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REG - United Utilities Grp - Final Results

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RNS Number : 8379M  United Utilities Group PLC  26 May 2022

United Utilities Group PLC

26 May 2022

 

FULL YEAR RESULTS FOR THE YEAR ENDED 31 MARCH 2022

 

 Delivering for the North West - Supporting customers, colleagues,
communities and environment

·    No increase in average household bills for 2022/23, despite rapidly
rising inflation

·    Extensive affordability schemes providing £280m of support to over
200,000 households over AMP7

·    Leading supporter of the Consumer Council for Water's drive to launch
a national social tariff

·    Improving river health over the next 3 years through our "Better
Rivers: Better North West" plan

·    Continuous apprentice recruitment, including 30 Green Apprentices to
support our climate change plans

·    On track to deliver our bold commitments to reduce carbon

·    Leading utility in The Inclusive Top 50 UK Employers List 2021/22

 

£400m additional investment - Responsibly sharing outperformance for the
benefit of all stakeholders

·    Increased outperformance facilitates further responsible investment;
contributing to 21.4%1 RCV growth

·    Investment beyond the AMP7 final determination increased by a further
£400m, now totalling £765m2

·    The investment will help to address new and emerging environmental
standards and drive customer ODIs

·    Financial strength and balance sheet headroom to fund additional
investment

·    Accelerated AMP7 base capital programme delivering operational
improvements with 90% on contract

 

Digital transformation - Systems Thinking driving value through sustainable
performance

·    Largest annual customer ODI reward of £25m for 2021/22; ahead of
guidance

·    Increasing our AMP7 customer ODI guidance by over 30% to c£200m in
total

·    A sector leading company on outcome delivery as assessed in Ofwat's
Service Delivery Report for 2020/21

·    Innovative Dynamic Network Management delivering reductions in sewer
flooding and pollution events

·    Overall pollution incidents reduced by over a third since the
beginning of AMP7

 

Financial resilience - Strong financial performance and robust balance sheet

·    Reported and underlying3 operating profit of £610m up 1.3%

·    Household bad debt improving to 1.8%; strong customer debtor position

·    Strong balance sheet; stable RCV gearing at 61%; A3 credit rating
with Moody's

·    Fully funded, inflation hedged pension scheme; Mar-21 valuation
complete, further de-risking progressing

·    Power commodity prices over 90% hedged for 2022/23 and 67% hedged for
2023/24 and 2024/25

·    Optimising government tax initiatives from investment; underlying tax
credit for 2021/22 of £65m;

·    7.9% reported return on regulated equity (RoRE) for 2021/22;
underlying RoRE of 7.7%

·    High inflation increases RCV although reduces earnings in the near
term

·    Balance sheet to remain strong and cash metrics not impacted by
indexation of index-linked debt

·    Total dividend of 43.50p, in line with AMP7 dividend policy

 

Key financials

                                             Year ended
                                             31 March 2022  31 March 2021
 Revenue                                     £1,862.7m      £1,808.0m
 Reported and underlying operating profit    £610.0m        £602.1m
 Reported earnings per share(3) (pence)      (8.3)p         66.5p
 Underlying earnings per share(3,4) (pence)  53.8p          56.2p
 Total dividend per ordinary share (pence)   43.50p         43.24p
 Net regulatory capital spend                £644.5m        £616.5m
 RCV gearing(5)                              61%            62%

(1) RCV growth over AMP7 in nominal prices

(2) £365m of additional investment already announced

(3) Reported earnings per share includes a one-off deferred tax charge of
£403m in relation to the increase in the headline rate to 25% from Apr-23

(4) Underlying measures are defined in the tables

(5) Regulatory capital value (RCV) gearing calculated as group net debt/United
Utilities Water Limited's shadow (adjusted for actual spend and timing
difference) RCV

 

Steve Mogford, Chief Executive Officer, said:

 

"We are very conscious of our responsibility to support customers at a time
when households are seeing significant rises in the cost of living. Despite
the high levels of inflation, we expect no increase in average household water
bills in our region in the coming financial year and we are offering more
financial support to customers in need than ever before. We are a leading
supporter of the Consumer Council for Water's drive for a national social
tariff and believe the right support should be provided to customers who
struggle to pay their bill regardless of where they live in the country.

