TIDMUU.
RNS Number : 9584H
United Utilities Group PLC
21 November 2018
United Utilities Group PLC
21 November 2018
HALF YEAR RESULTS FOR THE SIX MONTHSED 30 SEPTEMBER 2018
Customers continue to be at the heart of everything we do
-- Delivering customer service improvements through innovation
and strong operational performance
-- Top water and wastewater company on UKCSI and now expect an
AMP6 SIM reward of GBP11m or more
-- Providing the widest range of support for customers, doubling the number receiving help with affordability over AMP6
Sustained improvements in operational performance
-- Systems Thinking unlocking innovation opportunities,
underpinning long-term operational improvement
-- Achieved industry leading environmental and water quality performance scores
-- Sustained gains in efficiency delivering totex outperformance
of GBP100m against our AMP6 scope
-- Remain on track to deliver a cumulative AMP6 ODI reward
Strong plans for AMP7 and beyond
-- Ambitious PR19 business plan delivering GBP1bn efficiencies,
further reducing bills whilst improving service
-- 10.5% real bill reduction and targeted support helping over
300,000 households out of water poverty
-- Builds on our performance in AMP6 giving us confidence heading into AMP7 and beyond
-- Delivers for customers and creates long-term value for all stakeholders
Strong financial performance
-- Underlying operating profit of GBP367.8m (reported operating profit of GBP339.1m)
-- Interim dividend in line with AMP6 growth policy
-- Robust capital structure and strong pensions position
providing resilience and future financial flexibility
Key financials
Six months ended
30 September 2018 30 September 2017
------------------ ------------------
Revenue GBP916.4m GBP876.0m
------------------ ------------------
Reported operating profit GBP339.1m GBP341.8m
------------------ ------------------
Underlying operating profit(1) GBP367.8m GBP344.0m
------------------ ------------------
Reported profit after tax GBP212.5m GBP197.4m
------------------ ------------------
Underlying profit after tax(1) GBP196.9m GBP160.1m
------------------ ------------------
Interim dividend per ordinary
share (pence) 13.76p 13.24p
------------------ ------------------
Net regulatory capital spend GBP392.7m GBP394.4m
------------------ ------------------
RCV gearing(2) 60% 61%
------------------ ------------------
(1) Underlying profit measures have been provided to give a more
representative view of business performance and are defined in the
underlying profit measure tables below
(2) Regulatory capital value (RCV) gearing calculated as group
net debt/United Utilities Water's shadow RCV (outturn prices)
Steve Mogford, Chief Executive Officer, said:
"Customers are at the heart of everything we do. Our approach to
affordability and vulnerability together with our sustained
improvements in customer service position us as a leader in the
sector. In the most recent UK Customer Satisfaction Index we were
the most improved utility company and the highest ranked water and
wastewater company. The Institute of Customer Service, which
assesses excellence in customer service across all sectors,
recently awarded us its top Service Mark with Distinction.
"Our approach to innovation and the use of advanced technology
from around the world alongside our capital investment is
delivering better service, greater resilience and improved
efficiency. Fundamental to this is our pioneering Systems Thinking
approach which continues to unlock innovation opportunities and is
making a significant and positive difference to our sustainable,
long-term performance.
"The significant progress we have made positions us well for the
remainder of the current regulatory period and beyond. We have
responded well to the challenges brought about by the impact of
more variable weather and have created a platform for continuing
strong operational performance. We will continue to provide a great
service to our customers and create long-term value for all of our
stakeholders."
For further information on the day, please contact:
Gaynor Kenyon - Corporate Affairs Director +44 (0) 7753 622 282
Robert Lee - Head of Investor Relations +44 (0) 7500 087 704
Graeme Wilson - Tulchan Communications +44 (0) 2073 534 200
A presentation to investors and analysts starts at 9.00am on
Wednesday 21 November 2018, at the Auditorium, Deutsche Bank,
Winchester House, 1 Great Winchester Street, London, EC2N 2DB.
The presentation can be accessed via a live webcast facility at
the following link:
https://www.investis-live.com/united-utilities/5bd2e7805bdb5510001efda5/omns
The presentation can be accessed via a live listen only call
facility by dialling:
UK toll: + 44 20 3936 2999
Passcode: 703348
The webcast will be available on demand from Thursday 22
November 2018 at the following link:
https://www.unitedutilities.com/corporate/investors/
This results announcement and the associated presentation will
be available on the day at:
https://www.unitedutilities.com/corporate/investors/
OPERATIONAL OVERVIEW
The benefits of our innovative Systems Thinking approach and use
of technology are wide ranging and permeate all areas of the
business. This is delivering sustainable and long-term improvements
in operational performance and provides a strong platform for
performance into AMP7.
-- Sustained improvement in customer satisfaction - our
performance against Ofwat's Service Incentive Mechanism (SIM) has
improved significantly since the start of AMP6 and we now trend
above the industry average for both quantitative and qualitative
performance. This performance is mirrored in the UK Customer
Satisfaction Index against which we are the leading water and
wastewater company and the most improved utility company overall.
We were delighted to achieve the Service Mark with Distinction from
the Institute of Customer Service and were one of only a small
group of companies across the country to achieve this.
-- Innovation through Systems Thinking - our innovative Systems
Thinking approach and use of data and technology is pervasive
throughout the entire organisation. Through our Integrated Control
Centre we are able to identify issues before they become problems
and therefore minimise customer impact. This is delivering enhanced
levels of service and resilience along with sustainable
improvements in efficiency and contributes around GBP450 million of
savings identified in our PR19 business plan.
-- Leading performance with integrity - in July, we achieved
Industry Leading Company status for the third consecutive year as
measured through the Environment Agency's (EA) annual assessment.
Our performance against the Drinking Water Inspectorate's (DWI)
metrics continues to improve, and we are the leading water and
wastewater company against the DWI's overall drinking water quality
metric for 2017.
-- Delivering shareholder value through regulatory
outperformance - the low cost of debt we have already locked in
places us in a strong position to deliver on our target of
minimising our cost of debt compared to Ofwat's industry assumed
cost for the 2015-20 period. Through Systems Thinking and the
effective delivery of our investment plan, we are confident of
delivering our AMP6 scope for GBP100 million less than the Final
Determination totex assumption and a cumulative net reward against
our Outcome Delivery Incentives (ODIs) for AMP6. Our strong
performance on customer satisfaction now means we expect to be
eligible for a SIM reward in AMP6 of GBP11 million or more.
-- Sharing outperformance - sharing net outperformance through
additional investment of GBP250 million. This is delivering
industry leading, long-term resilience for the benefit of customers
and helping to mitigate future bill increases.
-- Prolonged period of dry weather - earlier this year, the UK
experienced a prolonged period of extreme hot and dry weather
resulting in exceptional demand from customers. To safeguard
continuity of supplies to customers and protect our water
resources, we expect to spend an additional GBP80 million during
the current financial year. These measures together with the cooler
and wetter weather in August avoided the need for any water
restrictions. In the first half of the year, we have incurred GBP34
million of costs of which GBP9 million is capex, GBP7 million is
infrastructure renewals expenditure (IRE) and GBP18 million is
operating costs. The IRE and operating cost elements are excluded
from the underlying results as shown in the underlying profit
measure tables below. We expect the costs in the second half of the
year to be predominantly capex.
-- Strong environmental, social & governance (ESG)
credentials - we have achieved our World Class rating in the Dow
Jones Sustainability Index for the eleventh consecutive year, a
very good achievement in light of the ever evolving standards. We
have retained our self-assurance status with Ofwat for reporting
and our best practice in the areas of affordability and
vulnerability has received external recognition through several
awards, many of which look beyond the water sector.
-- Strong plans for AMP7 and beyond - in September, we submitted
our business plan for AMP7 that delivers for customers and is
aligned with the key PR19 themes. Our plan has benefited from
extensive engagement with customers and other stakeholders in our
region and we are confident that it is a high quality and ambitious
plan, rich in content, with a compelling proposition of bill
reductions and service improvements.
Financial overview
The group has delivered a good set of financial results for the
six months ended 30 September 2018.
-- Revenue - revenue was up GBP40 million, at GBP916 million,
largely reflecting our allowed regulatory revenue changes.
-- Operating profit - underlying operating profit was up GBP24
million, at GBP368 million. This reflects the GBP40 million
increase in revenue partly offset by an GBP11 million increase in
IRE and a GBP6 million increase in depreciation. Reported operating
profit was down GBP3 million, at GBP339 million, impacted by the
same movements as underlying operating profit as well as one off
costs of GBP25 million associated with the extreme hot and dry
weather earlier this year.
-- Capex - total net regulatory capital investment in the first
half of the year was GBP393 million including IRE and the
additional capex associated with the extreme hot and dry weather
earlier this year. We are on track to deliver a total of around
GBP830 million of regulatory capex for the full year. This includes
around GBP70 million of the additional GBP250 million of investment
to improve resilience for customers and the capex and IRE
associated with the extreme hot and dry weather, neither of which
were anticipated at the time of the PR14 settlement. Our five-year
regulatory capex programme is around GBP3.8 billion including this
additional investment.
-- Profit before tax - underlying profit before tax was up GBP46
million, at GBP240 million, largely reflecting the increase in
underlying operating profit and a GBP24 million decrease in the
underlying net finance expense. The decrease in the underlying net
finance expense was mainly due to the impact of lower RPI inflation
on our index-linked debt. Reported profit before tax was GBP260
million, reflecting fair value movements and other adjusting items
as outlined in the underlying profit measures tables below.
-- Profit after tax - underlying profit after tax was up by
GBP37 million, at GBP197 million. Reported profit after tax was
higher at GBP212 million, mainly reflecting fair value
movements.
-- Capital structure - the group has a robust capital structure
with gearing of 60 per cent as at 30 September 2018 (measured as
group net debt to 'shadow' regulatory capital value, or RCV). Our
shadow RCV adjusts for actual spend and was GBP11.5 billion as at
30 September 2018. This gearing level is comfortably within our
target range of 55 per cent to 65 per cent, supporting a solid
investment grade credit rating. United Utilities Water Limited
(UUW) has long-term credit ratings of A3 from Moody's and A- from
Standard & Poor's, both on stable outlook.
-- Financing headroom - the group benefits from headroom to
cover its projected needs into 2020, enhanced by the recent raising
of new finance. At 30 September 2018, the group had headroom of
GBP426 million consisting of cash and committed funding. This
headroom provides 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.
