UUPS 3.15 2.60 3.20
Price inflation - RPI 3.80 3.50 3.75
Price inflation - CPI(1) 3.15 2.90 3.20
(1) The CPI price inflation assumption represents a single
weighted average rate derived from an assumption of 2.90 per cent
pre-2030 and 3.70 per cent post-2030.
The immediate period leading up to 30 September 2022 saw
significant volatility in UK government bond markets following the
"mini-budget" announced by the UK Government on 23 September 2022.
This resulted in a significant rise in yields in a matter of days.
On 28 September the Bank of England intervened in the markets to
restore order which immediately offset some of the significant
yield rises, although they remained volatile over the month end. As
a result, as at 30 September we have seen a significant increase in
corporate bond yields relative to the start of the year, leading to
a materially higher IAS 19 discount rate. In accordance with the
requirements of IAS 19 'Employee benefits', the figures presented
are reflective of market conditions as at the balance sheet date.
It should be noted, however, given the volatility in the markets,
that the assumptions could be materially different shortly before
or after 30 September.
This market volatility, together with volatility in the broader
economic environment, has resulted in a higher degree of estimation
uncertainty in respect of assets held by the group's defined
benefit pension schemes that are classified as 'level 3' within the
IFRS 13 fair value hierarchy, as prices are not directly observable
in the market. The fair value of these assets at 30 September 2022
was GBP235.4 million, which includes an adjustment to reflect
estimated movements in market values since the date of the last
valuations performed in respect of these assets based on movements
in indices identified as being reasonable proxies for the assets
held. Had this adjustment not been included in the valuation, the
defined benefit pension assets (and therefore the defined benefit
pension surplus) would have been GBP11.9 million lower.
The discount rate is consistent with a high quality corporate
bond rate, with 5.35 per cent being equivalent to gilts + 160bps
(30 September 2021: 2.05 per cent being equivalent to gilts +
75bps; 31 March 2022: 2.80 per cent being equivalent to gilts +
110bps).
At 30 September 2022 and 31 March 2022 mortality in retirement
is assumed to be in line with the Continuous Mortality
Investigation's (CMI) S3PA year of birth tables (30 September 2021:
S2PA year of birth tables), with scaling factor of 109 per cent and
115 per cent for male pensioners and non-pensioners respectively
(30 September 2021: 106 per cent and 109 per cent), and 110 per
cent and 111 per cent for female pensioners and non-pensioners
respectively (30 September 2021: 104 per cent and 105 per cent),
reflecting actual mortality experience. At both 30 September 2022
and 31 March 2022, mortality in retirement is based on CMI 2021
long-term improvement factors, with a long-term annual rate of
improvement of 1.25 per cent (30 September 2021: CMI 2020,
long-term annual rate of improvement of 1.25 per cent).
The net pension income before tax 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 2022
2022 2021 GBPm
GBPm GBPm
Current service cost 3.0 3.7 7.5
Administrative expenses 1.1 0.8 2.1
Pension expense charged to operating
profit 4.1 4.5 9.6
Net pension interest income credited
to investment income (note 5) (14.4) (7.3) (14.3)
-------------- -------------- -----------
Net pension income before tax (10.3) (2.8) (4.7)
-------------- -------------- -----------
The reconciliation of the opening and closing net pension
surplus included in the statement of financial position is as
follows:
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2022
2022 2021 GBPm
GBPm GBPm
At the start of the period 1,016.8 689.0 689.0
Net income recognised in the income
statement 10.3 2.8 4.7
Contributions less unregistered
pension promise payments 4.6 5.9 9.5
Remeasurement (losses)/gains gross
of tax (208.2) 123.4 313.6
-------------- -------------- -----------
At the end of the period 823.5 821.1 1,016.8
-------------- -------------- -----------
The closing surplus at each reporting date is analysed as
follows:
30 September 30 September 31 March
2022 2021 2022
GBPm GBPm GBPm
Present value of defined benefit
obligations (2,118.4) (3,341.9) (3,018.9)
Fair value of schemes' assets 2,941.9 4,163.0 4,035.7
------------- ------------- ----------
Net retirement benefit surplus 823.5 821.1 1,016.8
------------- ------------- ----------
The GBP208.2 million remeasurement loss has princip ally
resulted from experience losses recognised in the period due to
actual inflation being higher than assumed at 1 April 2022, as well
as increases in the discount rate assumption being more than offset
by increases in net yields reducing the schemes assets by a greater
amount than the liabilities.
The latest finalised funding valuation was carried out as at 31
March 2021, and determined that the schemes were fully funded on a
low-dependency basis without any funding deficit that requires
additional contributions from the company over and above those
related to current service and expenses.