 

"We take our role in the North West very seriously, and firmly believe that
responsibly sharing our successes is the right thing to do for all our
stakeholders. Our improving performance together with an environment of higher
inflation is yielding a greater level of outperformance, and so we will be
investing an additional £400 million to improve the service we provide to
customers and to accelerate the delivery of environmental outcomes. We
recently published our river revival plan which progressively reduces the
impact our operations have on river health. Our four-point strategy details
how we will work with others to transform the rivers and waterways across our
region.

 

"The maturing of our Systems Thinking approach - which uses innovative
technology to deliver a better service for customers - continues to create
value through sustainable performance improvements. This has contributed to
another strong outcome delivery incentive (ODI) reward for the year and
underpins our confidence in increasing our total AMP7 ODI target by a third,
to £200 million. Financial performance has again been good, demonstrating
resilience in a challenging environment and, together with the sustainable
improvements in our performance, is delivering value for our stakeholders
today as well as creating further value to be received in AMP8 and beyond."

 

Enquiries

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

 

Presentation webcast and conference call details

We will be hosting a live virtual presentation at 9.00am on Thursday 26 May
2022, which can be accessed via the following link:

http://www.unitedutilitiestv.live/ (http://www.unitedutilitiestv.live/)

 

The presentation slides will be available on our website shortly before the
presentation commences at the following link:

https://www.unitedutilities.com/corporate/investors/results-and-presentations/full-and-half-year-results/
(https://www.unitedutilities.com/corporate/investors/results-and-presentations/full-and-half-year-results/)

 

Following conclusion of the presentation a recording of the presentation will
be available from our website.

 

 

OPERATIONAL PERFORMANCE

 

We are helping over 200,000 households currently struggling with their bills,
and maintaining a high level of service for customers. We are earning higher
outperformance thanks to strong operational performance against customer
outcome delivery incentives as well as financial outperformance. As a
responsible company we are sharing our success with customers, like we did in
2010-20, by investing an additional £765 million to help accelerate further
enhancements for customers and the environment.

 

Our team has sustained a strong level of operational performance this year,
delivering value for all our stakeholders. Customer satisfaction and employee
engagement remain high, and we have achieved our best ever performance against
customer outcome delivery incentives (ODIs). We are on track to deliver our
AMP7 environmental improvement programme, which will improve river and bathing
water quality in the North West, and have made good progress against our
carbon pledges. We are upper quartile across a suite of environmental, social
and governance (ESG) indices, and our robust balance sheet provides long-term
financial resilience.

 

Helping customers struggling with bills

 

Many people across the country are facing real challenges as we emerge from a
global pandemic and are faced with significant rises in the cost of living. We
serve many of the most deprived areas in England and Wales, so it is more
important than ever that we are doing what we can to help customers.

 

Our average household bill for 2022/23 is not increasing, and we are offering
more support than ever before through our extensive range of affordability and
vulnerability schemes, helping over 200,000 households this year and providing
around £280 million of affordability support over AMP7.

 

There is still more we would like to be able to do, and we are a passionate
supporter of the Consumer Council for Water's drive to introduce a national
social tariff, which would help deliver a more equitable sharing of support
for customers struggling to pay their bill regardless of where they live in
the country.

 

Sustained high levels of operational and environmental performance

 

We were a sector leading company on outcome delivery in Ofwat's Service
Delivery Report for 2020/21, with nine of 11 outcomes(1) being at or better
than target, and were recognised as a top performer on supply interruptions
and pollution incidents - two areas where we are now seeing the benefits of
targeted investment we made in AMP6. On the two(1) outcomes where our
performance was below target we have plans in place to improve this.

 

Our customer ODI performance has been strong across the board this year,
meeting or beating over 80 per cent of our performance commitments. Based on
our anticipated reward this year, we will have earned rewards in both the
first two years of AMP7 against Ofwat's customer satisfaction measure, C-MeX,
and we have achieved our lowest ever level of written complaints this year.

 

We were pleased to achieve a four star rating in the 2020 Environmental
Performance Assessment from the Environment Agency (EA), meaning we were
categorised as an industry leading company in the most recent annual
assessment by the EA, taking into account performance across a broad range of
environmental metrics. It reflected our best ever performance, and we were the
first water company to achieve green status across all measures since 2015.