-- Dividend - the Board has proposed an interim dividend of
13.76 pence per ordinary share, an increase of 3.9 per cent, in
line with our policy of targeting an annual growth rate of at least
RPI inflation through to 2020.
KEY PERFORMANCE INDICATORS
United Utilities aims to deliver long-term shareholder value by
providing:
-- the best service to customers;
-- at the lowest sustainable cost;
-- in a responsible manner.
We have a number of KPIs within each of these strategic themes
to help measure and drive performance.
Best service to customers
-- Service incentive mechanism (SIM) - having been the most
improved company on SIM during the 2010-15 regulatory period, our
target is to move towards the upper quartile in the
medium-term.
Qualitative: Ofwat has undertaken two surveys in the first half
of the year. In the first survey we scored 4.49 points, compared
with 4.36 points in the first survey of 2017/18 (higher score is
better). In the second survey we scored 4.50 points, compared with
4.44 points in the second survey of 2017/18. We are trending above
the industry average of 4.35 points, with customers rating us
highly for billing and wastewater services.
Quantitative: the quantitative assessment measures customer
contacts, and performance is assessed on both an absolute and
relative basis. Whilst relative performance can only be assessed in
full following the end of each financial year, when the other
companies publish their respective results, on absolute performance
for the first half of 2018/19, we achieved a score of 39 points, a
slight deterioration from the first half of 2017/18 when our score
was 34 points (lower score is better). The deterioration is largely
due to the extreme hot and dry weather and resultant customer
contacts that we experienced earlier this year. Despite this, our
quantitative performance for the first half of 2018/19 still
compares favourably to the companies that do data share for which
the average performance was 45 points.
-- Outcome delivery incentives (ODIs) - we have 19 wholesale
financial ODIs with only ten providing the potential to earn a
reward in the 2015-20 regulatory period.
We were pleased to deliver a cumulative net reward of GBP2.2
million for the first three years of the current regulatory period,
exceeding our initial expectations. Whilst a number of our ODI
measures are susceptible to one-off events and, on the whole, our
ODI targets get tougher each year, our progress in the first half
of 2018/19 gives us confidence in delivering our target of a
cumulative net ODI outcome over the 2015-20 period of between zero
and a GBP30 million reward.
Lowest sustainable cost
-- Financing outperformance - the low cost of debt we have
already locked-in places us in a strong position to deliver
significant financing outperformance for the 2015-20 regulatory
period compared with the industry allowed cost.
-- Total expenditure (totex) performance - the totex assumed at
PR14 for the 2015-20 regulatory period represented a significant
challenge compared with the costs originally submitted as part of
our business plan. We have not only closed the gap to the PR14
assumption but we are also confident of delivering our AMP6 scope
for GBP100 million less than assumed in our Final Determination at
PR14. This has been achieved through a combination of driving
efficiency into our capital programme and through Systems
Thinking.
-- Household retail cost to serve - we continue to deliver
against a challenging benchmark set for AMP6. Our target is to
minimise our costs compared with our allowed revenue cap. We are
continuing with our strong focus on this target and will provide an
update for 2018/19 at our full year results next May.
Responsible manner
-- Leakage - although leakage is included within our ODIs, we
intend to continue publishing our leakage position separately, as
we consider it to be an important measure from a responsible
business perspective. In 2017/18 we again met our regulatory
leakage target of 463 megalitres per day, and despite the extreme
weather conditions experienced in the first half of 2018/19, we
believe that we can meet it again.
-- Environmental performance - on the Environment Agency's
latest annual assessment, published in July 2018, we were awarded
Industry Leading Company status across the range of operational
metrics for the third successive year. This indicates we were in
joint first position amongst the nine water and sewerage companies
assessed, and aligns with our medium-term goal of being an upper
quartile company on a consistent basis.
-- Corporate responsibility - United Utilities has a strong
focus on operating in a responsible manner and is the only UK water
company to have a World Class rating as measured by the Dow Jones
Sustainability Index. In 2018/19, United Utilities achieved its
World Class rating for the eleventh consecutive year. In addition,
United Utilities has been named in the FTSE4Good Index every year
for the last 16 years, and has been named as part of the Euronext
Vigeo Index UK 20 as of June 2018.
FINANCIAL PERFORMANCE
United Utilities delivered a good set of financial results for
the six months ended 30 September 2018.
Revenue
Revenue was up GBP40 million, at GBP916 million, largely
reflecting our allowed regulatory revenue changes.
Consistent with Ofwat's annual wholesale revenue forecasting
incentive mechanism (WRFIM), we will be reducing revenue by GBP8
million in 2018/19 and by GBP14 million in 2019/20 (outturn
prices). This consists of two components; firstly reflecting actual
volumes being higher than our original assumptions during AMP6, and
secondly reductions relating to the 2014/15 "AMP5 blind year",
which are GBP4 million in 2018/19 and GBP5 million in 2019/20.
Operating profit
Underlying operating profit at GBP368 million was GBP24 million
higher than the first half of last year. This reflects our allowed
regulatory revenue changes partly offset by an GBP11 million
increase in IRE and a GBP6 million increase in depreciation. Other
small, mainly inflationary increases in operating costs have been
offset by a GBP10 million credit resulting from the settlement of
an historical commercial claim compensating for costs that have
been incurred in previous years.
Reported operating profit decreased by GBP3 million, to GBP339
million, reflecting the increase in underlying operating profit
being more than offset by an increase in adjusted items. Adjusted
items for the first half of 2018/19 included GBP25 million of costs
associated with the extreme hot and dry weather earlier this year
and GBP4 million of restructuring costs. Adjusted items in the
first half of last year amounted to GBP2 million, including GBP1
million of restructuring costs and GBP1 million of market reform
costs.
Investment income and finance expense
The underlying net finance expense of GBP131 million for the
first half of 2018/19 was GBP24 million lower than the first half
of last year, mainly due to the impact of lower RPI inflation on
the group's index-linked debt, particularly on the portion of
index-linked debt with a three-month lag.
Interest on non index-linked debt of GBP40 million was GBP8
million lower than the first half of last year, due to the lower
rates locked in on our interest rate swaps. The indexation of the
principal on our index-linked debt amounted to a net charge in the
income statement of GBP67 million, compared with a net charge of
GBP83 million in the first half of last year. As at 30 September
2018, the group had approximately GBP3.8 billion of index-linked
debt at an average real rate of 1.3 per cent.
The lower RPI inflation charge compared with last year
contributed to the group's average underlying interest rate of 3.8
per cent being lower than the rate of 4.8 per cent for the six
months ended 30 September 2017. The average underlying interest
rate represents the underlying net finance expense divided by
notional average net debt as defined in note 17 ('Net debt') of
these condensed consolidated financial statements.
Reported net finance expense of GBP83 million was lower than the
GBP105 million expense in the first half of 2017/18. This GBP22
million decrease principally reflects the lower indexation charge
for the period and a change in the fair value gains and losses on
debt and derivative instruments, from a GBP35 million gain in the
first half of 2017/18 to a GBP44 million gain in the first half of
2018/19.
The fair value gain in the first half of 2018/19 is due to gains
on our derivatives hedging interest rates impacted by an increase
in market interest rates, and a net interest receivable on
derivatives and debt designated at fair value. Gains in the first
half of the prior year were also largely due to due to gains on our
derivatives hedging interest rates impacted by an increase in
market interest rates, partially offset by a loss on our fair value
option debt and associated swaps. The group uses swaps to fix
interest rates on a substantial proportion of its debt to better
match the financing cash flows assumed by Ofwat at each price
review. The group has fixed the substantial majority of its non
index-linked debt for the 2015-20 regulatory period.
Profit before tax
Underlying profit before tax was GBP240 million, GBP46 million
higher than the first half of last year, largely reflecting the
GBP24 million increase in underlying operating profit, and the
GBP24 million decrease in underlying net finance expense. This
underlying measure reflects the adjusted items, as outlined in the
operating profit section above, and other items such as fair value
movements in respect of debt and derivative instruments, as
outlined in the underlying profit measures tables below.
Reported profit before tax increased by GBP17 million to GBP260
million, reflecting the GBP3 million reduction in reported
operating profit more than offset by a GBP22 million decrease in
reported net finance expense including fair value movements.
Tax
In addition to corporation tax, the group makes further
contributions to the public finances, typically of around GBP210
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 its 5,000 strong workforce.
In the first half of 2018/19, we paid GBP6 million of
corporation tax, which represents an effective cash tax rate on
underlying profits of 3 per cent which is less than normal. Our
normal effective cash tax rate on underlying profits is around 11
per cent with the key reconciling items to the headline rate of
corporation tax (currently at 19 per cent) being allowable tax
deductions on capital investment and pension payments, 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 first half of 2018/19, the effective
rate is further reduced as a result of the phasing of quarterly tax
payments and also the impact of increased underlying profits as the
relevant quarterly payments relate to 2017/18 whereas the
underlying profits relate to 2018/19. This phasing of tax payments
will not be an issue going forward as from next year the quarterly
instalment tax payment rules are being amended to ensure that
payments become aligned with financial years.
For the 2018/19 full year we would expect the effective cash tax
rate to be around 6 per cent and for the following year we would
expect the effective cash tax rate to rise to around 20 per cent
reflecting six quarterly instalment tax payments as we transition
to the new payment regime together with the forecast impact of the
recent changes to the capital allowances rules announced in last
month's Chancellors Budget, including the reduction in the rate of
allowance for the majority of the company's infrastructure spend
from 8 per cent to 6 per cent, from 2019/20 onwards. We have
expressed the effective cash tax rate in terms of underlying
profits as this measure excludes fair value movements on debt and
derivative instruments and thereby facilitates more accurate
medium-term cash tax rate forecasting.
The current tax charge was GBP29 million in the first half of
2018/19, compared with GBP24 million in the corresponding period
last year.
In the first half of 2018/19, the group recognised a deferred
tax charge of GBP18 million, compared with a charge of GBP21
million in the first half of the previous year.
The total tax charge for the first half of 2018/19 was GBP47
million, compared to a total tax charge of GBP45 million for the
first half of last year. For both periods, the total underlying tax
effective rate was in line with the headline rate (currently at 19
per cent) and, subject to any further legislative or tax practice
changes, we would expect this to continue for the medium-term.
Profit after tax
Underlying profit after tax of GBP197 million was GBP37 million
higher than the first half of last year, principally reflecting the
GBP46 million increase in underlying profit before tax.