Member data used in arriving at the liability figure included
within the overall IAS 19 surplus has been based on the finalised
actuarial valuation as at 31 March 2021 for both the group's ESPS
and UUPS schemes.
Defined contribution schemes
During the period, the group made GBP14.4 million (30 September
2021: GBP12.8 million; 31 March 2022: GBP26.1 million) of
contributions to defined contribution schemes which are included in
employee benefits expense.
13. Borrowings
New borrowings raised during the six months ended 30 September
2022 were as follows:
-- On 26 April 2022, the group executed a GBP100 million loan facility, due April 2030.
-- On 29 July 2022, the group executed a GBP150 million loan facility, due June 2032.
-- On 30 August 2022, the group executed a GBP135 million loan facility, due August 2030.
The group entered into two undrawn committed borrowing
facilities in the period, and extensions to existing facilities
were approved on a further two, with amounts available under these
facilities totalling GBP100 million.
Borrowings at 30 September 2022 include GBP59.5 million in
relation to lease liabilities (30 September 2021: GBP60.6 million;
31 March 2022: GBP60.9 million), of which GBP55.9 million (30
September 2021: GBP57.2 million; 31 March 2022: GBP57.6 million)
was classified as non-current and GBP3.6 million (30 September
2021: GBP3.4 million; 31 March 2022: GBP3.3 million) was classified
as current.
14. Fair values of financial instruments
The fair values of financial instruments are shown in the table
below.
30 September 30 September 31 March 2022
2022 2021
Fair Carrying Fair Carrying Fair Carrying
value value value value value value
GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets at fair
value through profit or loss
Derivative financial assets
- fair value hedge 88.3 88.3 280.8 280.8 156.3 156.3
Derivative financial assets
- held for trading 523.2 523.2 152.4 152.4 190.1 190.1
Derivative financial assets
- cash flow hedge 299.5 299.5 48.1 48.1 111.0 111.0
Investments 0.1 0.1 0.1 0.1 0.1 0.1
Financial liabilities at
fair value through profit
or loss
Derivative financial liabilities
- fair value hedge (281.2) (281.2) (13.7) (13.7) (87.4) (87.4)
Derivative financial liabilities
- held for trading - - (95.8) (95.8) (49.8) (49.8)
Derivative financial liabilities
- cash flow hedge (9.6) (9.6) - - - -
Financial liabilities designated
at fair value through profit
or loss (384.7) (384.7) (388.0) (388.0) (369.9) (369.9)
Financial instruments for
which fair value does not
approximate carrying value
Financial liabilities in
fair value hedge relationships (2,193.2) (2,187.7) (3,002.8) (2,940.1) (2,511.5) (2,494.0)
Other financial liabilities
at amortised cost (5,271.0) (5,691.3) (6,697.4) (5,134.7) (6,283.7) (5,115.9)
---------- ---------- ---------- ---------- ---------- ----------
(7,228.6) (7,643.5) (9,716.3) (8,090.9) (8,844.8) (7,659.5)
---------- ---------- ---------- ---------- ---------- ----------
The group has calculated fair values using quoted prices where
an active market exists, which has resulted in 'level 1' fair value
liability measurements under the IFRS 13 'Fair Value Measurement'
hierarchy of GBP1,775.6 million (30 September 2021: GBP2,630.0
million; 31 March 2022: GBP2,206.6 million) for financial
liabilities in fair value hedge relationships, and GBP529.3 million
(30 September 2021: GBP3,761.6 million; 31 March 2022: GBP2,383.8
million) for other financial liabilities at amortised cost.
The GBP2,285.5 million decrease in 'level 1' fair value
liability measurements compared with the position at 31 March 2022
(30 September 2021: GBP1,762.3 million increase compared with 31
March 2021; 31 March 2022: GBP497.2 million decrease compared with
31 March 2021) is largely due to a decrease in the number of
observable quoted bond prices in active markets at 30 September
2022.
In the absence of an appropriate quoted price, the group has
applied discounted cash flow valuation models utilising market
available data, which are classified as 'level 2' valuations. More
information in relation to the valuation techniques used by the
group and the IFRS 13 hierarchy can be found in the audited
financial statements of United Utilities Group PLC for the year
ended 31 March 2022.
The principal reason for the decrease in the difference between
the fair value and carrying value of the group's borrowings at 30
September 2022 compared with the position at 31 March 2022 is due
to an increase in both the risk free rate and credit spreads.