The approach used to derive underlying profit after tax is not
consistent across the industry with the most significant difference
relating to the treatment of deferred tax. Our underlying profit
after tax includes the impact of an GBP18 million deferred tax
charge whereas some of our peers exclude the impact of deferred
tax. We are considering the merits of also excluding the impact of
deferred tax and will provide a further update at our full year
results in May. Had we excluded the impact of deferred tax for the
first half 2018/19, our underlying profit after tax would be GBP215
million.
Reported profit after tax at GBP212 million was higher than the
GBP197 million in the first half of the previous year, reflecting
the GBP17 million increase in the reported profit before tax.
Earnings per share
Underlying earnings per share increased from 23.5 pence to 28.9
pence. This underlying measure is derived from underlying profit
after tax.
As noted above, there is a difference across the sector in the
treatment of deferred tax in deriving underlying profit after tax.
Had we excluded the impact of deferred tax for the first half of
2018/19, our underlying earnings per share would have been 31.5
pence.
Basic earnings per share increased from 28.9 pence to 31.2
pence, for the same reasons that caused the increase in reported
profit after tax.
Dividend per share
The Board has proposed an interim dividend of 13.76 pence per
ordinary share in respect of the six months ended 30 September
2018. This is an increase of 3.9 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 at least RPI inflation each
year through to 2020. The inflationary increase of 3.9 per cent is
based on the RPI element included within the allowed regulated
revenue increase for the 2018/19 financial year (i.e. the movement
in RPI between November 2016 and November 2017).
The interim dividend is expected to be paid on 1 February 2019
to shareholders on the register at the close of business on 21
December 2018. The ex-dividend date is 20 December 2018.
In line with best practice guidance, our enhanced dividend
policy disclosure is outlined below.
-- Dividend policy - a growth rate target of at least RPI inflation each year through to 2020.
-- Policy period - the dividend policy aligns with the five-year
regulatory period which runs from 1 April 2015 to 31 March
2020.
-- Policy approval process - the dividend policy was considered
and approved by the United Utilities Group Board in January 2015,
as part of a comprehensive review of the 2015-20 regulatory final
determination in the context of a detailed business planning
process, with due regard for the group's financial metrics, credit
ratings and long-term financial stability, and is reviewed at least
annually.
-- Distributable reserves - as at 30 September 2018, the company
had distributable reserves of GBP3,148 million. The total external
dividends relating to the 2017/18 financial year amounted to GBP271
million. The company's distributable reserves support over 11 times
this annual dividend.
-- Financing headroom - supporting the group's cash flow, United
Utilities adopts a funding/liquidity headroom policy of having
available resources to cover at least the next 15 months of
projected cash outflows on a rolling basis.
-- Cash flows from subsidiaries - the directors consider that
the group's principal operating subsidiary, United Utilities Water
Limited, has sufficient resources to pay dividends to United
Utilities Group PLC for the duration of the current dividend policy
period to support the external payment of dividends to
shareholders.
-- Financial stability - the water industry has invested
significant capital since privatisation in 1989 to improve services
for customers and provide environmental benefits, a large part of
which is driven by legislation. Water companies have typically
raised borrowings to help fund the capital investment programme.
Part of total expenditure is additive to the regulatory capital
value, or RCV, on which Ofwat set an assumed return component of
the company's revenue controls. RCV gearing is useful in assessing
a company's financial stability in the UK water industry, and is
one of the key credit metrics that the credit rating agencies focus
on. United Utilities has had a relatively stable RCV gearing level
over the last five years, always comfortably within its target
range of 55 per cent to 65 per cent, supporting a solid A3 credit
rating for UUW with Moody's. RCV gearing at 30 September 2018 was
60 per cent and the movement in net debt is outlined in the cash
flow section below.
-- Dividend sustainability - in approving the policy, the Board
is satisfied that across the current regulatory period the
projected dividend is adequately covered by underlying profit after
tax. Separately, the executive directors' long-term remuneration
plan is directly linked to a measure of sustainable dividends.
Whilst specific targets are not disclosed in advance, for
commercial sensitivity reasons, there is a major focus on the
creation of strong earnings that ensure the sustainability of
dividends.
-- Viability statement - the dividend policy is underpinned by
the group's long-term viability statement (contained within the
group's annual report and financial statements). Assurance
supporting this statement is provided by the review of: the group's
key financial measures; the key credit financial metrics; the
group's liquidity position; the contingent liabilities of the
group; and the key risks of the group together with the associated
mitigating actions.
-- Annual dividend approval process - the group places
significant emphasis on strong corporate governance, and before
declaring interim and proposing final dividends the United
Utilities Group Board undertakes a comprehensive assessment of the
group's key financial metrics.
-- Policy sustainability
2015-20
o The policy is considered by the Board to be robust to
reasonable changes in assumptions such as inflation, opex, capex
and interest rates.
o Extreme economic, regulatory, political or operational events,
which could lead to a significant deterioration in the group's
financial metrics during the policy period, may present risks to
policy sustainability.
2020-25
o A dividend policy for the 2020-25 period will be formulated
after Ofwat announces the outcome of the regulatory price review
(currently expected in December 2019).
Cash flow
Net cash generated from continuing operating activities for the
six months ended 30 September 2018 was GBP438 million, compared
with GBP412 million in the first half of last year. The group's net
capital expenditure was GBP298 million, principally in the
regulated water and wastewater investment programmes. This excludes
infrastructure renewals expenditure which is treated as an
operating cost under IFRS. Cash flow capex differs from regulatory
capex, since regulatory capex is based on the capital work that is
done in the period, rather than actual cash spent.
Net debt including derivatives at 30 September 2018 was GBP6,914
million, compared with GBP6,868 million at 31 March 2018. This
modest increase reflects regulatory capital expenditure, payments
of dividends, interest and tax, and the inflationary uplift on
index-linked debt, largely offset by operating cash flows.
Fair value of debt
The group's gross borrowings at 30 September 2018 had a carrying
value of GBP7,707 million. The fair value of these borrowings was
GBP8,680 million. This GBP973 million difference principally
reflects the significant fall in real interest rates, compared with
the rates at the time we raised a portion of the group's
index-linked debt.
Debt financing and interest rate management
Gearing, measured as group net debt divided by UUW's shadow
(adjusted for actual spend) regulatory capital value, was 60 per
cent at 30 September 2018. This is slightly lower than the 61 per
cent gearing as at 31 March 2018 and remains comfortably within our
target range of 55 per cent to 65 per cent.
UUW has long-term credit ratings of A3/A- and United Utilities
PLC's (UU PLC) debt securities are rated Baa1/BBB from Moody's
Investors Service (Moody's) and Standard & Poor's (S&P)
Ratings Services respectively. Both Moody's and S&P have the
group's ratings on a stable outlook.
The group has access to the international debt capital markets
through its EUR7 billion euro medium-term note (EMTN) programme.
The EMTN programme does not represent a funding commitment, with
funding dependent on the successful issue of the notes.
Cash and short-term deposits at 30 September 2018 amounted to
GBP260 million. Over 2015-20 we have financing requirements
totalling around GBP2.5 billion to cover refinancing and
incremental debt, supporting our five-year investment programme,
and we have now raised around GBP2.3 billion of this
requirement.
In September 2018 UUW's financing subsidiary, United Utilities
Water Finance PLC (UUWF), increased the amount outstanding on its
GBP300 million public bond issued in February 2018 with a maturity
due in February 2025, by an additional GBP50 million taking the
total size of the bond to GBP350 million.
We remain one of the sector leaders in the issuance of
CPI-linked debt having previously raised GBP165 million, in
response to Ofwat's decision to transition away from RPI inflation
linkage.
In addition, since March 2018, the group has renewed GBP50
million of committed bank facilities for an initial five-year term
and extended a further GBP100 million out to 2023. The group has
headroom to cover its financing needs into 2020.
Long-term borrowings are structured or hedged to match assets
and earnings, which are largely in sterling, indexed to UK retail
price inflation, and subject to regulatory price reviews every five
years.
Long-term sterling inflation index-linked debt provides a
natural hedge to assets and earnings. At 30 September 2018,
approximately 54 per cent of the group's net debt was in
index-linked form, representing around 33 per cent of UUW's RCV,
with an average real interest rate of 1.3 per cent. The long-term
nature of this funding also provides a good match to the group's
long-life infrastructure assets and is a key contributor to the
group's average term debt maturity profile, which is just under 20
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, along with the
group's defined benefit pension schemes further de-risking by
increasing their hedges of RPI inflation in the external market
with a corresponding removal of the pension Inflation Funding
Mechanism.
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. Historically, this is supplemented by
fixing substantially all remaining floating rate exposure across
the forthcoming regulatory period around the time of the price
control determination. In line with this, the group has fixed
interest costs for substantially all of its nominal debt over the
2015-20 regulatory period, locking in an average annual interest
rate of around 3.2 per cent nominal (inclusive of credit
spreads).
Recognising Ofwat's intention to apply debt indexation for new
debt raised during the 2020-25 regulatory period, we will retain
the hedge to fix underlying interest costs on nominal debt out to
ten years on a reducing balance basis, but we will no longer
supplement this with the additional 'top up' hedge at the start of
each new regulatory period.
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. The group's
EUR7 billion EMTN programme provides further support.
Available headroom at 30 September 2018 was GBP426 million,
consisting of cash, short-term deposits and committed bank
facilities, net of short-term debt as well as committed facilities
and term debt falling due within 12 months.
United Utilities believes that it operates a prudent approach to
managing banking counterparty risk. Counterparty risk, in relation
to both cash deposits and derivatives, is controlled through the
use of counterparty credit limits. United Utilities' cash is held
in the form of short-term money market deposits with prime
commercial banks.
United Utilities operates a bilateral, rather than a syndicated,
approach to its core relationship banking facilities. This approach
spreads maturities more evenly over a longer time period, thereby
reducing refinancing risk and providing the benefit of several
renewal points rather than a large single refinancing
requirement.
Pensions
As at 30 September 2018, the group had an IAS 19 net pension
surplus of GBP326 million, compared with a net pension surplus of
GBP344 million at 31 March 2018. This GBP18 million reduction
mainly reflects an adverse movement in demographic assumptions
offset by a reduction in mortality assumptions over the period. The
scheme specific funding basis does not suffer from volatility due
to credit spread movements, as it uses a prudent, fixed credit
spread assumption. Therefore, any inflation and credit spread
movements have not had a material impact on the deficit calculated
on a scheme specific funding basis or the level of deficit repair
contributions.
Further detail on pensions is provided in note 13 ('Retirement
benefit surplus') of these condensed consolidated financial
statements.