15. Cash generated from operations
Six months Six months
ended ended Year ended
30 September 30 September 31 March
2022 2021 2022
GBPm GBPm GBPm
Operating profit 258.5 332.8 610.0
Adjustments for:
Depreciation of property, plant
and equipment 186.8 186.8 377.0
Amortisation of intangible assets 20.0 20.7 41.2
Loss on disposal of property, plant
and equipment 1.9 3.0 3.9
Amortisation of deferred grants
and contributions (7.9) (7.7) (15.8)
Equity-settled share-based payments
charge 2.8 2.6 4.8
Changes in working capital:
(Increase)/decrease in inventories (6.5) (0.6) 0.1
(Increase)/decrease in trade and
other receivables (15.8) (14.2) 13.2
Increase/(decrease) in trade and
other payables 0.5 11.5 24.7
Increase/(decrease) in provisions (1.4) 2.0 2.4
Pension contributions paid less
pension expense charged to operating
profit (0.6) (1.4) 0.1
------------- ------------- -----------
Cash generated from operations 439.0 535.5 1,061.6
------------- ------------- -----------
16. Net debt
Movements in net debt during the period were as follows:
Six months Six months
ended ended Year ended
30 September 30 September 31 March
2022 2021 2022
GBPm GBPm GBPm
At the start of the period 7,570.0 7,305.8 7,305.8
Net capital expenditure 330.7 288.0 626.7
Dividends (note 10) 197.7 196.6 295.5
Interest 53.7 58.2 118.3
Inflation expense on index-linked
debt (note 6) 251.7 92.8 227.9
Fair value movements including foreign
exchange (25.2) (17.6) 8.9
Net tax (receipt)/payment (15.4) 6.7 2.4
(Repayment)/extension of loans to
joint ventures (7.8) - 13.0
Net proceeds from disposal of subsidiary (90.5) - -
Non-cash movements in lease liabilities 0.8 1.6 -
Other 2.0 4.2 4.4
Dividends from joint ventures - - 28.7
Cash generated from operations (note
15) (439.0) (535.5) (1,061.6)
--------------- --------------- -------------
At the end of the period 7,828.7 7,400.8 7,570.0
--------------- --------------- -------------
Movements in net debt during the period are impacted by net cash
generated from financing activities as disclosed in the
consolidated statement of cash flows.
Net debt at the end of each period comprised:
30 September 30 September 31 March
2022 2021 2022
GBPm GBPm GBPm
Borrowings 8,263.8 8,462.8 7,979.8
Derivative financial instruments
(liabilities) 290.8 109.5 137.2
Derivative financial instruments
(assets) (911.0) (481.3) (457.4)
Cash and short-term deposits (532.2) (655.9) (240.9)
------------- ------------- ---------
Net debt - as agreed to statement
of financial position 7,111.4 7,435.1 7,418.7
Adjustments to exclude the fair
value impact of:
Interest rate derivatives fixing
future nominal interest rates 294.5 (49.9) 55.5
Inflation derivatives fixing future
real interest rates 132.8 (32.5) (15.2)
Electricity derivatives fixing future
electricity costs 290.0 48.1 111.0
------------- ------------- ---------
Net debt - as adjusted to align
to the group's definition 7,828.7 7,400.8 7,570.0
------------- ------------- ---------
The group defines net debt as the sum of borrowings and
derivative financial instruments, net of cash and short term
deposits, and adjusted to exclude the impact of derivatives that
are not hedging specific debt instruments. In presenting net debt
in this way, the group aims to give a fair reflection of the net
debt amount the group is contractually obliged to repay, consistent
with the approach taken by credit rating agencies, and the
regulatory economics of the group's arrangements. As the impact of
derivatives that are not hedging specific debt instruments is
excluded from the group's definition of net debt, fair value
movements associated with these derivatives are not included in the
above reconciliation from the opening to closing net debt
position.
17. Other reserves
Six months ended 30 September 2022
Cost Cash
Cumulative Capital of hedging flow
exchange redemption Merger reserve hedge
reserve reserve reserve GBPm reserve Total
GBPm GBPm GBPm GBPm GBPm
At 1 April 2021 - 1,033.3 (703.6) 0.4 86.1 416.2
Changes in fair value recognised
in other comprehensive income - - - 0.1 207.0 207.1
Amounts reclassified from
other comprehensive income
to profit or loss - - - - (24.0) (24.0)
Tax on hedge effectiveness
taken directly to equity - - - - (51.8) (51.8)
Tax on reclassifications
to consolidated income statement - - - - 4.6 4.6
At 30 September 2022 - 1,033.3 (703.6) 0.5 221.9 552.1
----------------------------------- ------------ ------------ --------- ------------ --------- -------
Six months ended 30 September 2021
Cost Cash
Cumulative Capital of hedging flow
exchange redemption Merger reserve hedge
reserve reserve reserve GBPm reserve Total
GBPm GBPm GBPm GBPm GBPm
At 1 April 2021 - 1,033.3 (703.6) 0.4 6.2 336.3
Changes in fair value recognised
in other comprehensive income - - - 1.8 43.8 45.6
Amounts reclassified from
other comprehensive income
to profit or loss - - - - (0.9) (0.9)
Tax on hedge effectiveness
taken directly to equity - - - (0.5) (10.9) (11.4)
Tax on reclassifications
to consolidated income statement - - - - 0.2 0.2
At 30 September 2021 - 1,033.3 (703.6) 1.7 38.4 369.8
----------------------------------- ------------ ------------ --------- ------------ --------- -------
Year ended 31 March 2022
Cost Cash
Cumulative Capital of hedging flow
exchange redemption Merger reserve hedge
reserve reserve reserve GBPm reserve Total
GBPm GBPm GBPm GBPm GBPm
At 1 April 2021 - 1,033.3 (703.6) 0.4 6.2 336.3
Changes in fair value recognised
in other comprehensive
income - - - - 107.5 107.5
Amounts reclassified from
other comprehensive income
to profit or loss - - - - (0.9) (0.9)
Tax on hedge effectiveness
taken directly to equity - - - - (26.9) (26.9)
Tax on reclassifications
to consolidated income
statement - - - - 0.2 0.2
At 31 March 2022 - 1,033.3 (703.6) 0.4 86.1 416.2
---------------------------------- ------------ ------------ --------- ------------ --------- -------
The capital redemption reserve arose as a result of a return of
capital to shareholders following the reverse acquisition of United
Utilities PLC by United Utilities Group PLC in the year ended 31
March 2009. The merger reserve arose in the same year on
consolidation and represents the capital adjustment to reserves
required to effect the reverse acquisition.
The cost of hedging reflects accumulated fair value movements on
cross-currency swaps resulting from changes in the foreign currency
basis spread, which represents a liquidity charge inherent in
foreign exchange contracts for exchanging currencies and is
excluded from the designation of cross-currency swaps as hedging
instruments.
On adoption of IFRS 9 'Financial instruments', the group
designated a number of swaps hedging non-financial risks in cash
flow hedge relationships in order to give a more representative
view of operating costs. The cash flow hedge reserve reflects fair
value movements relating to the effective part of swaps hedging
non-financial risks that have been designated in cash flow hedge
relationships in order to give a more representative view of
operating costs.
18. Commitments and contingent liabilities
At 30 September 2022 there were commitments for future capital
expenditure contracted but not provided for of GBP337.5 million (30
September 2021: GBP319.1 million; 31 March 2022: GBP282.6
million).
Since 2016, the group has received indications from a number of
groups of property search companies (PSCs) that they intend to
claim compensation for amounts paid in respect of CON29DW water and
drainage search reports, which they allege should have been
provided to them either free of charge or for a nominal fee in
accordance with the Environmental Information Regulations. In April
2020 a group of over 100 PSCs, comprising companies within the
groups that had previously issued notice of intended claims, served
proceedings on all of the water and sewerage undertakers in England
and Wales, including United Utilities Water Limited, for an
unspecified amount of compensation. This is an industry-wide issue,
and while the litigation has progressed during the period it
remains in its early stages. The litigation's likely direction and
the quantum of any compensation being claimed remains uncertain at
this stage; however, based on the information currently available
the likelihood of the claim's success is considered to be low, and
any potential outflow is not expected to be material.
The group has credit support guarantees as well as general
performance commitments and potential liabilities under contract
that may give rise to financial outflow. The group has determined
that the possibility of any outflow arising in respect of these
potential liabilities is remote and, as such, no contingent
liabilities are disclosed (30 September 2021 and 31 March 2022:
none).
19. Related party transactions
The related party trading transactions with the group's joint
ventures and other interests during the period, and amounts
outstanding at the period end date, were as follows:
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2022
2022 2021 GBPm
GBPm GBPm
Sales of services 173.0 183.1 363.1
Charitable contributions advanced
to related parties 0.1 0.1 0.1
Interest income and fees recognised
on loans to related parties 1.8 1.5 2.8
Amounts owed by related parties 100.5 96.8 116.4
Amounts owed to related parties - 1.9 -
Sales of services to related parties mainly represent
non-household wholesale charges to Water Plus that were billed and
accrued during the period. These transactions were on market credit
terms in respect of non-household wholesale charges, which are
governed by the wholesale charging rules issued by Ofwat.