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 under
International Financial Reporting Standards (IFRSs) as adopted by
the European Union 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.
Adjusted item Rationale
Flooding incidents Two significant flooding incidents in the year
ended 31 March 2016 caused extensive damage to
localised parts of our infrastructure, resulting
in significant levels of remedial operating expenditure
and a large claim under the group's insurance
cover. Management's view is that these were significant
and infrequent events and, as such, were not part
of the normal course of business.
---------------------------------------------------------
Non-household retail The group has incurred significant costs since
market reform the year ended March 2015 in preparation for the
non-household retail market opening to competition
in April 2017. This represents a one-off event
and as such, is not considered part of the normal
course of business.
---------------------------------------------------------
Dry weather event An extreme period of hot and dry weather during
the summer of 2018 led to significant strain being
placed on our water resources and network and
as a result our reservoir levels ran extremely
low. Activities were carried out to safeguard
supplies, generating significant costs which would
not have been incurred under normal conditions.
Given the severity of this unusually dry weather,
this event is not considered part of the normal
course of business.
---------------------------------------------------------
Restructuring costs The group has incurred restructuring costs in
the past in relation to a number of discrete events
which can cause volatility in the reported results.
Management adjusts internally for these costs
to provide an underlying view of performance which
it views as being more representative of the normal
course of business and more comparable period
to period.
---------------------------------------------------------
Net fair value gains Fair value movements on debt and derivatives can
on debt and derivative be both very significant and volatile from one
instruments period to the next. These movements are determined
by macro-economic factors which are outside the
control of management and these instruments are
purely held for funding and hedging purposes (not
for trading purposes). Taking these factors into
account, management believe it is useful to adjust
for this to provide a more representative view
of performance.
---------------------------------------------------------
Interest on derivatives Net fair value gains on debt and derivative instruments
and debt under fair includes interest on derivatives and debt under
value option fair value option. In adjusting for the former,
it is appropriate to add back interest on derivatives
and debt under fair value option to provide a
view of the group's cost of debt which is better
aligned to the return on capital it earns through
revenue.
---------------------------------------------------------
Net pension interest This item can be very volatile from one period
(income)/expense to the next and it is a direct function of the
extent to which the pension scheme is in an accounting
deficit or surplus position. Management believe
it is useful to adjust for this to provide a more
representative view of performance which is better
aligned to the return on capital it earns through
revenue.
---------------------------------------------------------
Capitalised borrowing Accounting standards allow for the capitalisation
costs of borrowing costs in the cost of qualifying assets.
Management believe it is appropriate to adjust
for these significant costs to provide a representative
cost of borrowings and current year performance
which is better aligned to the return on capital
it earns through revenue.
---------------------------------------------------------
Agreement of prior The agreement of prior years' tax matters can
years' tax matters be significant, volatile and often related to
final settlement with tax authorities of numerous
prior year periods. Management adjust for this
to provide a more representative view of the tax
charge/credit in relation to current year performance.
---------------------------------------------------------
Tax in respect of Management adjust for the tax impacts of the above
adjustments to underlying adjusted items to provide a more representative
profit before tax view of current year performance.
---------------------------------------------------------
Operating profit Six months ended Six months ended
30 September 30 September
2018 2017
GBPm GBPm
Operating profit per published results 339.1 341.8
Flooding Incidents (net of insurance
proceeds) - (0.1)
Non-household retail market reform - 1.0
Dry weather event 25.0 -
Restructuring costs 3.7 1.3
Underlying operating profit 367.8 344.0
----------------- -----------------
Net finance expense
GBPm GBPm
Finance expense (90.7) (109.8)
Investment income 7.8 5.2
Net finance expense per published results (82.9) (104.6)
----------------- -----------------
Adjustments:
Net fair value gains on debt and derivative
instruments (43.7) (34.5)
Interest on derivatives and debt under
fair value option 18.7 8.8
Net pension interest income (4.5) (3.3)
Adjustment for capitalised borrowing
costs (18.5) (21.2)
Underlying net finance expense (130.9) (154.8)
----------------- -----------------
Profit before tax
GBPm GBPm
Share of profits of joint ventures 3.4 5.1
Profit before tax per published results 259.6 242.3
Adjustments:
Flooding incidents - (0.1)
Non-household retail market reform - 1.0
Dry weather event 25.0 -
Restructuring costs 3.7 1.3
Net fair value gains on debt and derivative
instruments (43.7) (34.5)
Interest on derivatives and debt under
fair value option 18.7 8.8
Net pension interest income (4.5) (3.3)
Capitalised borrowing costs (18.5) (21.2)
Underlying profit before tax 240.3 194.3
----------------- -----------------
Profit after tax
GBPm GBPm
Underlying profit before tax 240.3 194.3
Reported tax charge (47.1) (44.9)
Agreement of prior years' UK tax matters - 1.6
Tax in respect of adjustments to underlying
profit before tax 3.7 9.1
Underlying profit after tax 196.9 160.1
----------------- -----------------
Earnings per share
GBPm GBPm
Profit after tax per published results
(a) 212.5 197.4
Underlying profit after tax (b) 196.9 160.1
Weighted average number of shares in
issue, in millions (c) 681.9m 681.9m
Earnings per share per published results,
in pence (a/c) 31.2p 28.9p
Underlying earnings per share, in pence
(b/c) 28.9p 23.5p
PRINCIPAL RISKS AND UNCERTAINTIES
We continue to focus on creating sustainable value by delivering
a high quality customer service, at the lowest sustainable cost,
while acting in a responsible manner at every level within our
organisation. In our day-to-day operations we encounter a wide
variety of risks which can challenge the quality,
cost-effectiveness and timescales for the delivery of our aims and
ambitions. We identify and plan for mitigation of these risks under
our established risk management framework which includes:
-- an enterprise-wide approach to risk management;
-- oversight and control of risk through a well-established governance and reporting process;
-- a risk assessment and management process which aligns to ISO 31000:2018; and
-- training materials, accessible policies and guidance to help
our people to identify and manage risk in a consistent manner.
Our individual business areas and functions take responsibility
for identifying, quantifying, communicating and controlling the
risks relevant to their own business activities. We also use a
forward looking approach to take into account new and emerging
areas of concern and the long-term impact of risk. The identified
risks cover a very wide range of potential events including
regulatory, legal, core operations, service and hazard risks. They
are reviewed and scored for likelihood as well as for financial and
reputational impact should the identified event occur. Initially we
use the gross position when assessing risk, i.e. we assume that any
controls over the risk are absent or have failed. We then assess
the current position of the risk including considering existing
controls and their effectiveness. This is then followed by a
targeted risk position which introduces further mitigating controls
where the current state does not fully align with objectives and/or
obligations.
Our governance and reporting process includes twice-yearly
reports to our group board on the character of the group's risk
profile, informed by the above risk identification and assessment
approach. Individual event-based risks are identified and then
categorised within ten inherent risk areas known as principal
risks. These principal risks were set out on pages 56-57 of the
2018 United Utilities Group PLC Annual Report and Financial
Statements and are: (1) Political and regulatory; (2) Compliance;
(3) Water service; (4) Wastewater service; (5) Retail and
commercial; (6) Financial; (7) Programme delivery; (8) Resource;
(9) Security; and (10) Health, safety and environmental. They
reflect the categories of risks that define business activity or
contributing factors where value can be lost or gained and could
have a material impact on the business model, future performance,
solvency or liquidity of the group. In each case the nature and the
extent of exposure is highlighted together with the extent of
management/mitigation. To ensure relevance with the current
environment, issues or areas of uncertainty are also
illustrated.
We also build on this overview in the board report, highlighting
two key categories of risk: i) the most significant group-wide
business risks; and ii) wholesale operational risks. These are
represented by the 10 highest ranked risks (based on the scores
awarded for likelihood x 'full life' financial impact) for each of
the two categories plus a further five risks with potentially very
high impact severity in their current state (net of control
effectiveness). In addition, the report also identifies risks that
could create potentially significant reputational impacts or are
associated with potentially significant emerging topics but have
not already been covered by the other reported categories.
Our approach aligns with the UK Corporate Governance Code and
includes reports to the group board for every full and half year
statutory accounting period so that the board is in a position
to:
-- determine the nature and extent of the principal risks it is
willing to take in achieving its strategic objectives;
-- oversee the management of those risks and provide challenge
to executive management where appropriate;
-- express an informed opinion on the long-term viability of the company; and
-- monitor risk management and internal control systems and review their effectiveness.
Key developments
Key developments in the last 12 months include a maturing of and
increased formalisation of our risk appetite framework. Our
framework supports our assessment of the extent of risk we are
willing to take based on obligations, stakeholders' requirements
and the company's capacity and capability to manage risk. By doing
this we aim to influence the target position for individual risks
underpinning the principal risks through improved consistency. This
approach also enables better benchmarking of individual risks
against the appetite limits and boundaries. We have also sought to
make an incremental governance improvement in our sign-off
processes for all risks and also in relation to the wholesale risk
and resilience board and the core risk team meetings which focus on
long-term resilience. Associated with this is a focus on asset
health and operational hazard risk assessment in advance of and
beyond PR19. This supports our understanding of the long-term risk
profile of our asset base and improves our capability to deliver
the most cost-effective and proportionate risk management response
as a result.
Profile features
Our risk profile currently consists of around 200 event-based
risks. By their nature, these will include all combinations of high
to low likelihood and high to low impact. Heat maps are typically
used in various managerial and group reports either as a method to
evaluate the extent of multiple risks within a certain profile or
to evaluate the effectiveness of mitigation for a single risk
relative to the initial gross position.
Political and regulatory risk and uncertainty feature
prominently within the profile, notably with the outcome of PR19
which is expected to be even tougher than previous price reviews.
The possibility of 'Renationalisation' is a key area of uncertainty
as is the opening up to competition of wholesale operations
(including the current focus on possible competition in
bioresources and water abstraction) and the potential for
competition covering domestic retail activities.
Our operations continue to be substantially UK-based, but the
potential impacts of 'Brexit' remain under review and have been
reported to the group board. In common with other UK companies, a
significant issue is the uncertainty surrounding the effects of the
Brexit deal that the UK Government ultimately delivers. Our review
has considered the availability of European funding, the price of
goods and services, exchange rate impacts, possible impacts on our
ability to collect cash were there to be an economic downturn and
the effect of any potential inflationary shift outside current
predicted parameters. We continue to keep this area under
review.
Following the launch of non-household retail competition in
April 2017, we have continued to monitor our operations within the
market to review compliance risks and ensure that we continue to
operate in a manner that complements and promotes the 'level
playing field'.
From an operational risk perspective, the dominance of the
penalty element of Ofwat's outcome delivery incentive mechanism and
the effect following changes to the Environmental Sentencing
Guidelines are key features of evolving exposure. Reputationally,
our core operations/service provision (notably water service) and
health, safety and environmental risks have the highest focus for
monitoring and reviewing control effectiveness based on the
potential impact should the risk event occur.
We continue to adapt to and plan for climate change and its
significant and permanent impacts on the water cycle, our
operations and the broader operating environment. This includes
consideration of the long-term viability of water and wastewater
services such as water abstraction, drinking water supply and
treatment capability, drainage and sewer capacity, wastewater
treatment and its discharge efficiency and effectiveness. The
recommendations of the Task Force on Climate-related Financial
Disclosures (TCFD) support and reinforce the need to consider
climate-related risks and uncertainties. These continue to be
factored into risk management and the likely effects of future
changes are a critical consideration in our long and medium-term
risk, operational and financial planning. Our water service and
wastewater service risks also reflect current key risks including
the potential for extreme weather and climate change.
Material Litigation
There continue to be two ongoing pieces of material litigation
worthy of note, as outlined on page 55 of the 2018 United Utilities
Group PLC Annual Report and Financial Statements. However, based on
the facts currently known to us and the provisions in our statement
of financial position, the directors remain of the opinion that the
likelihood of these having a material adverse impact on the group's
financial position is remote.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This financial report contains certain forward-looking
statements with respect to the operations, performance and
financial condition of the group. By their nature, these statements
involve uncertainty since future events and circumstances can cause
results and developments to differ materially from those
anticipated. The forward-looking statements reflect knowledge and
information available at the date of preparation of this financial
report and the company undertakes no obligation to update these
forward-looking statements. Nothing in this financial report should
be construed as a profit forecast.
Certain regulatory performance data contained in this financial
report is subject to regulatory audit.
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 ended Six months Year ended
30 September ended 31 March
2018 30 September 2018
2017
GBPm GBPm GBPm
Revenue (note 3) 916.4 876.0 1,735.8
------------------- --------------- ------------
Employee benefits expense (note
4) (80.0) (74.4) (153.5)
Other operating costs (note 5) (220.7) (205.2) (423.4)
Other income 2.0 1.7 3.8
Depreciation and amortisation expense (191.0) (185.3) (376.8)
Infrastructure renewals expenditure (87.6) (71.0) (149.5)
------------------- --------------- ------------
Total operating expenses (577.3) (534.2) (1,099.4)
------------------- --------------- ------------
Operating profit 339.1 341.8 636.4
Investment income (note 6) 7.8 5.2 12.0
Finance expense (note 7) (90.7) (109.8) (218.6)
------------------- --------------- ------------
Investment income and finance expense (82.9) (104.6) (206.6)
Share of profits of joint ventures
(note 11) 3.4 5.1 2.3
Profit before tax 259.6 242.3 432.1
Current tax charge (28.9) (24.4) (18.7)
Deferred tax charge (18.2) (20.5) (58.8)
Tax (note 8) (47.1) (44.9) (77.5)
Profit after tax 212.5 197.4 354.6
------------------- --------------- ------------
All of the results shown above relate to continuing operations.
Earnings per share (note 9)
Basic 31.2p 28.9p 52.0p
Diluted 31.1p 28.9p 51.9p
Dividend per ordinary share (note
10) 13.76p 13.24p 39.73p
Consolidated statement of comprehensive income
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2018
2018 2017
GBPm GBPm GBPm
Profit after tax 212.5 197.4 354.6
Other comprehensive income
Remeasurement (losses)/gains on defined
benefit pension
schemes (note 13) (43.3) (52.4) 50.2
Tax on items taken directly to equity
(note 8) 5.1 9.4 (8.5)
Change in credit assumptions for
debt reported at fair value through
profit and loss 2.6 - -
Cash flow hedge effectiveness 13.3 - -
Foreign exchange adjustments 0.7 0.7 0.2
--------------- ---------------
Total comprehensive income 190.9 155.1 396.5
--------------- --------------- ------------
Consolidated statement of financial position
30 September 30 September 31 March
2018 2017 2018
GBPm GBPm GBPm
ASSETS
Non-current assets
Property, plant and equipment 10,944.3 10,589.0 10,790.5
Intangible assets 212.0 192.3 197.7
Interests in joint ventures (note
11) 77.0 78.3 75.2
Investments (note 12) 11.5 7.8 7.1
Trade and other receivables 143.4 131.6 141.1
Retirement benefit surplus (note
13) 326.3 219.8 344.2
Derivative financial instruments 443.7 418.3 297.8
--------------- ---------------
12,158.2 11,637.1 11,853.6
--------------- --------------- -----------
Current assets
Inventories 14.3 19.6 16.8
Trade and other receivables 284.9 284.6 260.9
Current tax asset 6.3 7.6 24.5
Cash and short-term deposits 259.6 87.6 510.0
Derivative financial instruments 163.6 331.4 337.7
-----------
728.7 730.8 1,149.9
--------------- --------------- -----------
Total assets 12,886.9 12,367.9 13,003.5
--------------- --------------- -----------
LIABILITIES
Non-current liabilities
Trade and other payables (667.8) (611.5) (642.7)
Borrowings (note 14) (7,143.7) (6,778.2) (7,072.8)
Deferred tax liabilities (1,116.7) (1,047.3) (1,098.8)
Derivative financial instruments (70.5) (111.0) (96.8)
-----------
(8,998.7) (8,548.0) (8,911.1)
--------------- --------------- -----------
Current liabilities
Trade and other payables (338.5) (342.0) (275.7)
Borrowings (note 14) (563.1) (649.6) (839.5)
Provisions (19.5) (22.8) (22.1)
Derivative financial instruments (3.7) (7.1) (4.2)
-----------
(924.8) (1,021.5) (1,141.5)
--------------- --------------- -----------
Total liabilities (9,923.5) (9,569.5) (10,052.6)
--------------- --------------- -----------
Total net assets 2,963.4 2,798.4 2,950.9
--------------- --------------- -----------
EQUITY
Share capital 499.8 499.8 499.8
Share premium account 2.9 2.9 2.9
Cumulative exchange reserve (2.2) (1.3) (1.8)
Cash flow hedging reserve 13.3 - -
Merger reserve 329.7 329.7 329.7
Retained earnings 2,119.9 1,967.3 2,120.3
-----------
Shareholders' equity 2,963.4 2,798.4 2,950.9
--------------- --------------- -----------
Consolidated statement of changes in equity
Six months ended 30 September 2018
Cash
Share Cumulative flow
Share premium exchange Merger hedging Retained
capital account reserve reserve reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 31 March 2018 499.8 2.9 (1.8) 329.7 - 2,120.3 2,950.9
Adjustment on initial adoption
of IFRS 9 and IFRS 15 (note
1) - - (1.1) - - 3.7 2.6
At 1 April 2018 499.8 2.9 (2.9) 329.7 - 2,124.0 2,953.5
Profit after tax - - - - - 212.5 212.5
Other comprehensive income/(expense)
Remeasurement losses on
defined benefit pension
schemes (note 13) - - - - - (43.3) (43.3)
Tax on items taken directly
to equity (note 8) - - - - - 5.1 5.1
Change in credit assumption
for debt reported at fair
value through profit and
loss - - - - - 2.6 2.6
Cash flow hedge effectiveness - - - - 13.3 - 13.3
Foreign exchange adjustments - - 0.7 - - - 0.7
Total comprehensive income - - 0.7 - 13.3 176.9 190.9
-------------------------------------- --------- --------- ----------- --------- ---------- ---------- --------
Dividends (note 10) - - - - - (180.6) (180.6)
Equity-settled share-based
payments - - - - - 1.6 1.6
Exercise of share options
- purchase of shares - - - - - (2.0) (2.0)
-------------------------------------- --------- --------- ----------- --------- ---------- ---------- --------
At 30 September 2018 499.8 2.9 (2.2) 329.7 13.3 2,119.9 2,963.4
-------------------------------------- --------- --------- ----------- --------- ---------- ---------- --------
Six months ended 30 September 2017
Share Cumulative
Share premium exchange Merger Retained
capital account reserve reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2017 499.8 2.9 (2.0) 329.7 1,991.2 2,821.6
Profit after tax - - - - 197.4 197.4
Other comprehensive income/(expense)
Remeasurement losses on
defined benefit pension
schemes (note 13) - - - - (52.4) (52.4)
Tax on items taken directly
to equity (note 8) - - - - 9.4 9.4
Foreign exchange adjustments - - 0.7 - - 0.7
Total comprehensive income - - 0.7 - 154.4 155.1
-------------------------------------- --------- --------- ----------- --------- ---------- --------
Dividends (note 10) - - - - (176.7) (176.7)
Equity-settled share-based
payments - - - - 1.2 1.2
Exercise of share options
- purchase of shares - - - - (2.8) (2.8)
-------------------------------------- --------- --------- ----------- --------- ---------- --------
At 30 September 2017 499.8 2.9 (1.3) 329.7 1,967.3 2,798.4
-------------------------------------- --------- --------- ----------- --------- ---------- --------
Year ended 31 March 2018
Share Cumulative
Share premium exchange Merger Retained
capital account reserve reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2017 499.8 2.9 (2.0) 329.7 1,991.2 2,821.6
Profit after tax - - - - 354.6 354.6
Other comprehensive income/(expense)
Remeasurement gains on
defined benefit pension
schemes (note 13) - - - - 50.2 50.2
Tax on items taken directly
to equity (note 8) - - - - (8.5) (8.5)
Foreign exchange adjustments - - 0.2 - - 0.2
Total comprehensive income - - 0.2 - 396.3 396.5
-------------------------------------- --------- --------- ----------- --------- ---------- --------
Dividends (note 10) - - - - (267.0) (267.0)
Equity-settled share-based
payments - - - - 3.2 3.2
Exercise of share options
- purchase of shares - - - - (3.4) (3.4)
-------------------------------------- --------- --------- ----------- --------- ---------- --------
At 31 March 2018 499.8 2.9 (1.8) 329.7 2,120.3 2,950.9
-------------------------------------- --------- --------- ----------- --------- ---------- --------
Consolidated statement of cash flows
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2018
2018 2017
GBPm GBPm GBPm
Operating activities
Cash generated from operations (note
16) 507.1 499.4 989.8
Interest paid (66.2) (71.1) (144.6)
Interest received and similar income 3.3 3.5 5.9
Tax paid (6.0) (20.2) (35.5)
Net cash generated from operating
activities 438.2 411.6 815.6
-------------- -------------- ------------
Investing activities
Purchase of property, plant and
equipment (302.6) (323.5) (698.6)
Purchase of intangible assets (13.3) (15.7) (36.1)
Proceeds from sale of property,
plant and equipment 1.2 0.2 1.1
Grants and contributions received 17.2 10.5 23.7
Loans to joint ventures (6.0) (12.6) (26.5)
Proceeds from disposal of business - 6.5 8.9
Dividends received from joint ventures 2.3 3.4 3.3
Proceeds from investments 0.6 0.6 1.0
-------------- --------------
Net cash used in investing activities (300.6) (330.6) (723.2)
-------------- --------------
Financing activities
Proceeds from borrowings 120.7 129.1 801.0
Repayment of borrowings (337.5) (178.0) (345.9)
Dividends paid to equity holders
of the company (note 10) (180.6) (176.7) (267.0)
Exercise of share options - purchase
of shares (2.0) (2.8) (3.4)
Net cash (used in)/generated from
financing activities (399.4) (228.4) 184.7
-------------- -------------- ------------
Net (decrease)/increase in cash
and cash equivalents (261.8) (147.4) 277.1
Cash and cash equivalents at beginning
of the period 497.4 220.3 220.3
-------------- -------------- ------------
Cash and cash equivalents at end
of the period 235.6 72.9 497.4
-------------- -------------- ------------
NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the six
months ended 30 September 2018 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).