At 30 September 2022 amounts owed by joint ventures, as recorded
within trade and other receivables in the statement of financial
position, were GBP100.5 million (30 September 2021: GBP96.8
million; 31 March 2022: GBP116.4 million), comprising GBP27.8
million (30 September 2021: GBP28.2 million; 31 March 2022: GBP28.5
million) of trade balances, which are unsecured and will be settled
in accordance with normal credit terms, and GBP72.7 million (30
September 2021: GBP68.6 million; 31 March 2022: GBP80.4 million)
relating to loans. A further GBP6.1 million owed by Water Plus
relating to the surrender of consortium relief tax losses was
included within the amounts owed by joint ventures as at 31 March
2022 and was settled during the six months ended 30 September
2022.
Included within these loans receivable were the following
amounts owed by Water Plus:
-- GBP71.5 million outstanding on a GBP100.0 million revolving
credit facility provided by United Utilities PLC, with a maturity
date of December 2023, bearing a floating rate interest rate of the
Bank of England base rate plus a credit margin. This balance
comprises GBP72.5 million outstanding, net of a GBP1.0 million
allowance for expected credit losses; and
-- GBP1.2 million receivable being the GBP10.8 million fair
value of amounts owed in relation to a GBP12.5 million unsecured
loan note held by United Utilities PLC, with a maturity date of 28
March 2027, net of a GBP0.1 million allowance for expected credit
losses and GBP9.5 million of the group's share of joint venture
losses relating to historic periods as the loan note is deemed to
be part of the group's long-term interest in Water Plus. This is a
zero coupon shareholder loan with a total amount outstanding at 30
September 2022 of GBP12.5 million, comprising GBP10.8 million
receivable measured at fair value, and GBP1.7 million recorded as
an equity contribution to Water Plus recognised within interests in
joint ventures.
A further GBP1.2 million of non-current receivables was owed by
other related parties at 30 September 2022.
During the period, United Utilities PLC provided guarantees in
support of Water Plus in respect of certain amounts owed to
wholesalers. The aggregate limit of these guarantees was GBP54.1
million, of which GBP32.1 million related to guarantees to United
Utilities Water Limited.
20. Events after the reporting period
There have been no material events subsequent to 30 September
2022 that either require adjustment to the amounts disclosed in the
interim financial statements or disclosure on the basis that they
could materially affect users' understanding of the interim
financial statements.
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 in
the UK;
- 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:
Sir David Higgins
Steve Mogford
Phil Aspin
Louise Beardmore
Liam Butterworth
Kath Cates
Alison Goligher
Paulette Rowe
Doug Webb
This responsibility statement was approved by the board and
signed on its behalf by:
Steve Mogford Phil Aspin
22 November 2022 22 November 2022
Chief Executive Officer Chief Financial Officer
INDEPENDENT REVIEW REPORT TO UNITED UTILITIES GROUP PLC
Conclusion
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 2022 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 cash flows and the related explanatory notes.
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 2022 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted for
use in the UK and the Disclosure Guidance and Transparency Rules
("the DTR") of the UK's Financial Conduct Authority ("the UK
FCA").
Basis for conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410 Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity ("ISRE (UK) 2410") issued 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. We
read the other information contained in the half-yearly financial
report and consider whether it contains any apparent misstatements
or material inconsistencies with the information in the condensed
set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) 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.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
conclusion section of this report, nothing has come to our
attention that causes us to believe that the directors have
inappropriately adopted the going concern basis of accounting, or
that the directors have identified material uncertainties relating
to going concern that have not been appropriately disclosed.
This conclusion is based on the review procedures performed in
accordance with ISRE (UK) 2410. However, future events or
conditions may cause the group to cease to continue as a going
concern, and the above conclusions are not a guarantee that the
group will continue in operation.
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, the latest annual financial statements
of the group were prepared in accordance with UK-adopted
international accounting standards.
The directors are responsible for preparing the condensed set of
financial statements included in the half-yearly financial report
in accordance with IAS 34 as adopted for use in the UK.
In preparing the condensed set of financial statements, the
directors are responsible for assessing the group's ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
group or to cease operations, or have no realistic alternative but
to do so.
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. Our conclusion, including our
conclusions relating to going concern, are based on procedures that
are less extensive than audit procedures, as described in the Basis
for conclusion section of this report.
The purpose of our review work and to whom we owe our
responsibilities
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 DTR of 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.
Ian Griffiths
for and on behalf of KPMG LLP
Chartered Accountants
1 St Peter's Square
Manchester
M2 3AE
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END
IR GZMZMGZVGZZZ
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