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 2018.
The comparative figures for the year ended 31 March 2018 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 condensed consolidated financial statements have been
prepared in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union (EU). The
accounting policies, presentation and methods of computation are
consistent with those applied in the audited financial statement of
United Utilities Group PLC for the year ended 31 March 2018 with
the exception of the adoption of IFRS 9 'Financial Instruments' and
IFRS 15 'Revenue from Contracts with Customers'. Adoption of these
standards is broadly in line with expectations set out in the March
2018 group financial statements, and has resulted in no material
impact to the financial statements.
Impact of newly adopted standards
IFRS 9 'Financial Instruments'
The group adopted IFRS 9 on 1 April 2018, applying the standard
retrospectively in accordance with the standard's transition
requirements. Comparative periods have not been restated, with any
differences arising from retrospective application being recognised
as an adjustment to retained earnings at the beginning of the
period. This has resulted in retained earnings at the adoption date
increasing by GBP1.1 million with a corresponding debit to the
cumulative exchange reserve.
During the period fair value foreign exchange gains of GBP0.5
million have been recognised in the income statement which would
have been recognised in the cumulative exchange reserve under
previous accounting policies. This has resulted from the
classification of an investment previously accounted for as an
available for sale financial asset under IAS 39 'Financial
Instruments: Recognition and Measurement' as a financial asset
measured at fair value through profit or loss.
The group has reassessed the effectiveness of existing
accounting hedges on adoption of IFRS 9 and the documentation that
supports any designation. Financial instruments that had been
designated in an accounting fair value hedge relationship under IAS
39 continue to be designated as such under IFRS 9, however the
group has reassessed its position with regards to designating
non-financial risks in hedge relationships and has determined that
in order to give a more representative view of operating costs it
would be appropriate to designate a number of existing swaps as
being in a cash flow hedge relationship. This means that only the
impact of any hedging ineffectiveness is recognised through fair
value in the income statement, with movements reflecting the
effective part of the swaps being recognised in other comprehensive
income. At the maturity date the amounts paid/received will be
recognised against expenses in the income statement, thus giving a
more representative view of operating costs.
The impact of this change is that whereas previously no income
relating to these swaps would have been recognised against
corresponding operating expenses, with the full GBP14.6 million
gain recognised as a fair value movement as part of finance
expense, the settlement of existing swaps in the period has instead
resulted in income of GBP1.3 million being recognised against
operating expenses, with a fair value gain of GBP13.3 million
relating to the effective element of the cash flow hedge being
recognised in other comprehensive income together with a
corresponding increase in the cash flow hedge reserve.
In addition to this, where the group has chosen to measure
borrowings at fair value through profit or loss, the portion of the
change in fair value due to changes in the group's own credit risk,
which has been a GBP2.6 million gain during the period, has been
recognised in other comprehensive income rather than within profit
or loss.
A deferred tax charge of GBP2.7 million has been recognised in
other comprehensive income during the period in relation to the
above.
IFRS 15 'Revenue from Contracts with Customers'
The group adopted IFRS 15 on 1 April 2018, applying the standard
retrospectively with the cumulative effect of initial application
recognised at the date of initial application as an adjustment to
retained earnings. Prior period comparatives have therefore not
been restated. The group has elected to use the practical expedient
whereby any contracts that were completed in accordance with
accounting standards as at 31 March 2018 need not be restated on an
IFRS 15 basis. This transition approach has resulted in a GBP2.6
million increase in retained earnings and reduction in deferred
income on the adoption date due to a change in the period over
which revenue relating to connection activities is recognised.
The two main areas of the group's activities impacted by the
adoption of IFRS 15 are (i) the provision of core water and
wastewater services, and (ii) capital income streams relating to
diversions work and activities, typically performed opposite
property developers, that facilitate the creation of an authorised
connection through which properties can obtain water and wastewater
services.
The adoption of IFRS 15 has had no impact on the timing or
amount of revenue recognised in relation to core water and
wastewater services, which are deemed to be distinct performance
obligations under the contract with customers, though following the
same pattern of transfer to the customer who simultaneously
receives and consumes both of these services over time.
The main impact of adoption for the group has been in respect of
connection activities. Under IFRS 15 the performance obligation
associated with the connection activities is deemed to be satisfied
over the period of time that water and wastewater services are
expected to be provided through the connection, which has been
estimated as being around 60 years. These revenues are therefore
deferred on the balance sheet and released to the income statement
over this period. Further detail can be found in the group's annual
report and financial statements for the year ended 31 March 2018.
Had the new standard not been adopted in the current period,
revenue would have been GBP3.5 million less based on the
application of previous accounting policies rather than IFRS 15 due
to a longer average amortisation period having previously been
used.
New and revised standards not yet effective
IFRS 16 'Leases'
IFRS 16 is effective for periods commencing on or after 1
January 2019, and will therefore be adopted on 1 April 2019. Under
the provisions of the standard, most leases, including the majority
of those previously classified as operating leases, will be brought
onto the statement of financial position as both a right-of-use
asset and a largely offsetting lease liability. The right-of-use
asset and lease liability will both be based on the present value
of lease payments due over the term of the lease, with the asset
being depreciated in accordance with IAS 16 'Property, Plant and
Equipment' and the liability increased for the accretion of
interest and reduced by lease payments.
The key judgements associated with adoption of this standard
relate to the identification and classification of contracts
containing a lease within the scope of IFRS 16, and the discount
rate to use in calculating the present value of future lease
payments on which the reported lease liability and right-of-use
asset is based when the rate is not implicit in the contract.
Implementation work associated with adoption is well progressed.
For current operating leases, contracts making up the vast majority
of the value of future lease payments have been reviewed and
appropriately classified as leases under IFRS 16 ahead of adoption.
These future lease payments will be discounted using the group's
incremental cost of borrowing. The value of the assets and
liabilities brought onto the statement of financial position will
be highly sensitive to this rate on the adoption date. We estimate
that the right-of-use asset and offsetting lease liability brought
onto the statement of financial position will be in the region of
GBP50 million based on borrowing rates at the reporting date.
Going concern
The directors have a reasonable expectation that the group has
adequate resources for a period of at least 12 months from the date
of approval of the condensed financial statements, and have
therefore assessed that the going concern basis of accounting is
appropriate in preparing the condensed financial statements and
that there are no material uncertainties to disclose. This
conclusion is based upon a review of the resources available to the
group, taking account of the group's financial projections together
with available cash and committed borrowing facilities as well as
consideration of the group's capital adequacy. The board has also
considered the magnitude of potential impacts resulting from
uncertain future events or changes in conditions, the likelihood of
their occurrence, and the likely effectiveness of mitigating
actions that the directors would consider undertaking.
2. Segmental reporting
The board of directors of United Utilities Group PLC (the board)
is provided with information on a single segment basis for the
purposes of assessing performance and allocating resources. The
board reviews revenue, underlying operating profit, operating
profit, assets and liabilities, regulatory capital expenditure, and
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
2018 2017 2018
GBPm GBPm GBPm
Wholesale water charges 383.4 360.8 719.2
Wholesale wastewater charges 460.7 436.3 875.6
Residential retail charges 45.9 46.3 91.2
Other 26.4 32.6 49.8
--------------- ---------------
916.4 876.0 1,735.8
--------------- --------------- -----------
In accordance with IFRS 15, revenue has been disaggregated based
on what is recognised in relation to the core services of supplying
clean water and the removing and treating of wastewater. Each of
these services is deemed to give rise to a distinct performance
obligation under the contract with customers, though following the
same pattern of transfer to the customer who simultaneously
receives and consumes both of these services over time.
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 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. Employee benefits expense
Included within employee benefits expense were GBP3.7 million
(30 September 2017: GBP1.3 million, 31 March 2018: GBP6.0 million)
of restructuring costs, and GBP0.9 million (30 September 2017 and
31 March 2018: GBPnil) of costs incurred in relation to the group's
response to the severe dry weather event experienced during the
period.
5. Other operating costs
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2018
2018 2017 GBPm
GBPm GBPm
Hired and contracted services 57.2 47.7 97.7
Property rates 45.6 42.6 90.5
Materials 41.2 33.2 67.3
Power 34.1 31.9 70.4
Regulatory fees 17.3 14.9 29.7
Charge for bad and doubtful
receivables 13.2 14.8 20.8
Cost of properties disposed 2.9 7.7 9.8
Operating leases payable 2.1 2.0 4.2
Settlement of commercial claims (9.9) - -
Compensation from insurers - (3.5) (3.6)
Other expenses 17.0 13.9 36.6
--------------- --------------- ------------
220.7 205.2 423.4
--------------- --------------- ------------
During the current period, as a result of the group's response
to a severe dry weather event, there were GBP25.0 million of
expenses incurred, comprising GBP17.3 million of other operating
costs, GBP6.8 million of infrastructure renewals expenditure, and
GBP0.9m of employee costs (see note 4).
During the prior periods, as a result of two significant
flooding incidents caused by storms Desmond and Eva in December
2015, there were GBP3.4 million and GBP5.3 million of expenses
incurred comprising GBP2.2 million and GBP2.9 million of operating
costs, and GBP1.2 million and GBP2.4 million of infrastructure
renewals expenditure, for 30 September 2017 and 31 March 2018
respectively. Insurance compensation relating to the flooding
incidents of GBP3.5 million and GBP3.6 million for 30 September
2017 and 31 March 2018 respectively was recognised as part of a
final settlement of the insurance claim. In addition, in prior
periods there were GBP1.0 million of market reform restructuring
costs incurred, preparing the business for open competition in the
non-household retail market.
Total other operating costs are stated net of GBP0.2 million (30
September 2017: GBP0.9 million, 31 March 2018: GBP1.4 million)
costs recharged to Water Plus at nil margin under transitional
service agreements.
6. Investment income
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2018
2018 2017 GBPm
GBPm GBPm
Interest receivable 3.3 1.9 4.9
Net pension interest income (note
13) 4.5 3.3 7.1
--------------- ---------------
7.8 5.2 12.0
--------------- --------------- -------------
7. Finance expense
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2018
2018 2017 GBPm
GBPm GBPm
Interest payable 134.4 144.3 265.9
Net fair value gains on debt and
derivative instruments (43.7) (34.5) (47.3)
--------------- --------------- -------------
90.7 109.8 218.6
--------------- --------------- -------------
Interest payable is stated net of GBP18.5 million (30 September
2017: GBP21.2 million, 31 March 2018: GBP39.7 million) borrowing
costs capitalised in the cost of qualifying assets within property,
plant and equipment and intangible assets during the period.
Interest payable includes an GBP67.1 million (30 September 2017:
GBP83.0 million, 31 March 2018: GBP137.8 million) non-cash,
inflation uplift charge in relation to the group's index-linked
debt.
Net fair value gains on debt and derivative instruments includes
GBP18.7 million income (30 September 2017: GBP8.8 million, 31 March
2018: GBP23.5 million) due to net interest on derivatives and debt
designated at fair value.
8. Tax
The total effective tax rate for the current and prior period
was in line with the headline rate of 19 per cent. 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, pension contributions, and unrealised gains and losses
on treasury derivatives.
The tax adjustments taken to equity primarily relate to
remeasurement movements on the group's defined benefit pension
schemes.
9. Earnings per share
Basic and diluted earnings per share are calculated by dividing
profit after tax by the weighted average number of shares in issue
during the period. The weighted average number of shares in issue
as at 30 September 2018 for the purpose of the basic earnings per
share was 681.9 million (30 September 2017 and 31 March 2018: 681.9
million) and for the diluted earnings per share was 683.0 million
(30 September 2017: 683.0 million, 31 March 2018: 683.1
million).
10. Dividends
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2018
2018 2017 GBPm
GBPm GBPm
Dividends relating to the period
comprise:
Interim dividend 93.8 90.3 90.3
Final dividend - - 180.6
-------------- -------------- ------------
93.8 90.3 270.9
-------------- -------------- ------------
Dividends deducted from shareholders' equity comprise:
Interim dividend - - 90.3
Final dividend 180.6 176.7 176.7
-------------- -------------- ------------
180.6 176.7 267.0
-------------- -------------- ------------
The interim dividends for the six months ended 30 September 2018
and 30 September 2017, and the final dividend for the year ended 31
March 2018, have not been included as liabilities in the respective
condensed consolidated financial statements at 30 September 2018
and 30 September 2017, and the consolidated financial statements at
31 March 2018, because they were approved after the reporting
date.
The interim dividend of 13.76 pence per ordinary share (2017:
interim dividend of 13.24 pence per ordinary share, final dividend
of 26.49 pence per ordinary share) is expected to be paid on 1
February 2019 to shareholders on the register at the close of
business on 21 December 2018. The ex-dividend date for the interim
dividend is
20 December 2018.
11. Joint ventures
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2018
2018 2017 GBPm
GBPm GBPm
At the start of the period 75.2 75.2 75.2
Share of profits of joint ventures 3.4 5.1 2.3
Dividends received from joint
ventures (2.3) (3.4) (3.3)
Currency translation differences 0.7 1.4 1.0
-------------- -------------- ------------
At the end of the period 77.0 78.3 75.2
-------------- -------------- ------------
The group's interests in joint ventures mainly comprise its
interests in Water Plus Group Limited (Water Plus) and AS Tallinna
Vesi (Tallinn Water). Water Plus is jointly owned and controlled by
the group and Severn Trent PLC under a joint venture agreement.
Joint management of Tallinn Water is based on a shareholders'
agreement.
Tallinn Water disclosed a contingent liability of EUR 26.5
million in its latest financial statements relating to possible
third-party claims. If this contingent liability materialises in
the future this would impact the group's share of profits of the
joint venture and therefore the joint venture's carrying value
under the equity method of accounting.
Details of transactions between the group and its joint ventures
are disclosed in note 19.
12. Investments
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2018
2018 2017 GBPm
GBPm GBPm
At the start of the period 7.1 9.0 9.0
Change in fair value 4.1 - -
Disposals (0.6) (0.6) (1.0)
Currency translation differences 0.9 (0.6) (0.9)
-------------- -------------- ------------
At the end of the period 11.5 7.8 7.1
-------------- -------------- ------------
At 30 September 2018, the group's investments mainly comprised
its investment in Muharraq Holding Company 1 Limited. These
investments are held at fair value.
13. Retirement benefit surplus
The main financial assumptions used by the company'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
2018 2017 2018
% p.a. % p.a. % p.a.
Discount rate 2.90 2.70 2.60
Pensionable salary growth and
pension increases 3.45 3.40 3.35
Price inflation - RPI 3.45 3.40 3.35
Price inflation - CPI 2.05 - 1.95
Mortality in retirement is assumed to be in line with the
Continuous Mortality Investigation's (CMI) S2PA (30 September 2017
and 31 March 2018: S2PA) year of birth tables, with a scaling
factor of 108 per cent for males and 102 per cent for females,
reflecting actual mortality experience; and CMI 2017 (30 September
2017 and 31 March 2018: CMI 2016) long-term improvement factors,
with a long-term annual rate of improvement of 1.75 per cent (30
September 2017 and 31 March 2018: 1.75 per cent).
The net pension expense before tax charged to 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 2018
2018 2017 GBPm
GBPm GBPm
Current service cost 2.8 14.0 27.3
Curtailments/settlements 1.4 0.2 2.3
Administrative expenses 1.2 1.2 2.6
Pension expense charged to operating
profit 5.4 15.4 32.2
Net pension interest income credited
to investment income (note 6) (4.5) (3.3) (7.1)
-------------- -------------- -----------
Net pension expense charged before
tax 0.9 12.1 25.1
-------------- -------------- -----------
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 2018
2018 2017 GBPm
GBPm GBPm
At the start of the period 344.2 247.5 247.5
Expense recognised in the income
statement (0.9) (12.1) (25.1)
Contributions paid 26.3 36.8 71.6
Remeasurement (losses)/gains gross
of tax (43.3) (52.4) 50.2
-------------- -------------- -----------
At the end of the period 326.3 219.8 344.2
-------------- -------------- -----------
The closing surplus at each reporting date is analysed as
follows:
30 September 30 September 31 March
2018 2017 2018
GBPm GBPm GBPm
Present value of defined benefit
obligations (3,340.9) (3,487.9) (3,498.7)
Fair value of schemes' assets 3,667.2 3,707.7 3,842.9
------------- ------------- ----------
Net retirement benefit surplus 326.3 219.8 344.2
------------- ------------- ----------
The GBP43.3 million remeasurement loss has principally resulted
from an increase in swap yields impacting the liability hedge, and
adverse movements in demographic assumptions following an update to
commutation factors and death in service and ill health benefits,
offset by a reduction in mortality from the latest CMI 2017 model.
Further details on the approach to managing pension scheme risk are
set out in the audited consolidated financial statements of United
Utilities Group PLC for the year ended 31 March 2018. During the
period the investment and risk management strategy continued to
evolve with both UUPS and ESPS now fully hedging inflation exposure
through external market swaps and gilts. As a consequence the
Inflation Funding Mechanism (IFM), which previously provided an
element of inflation hedging directly with the company, has now
ceased to apply.
During the current period, the majority of active members in the
defined benefit sections of the UUPS transitioned to a hybrid
section comprising a capped defined benefit element and a top up
defined contribution component. Pension benefits under the defined
benefit element of the new UUPS hybrid section that became
effective for pensionable service from 1 April 2018 are linked to
CPI rather than RPI.
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 2016 for both the group's ESPS
and UUPS schemes.
On 26 October 2018 the High Court handed down a judgement
involving Lloyds Banking Group's defined benefit pension schemes.
The judgement concluded that the schemes should be amended to
equalise pension benefits for males and females in relation to
Guaranteed Minimum Pension (GMP) benefits for the effect of unequal
GMPs accrued between 1990 and 1997. The issues determined by the
judgement are expected to have a widespread impact on defined
benefit schemes operating in the UK, which will see an increase in
the defined benefit obligations of the schemes. We are working with
the trustees of our pension schemes, and our actuarial and legal
advisers, to understand the extent to which the judgement
crystallises additional liabilities for the group's pension
schemes. We estimate that this could be in the tens of millions of
pounds, with any adjustment necessary expected to be recognised in
the second half of the 2018/19 financial year.
Defined contribution schemes
During the period, the group made GBP12.4 million (30 September
2017: GBP6.0 million, 31 March 2018: GBP12.1 million) of
contributions to defined contribution schemes which are included in
employee benefits expense.
14. Borrowings
New borrowings raised during the six month period ended 30
September 2018 were as follows:
-- On 12 September 2018 the group issued a further GBP50 million
fixed interest rate notes in addition to the GBP300 million notes
that had been issued on 14 February 2018. These notes are due
February 2025.
The notes were issued through private placement under the Euro
medium-term note programme.
15. Fair values of financial instruments
The fair values of financial instruments are shown in the table
below.
30 September 30 September 31 March
2018 2017 2018
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 419.5 419.5 543.1 543.1 455.7 455.7
Derivative financial assets
- held for trading 187.8 187.8 206.6 206.6 179.8 179.8
Investments* 11.5 11.5 7.8 7.8 7.1 7.1
Financial liabilities at fair
value through profit or loss
Derivative financial liabilities
- fair value hedge (11.6) (11.6) (5.7) (5.7) (24.2) (24.2)
Derivative financial liabilities
- held for trading (62.6) (62.6) (112.4) (112.4) (76.8) (76.8)
Financial liabilities designated
as fair value through profit
or loss (360.1) (360.1) (367.7) (367.7) (347.7) (347.7)
Financial instruments for which
fair value does not approximate
carrying value
Financial liabilities in fair
value hedge relationships (2,651.6) (2,618.7) (2,492.1) (2,449.8) (2,905.9) (2,895.3)
Other financial liabilities
at amortised cost (5,667.8) (4,728.0) (5,761.8) (4,610.3) (5,798.4) (4,669.3)
---------- ---------- ---------- ---------- ----------- ----------
(8,134.9) (7,162.2) (7,982.2) (6,788.4) (8,510.4) (7,370.7)
---------- ---------- ---------- ---------- ----------- ----------
*Prior to the adoption of IFRS 9 'Financial Instruments' on 1
April 2018 investments were classified as available for sale
financial assets in accordance with IAS 39 'Financial Instruments:
Recognition and Measurement'.
An increase in credit spreads during the period is the principal
reason for the reduction in the difference between the fair value
and carrying value of the group's borrowings compared with the
position at 31 March 2018.
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 GBP2,338.5 million (30
September 2017: GBP1,708.1 million, 31 March 2018: GBP2,192.4
million) for financial liabilities in fair value hedge
relationships and GBP1,801.8 million (30 September 2017: GBP2,253.7
million, 31 March 2018: GBP2,425.6 million) for other financial
liabilities at amortised cost.
The GBP477.7 million reduction (30 September 2017: GBP1,257.8
million increase, 31 March 2018: GBP1,914.0 million increase) in
'level 1' fair value liability measurements is largely due to a
decrease in the number of observable quoted bond prices in active
markets at 30 September 2018. 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 2018.
16. Cash generated from operations
Six months Six months
ended ended Year ended
30 September 30 September 31 March
2018 2017 2018
GBPm GBPm GBPm
Operating profit 339.1 341.8 636.4
Adjustments for:
Depreciation of property, plant
and equipment 174.0 172.5 348.4
Amortisation of intangible assets 17.0 12.8 28.4
Loss on disposal of property, plant
and equipment 0.4 2.2 6.8
Amortisation of deferred grants
and contributions (3.0) (3.1) (6.4)
Equity-settled share-based payments
charge 1.6 1.2 3.2
Other non-cash movements (3.5) (1.6) (3.3)
Changes in working capital:
Decrease in inventories 2.5 2.9 5.6
(Increase)/Decrease in trade and
other receivables (20.6) 3.7 27.5
Increase/(Decrease) in trade and
other payables 23.1 (8.0) (13.0)
Decrease in provisions (2.6) (3.6) (4.4)
Pension contributions paid less
pension expense charged to operating
profit (20.9) (21.4) (39.4)
------------- ------------- ----------
Cash generated from operations 507.1 499.4 989.8
------------- ------------- ----------
17. Net debt
Six months Six months Year ended
ended ended 31 March
30 September 30 September 2018
2018 2017 GBPm
GBPm GBPm
At the start of the period 6,867.8 6,578.7 6,578.7
Net capital expenditure 297.5 328.5 701.0
Dividends (note 10) 180.6 176.7 267.0
Inflation uplift on index-linked
debt (note 7) 67.1 83.0 137.8
Interest 62.9 67.6 138.7
Loans to joint ventures 6.0 12.6 26.5
Tax 6.0 20.2 35.5
Other 2.5 (6.4) (0.7)
Fair value movements (69.2) (52.9) (26.9)
Cash generated from operations
(note 16) (507.1) (499.4) (989.8)
--------------- --------------- -------------
At the end of the period 6,914.1 6,708.6 6,867.8
--------------- --------------- -------------
Net debt comprises borrowings, net of cash and short-term
deposits and derivatives. As such, movements in net debt during the
period reflected in the above reconciliation are impacted by net
cash generated from financing activities as disclosed in the
consolidated statement of cash flows.
Fair value movements includes net fair value gains on debt and
derivative instruments of GBP43.7 million (30 September 2017:
GBP34.5 million, 31 March 2018: GBP47.3 million) less net payments
on swaps and debt designated at fair value of GBP12.2 million (30
September 2017: GBP18.4 million net payment, 31 March 2018: GBP20.4
million net receipt) and fair value gains on cash flow hedges of
GBP13.3 million following the adoption of IFRS 9.
During the period the group received GBP31.7 million in
settlement of certain cross-currency interest rate swap liabilities
as part of an exercise to manage the mandatory breaks included
within the swap contracts. The receipt is included within 'Proceeds
from borrowings' in the statement of cash flows.
In the prior periods the group paid GBP106.8 million in
settlement of certain interest rate swap liabilities as part of an
exercise to better align the existing hedging profile with the
group's target hedge ratios and to manage swap counterparty
positions to facilitate future treasury activity. The payment is
included within 'Repayment of borrowings' in the statement of cash
flows.
Notional net debt totals GBP6,935.2 million as at 30 September
2018 (30 September 2017: GBP6,672.7 million, 31 March 2018:
GBP6,830.2 million). 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 of the group's index-linked
debt; and the sterling principal amount of the cross-currency swaps
relating to the group's foreign currency debt.
18. Commitments and contingent liabilities
At 30 September 2018 there were commitments for future capital
expenditure contracted but not provided for of GBP372.5 million (30
September 2017: GBP325.8 million, 31 March 2018: GBP432.9
million).
Details of the group's contingent liabilities were disclosed in
the audited financial statements of United Utilities Group PLC for
the year ended 31 March 2018. There have been no significant
developments relating to contingent liabilities in the period ended
30 September 2018 with the exception of that relating to the
equalisation of Guaranteed Minimum Pensions (GMP) discussed in note
13.
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 2018
2018 2017 GBPm
GBPm GBPm
Sales of services 234.6 264.9 496.3
Charitable contributions advanced 0.2 - -
to related parties
Purchases of goods and services 0.2 0.2 0.7
Costs recharged at nil margin under
transitional service agreements 0.2 0.9 1.4
Interest income and fees recognised
on loans to related parties 1.9 1.2 3.4
Amounts owed by related parties 183.0 179.9 179.7
Amounts owed to related parties - 3.4 1.4
Sales of services to related parties during the period mainly
represent non-household wholesale charges to Water Plus Group
Limited (Water Plus), a joint venture in which the group holds a 50
per cent stake alongside Severn Trent PLC, billed and accrued
during the period. These transactions were on the group's normal
trading terms in respect of non-household wholesale charges, which
are governed by the wholesale charging rules issued by Ofwat.
Charitable contributions advanced to related parties during the
year relate to amounts paid to Rivington Heritage Trust, a
charitable company limited by guarantee for which United Utilities
Water Limited is one of three guarantors.
At 30 September 2018 amounts owed by joint ventures, as recorded
within trade and other receivables in the statement of financial
position, were GBP183.0 million (30 September 2017: GBP179.9
million, 31 March 2018: GBP179.7 million), comprising GBP39.6
million (30 September 2017: GBP51.6 million, 31 March 2018: GBP42.5
million) of trade balances, which are unsecured and will be settled
in accordance with normal credit terms, and GBP143.4 million (30
September 2017: GBP128.3 million, 31 March 2018: GBP137.2 million)
relating to loans. Included within these loans receivable were the
following amounts owed by Water Plus:
-- GBP100.0 million outstanding on a GBP100.0 million revolving
credit facility provided by United Utilities Water Limited, which
is guaranteed by United Utilities PLC, with a maturity date of 30
September 2019, bearing a floating interest rate of LIBOR plus a
credit margin;
-- GBP9.5 million receivable being the 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. This
is an interest-free shareholder loan with a total amount
outstanding at 30 September 2018 of GBP12.5 million, comprising the
GBP9.5 million receivable held at fair value, and GBP3.0 million
recorded as a net equity contribution to Water Plus recognised
within interests in joint ventures; and
-- GBP32.5 million outstanding on a GBP32.5 million revolving
credit facility provided by United Utilities PLC, with a maturity
date of 30 September 2019, bearing a floating interest rate of
LIBOR plus a credit margin.
A further GBP1.4 million (30 September 2017: GBP3.7 million, 31
March 2018: GBP1.4 million) of non-current receivables was owed by
other related parties at 30 September 2018.
No expense or allowance has been recognised for bad and doubtful
receivables in respect of the amounts owed by related parties (30
September 2017 and 31 March 2018: GBPnil).
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 GBP64.0
million, of which GBP38.5 million related to guarantees to United
Utilities Water Limited.
At 30 September 2018, amounts owed to joint ventures were GBPnil
million (30 September 2017: GBP3.4 million, 31 March 2018: GBP1.4
million). Amounts outstanding are unsecured and settle in
accordance with normal credit terms.
20. Events after the reporting period
With the exception of the High Court ruling relating to GMP
equalisation documented in note 13, there were no material events
arising after the reporting date that required recognition or
disclosure in the condensed financial statements for the period
ended 30 September 2018.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
Responsibilities Statement
We confirm that to the best of our knowledge:
- the condensed set of financial statements has been prepared in
accordance with IAS 34 'Interim Financial Reporting' as adopted by
the EU;
- the interim management report includes a fair review of the information required by:
-- DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first
six months of the financial year and their impact on the condensed
set of financial statements; and a description of the principal
risks and uncertainties for the remaining six months of the year;
and
-- DTR 4.2.8R of the Disclosure and Transparency Rules, being
related party transactions that have taken place in the first six
months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
The directors of United Utilities Group PLC at the date of this
announcement are listed below:
Dr John McAdam
Steve Mogford
Stephen Carter
Mark Clare
Steve Fraser
Alison Goligher
Russ Houlden
Brian May
Paulette Rowe
Sara Weller
This responsibility statement was approved by the board and
signed on its behalf by:
Steve Mogford Steve Fraser
20 November 2018 20 November 2018
Chief Executive Officer Chief Operating 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 2018 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 2018 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted by
the EU and the Disclosure Guidance and Transparency Rules ("the
DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. 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.
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 annual financial statements of the
group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. 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 by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
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.
William Meredith
for and on behalf of KPMG LLP
Chartered Accountants
St Peter's Square
Manchester
M2 3AE
20 November 2018
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR BRBDBDBDBGIG
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