 

We continue to be at the sector frontier on pollution performance, having
reduced overall pollution by a third since the start of the AMP. Our treatment
works compliance remains strong and we expect to remain green on this measure
in the EA's assessment for 2021.

 

Performance improvements earning outperformance

 

We earned a reported return on regulated equity (RoRE) of 7.9 per cent(2) for
2021/22, driven by our continued improvements in operational performance
together with high levels of inflation, which increases financing
outperformance, and tax outperformance.

 

Underlying RoRE is slightly lower at 7.7 per cent, and excludes the tax that
will be recovered through the regulatory sharing mechanism.

 

Cumulative RoRE for the first two years of AMP7 is 6.2 per cent on both a
reported and underlying basis.

 

Our strong performance this year earned a £25 million reward(1) against
customer ODIs, the highest annual reward we have achieved to date. We
anticipate earning total customer ODI rewards over AMP7 of £200 million, a
third higher than we estimated in last year's report.

 

We consistently issue debt at efficient rates, and we earned financing
outperformance of 1.6 per cent of regulated equity this year. We also
performed strongly on tax as a result of optimising government tax incentives.

 

The economic environment as we emerge from a global pandemic, as well as the
war in Ukraine, has driven higher costs in our supply chain and we are
starting to see significant cost increases in power and chemicals. We continue
to seek efficiencies and exploit technology and innovation to help us deliver
our total expenditure (totex) efficiently.

 

(1) Excluding per capita consumption, which Ofwat will be revisiting at the
next price review once there is a better understanding of the impact of COVID
19 and any enduring effects

(2) On a real, RPI/CPIH blended basis

 

Sharing our success with customers

 

As a responsible company it is right that we should share our success with
customers, and we feel the best way for us to create more value for customers
and other stakeholders is through investing to accelerate improvements in
performance. This is in line with the approach we have taken historically,
sharing over £600 million over the 2010-20 period.

 

We have increased the investment we are making by a further £400 million
meaning that, over the 2020-25 period, we are investing £765 million beyond
the scope of our final determination allowance to help us accelerate
environmental and customer outcomes.

 

Investing to improve service for customers

 

£250 million of the additional investment is helping us deliver further
improvements to service for customers and better performance against our
customer ODIs.

 

As mentioned above, our performance has been strong across the majority of our
customer outcomes, but this investment is targeted at delivering sustainable
improvements for customers in two specific areas where we want to do better -
sewer flooding and water quality (specifically discolouration).

 

It includes investment in Dynamic Network Management (DNM), an advancement of
Systems Thinking in our wastewater network that will help us reduce sewer
flooding and pollution incidents using real-time performance data from a
network of sensors to enable predictive and preventative optimisation.

 

Investing outperformance for environmental improvements

 

A further £250 million of the additional investment is being used to deliver
environmental outcomes. This includes delivering elements of the new
Environment Act requirements earlier, and improving the health of rivers
across the North West.

 

In July 2021, we launched a collaborative partnership with The Rivers Trust, a
first for any water company in the United Kingdom. To help kickstart a river
revival in the North West we published 'Better Rivers: Better North West', our
plan to improve the health of rivers across our region in the next three
years. We are delivering improvements that support at least a one-third
sustainable reduction in the number of spills recorded from our storm
overflows between 2020 and 2025, with all storm overflows monitored by 2023
and real time data on their operation made publicly available. Our plans will
lead to 184 kilometres of improved waterways across the region. We also
continue to engage with the ongoing industry-wide investigations by Ofwat and
the Environment Agency into possible unpermitted sewage discharges.

 

The remaining £265 million of the £765 million of additional investment is
for projects where regulatory allowances and mechanisms have been secured,
much of which will deliver further environmental benefits. For example, around
£90 million will fund a project in Bolton that is part of our Water Industry
National Environment Programme (WINEP), and £65 million will go towards
supporting the country's green economic recovery in the wake of the pandemic.

 

Long-term investment needs for the environment

 

Protecting and enhancing the natural environment has always been a key
priority for us and many of our stakeholders. In the last 12 months this has
received increased public interest, particularly the health of rivers and the
part the water industry can play in helping to improve this.

 

New and emerging requirements reflect the increased importance being given by
the Government to the environmental agenda and we share the Government's
ambitious improvement plans.

 

The Environment Act 2021 introduces several new challenges for the sector,
including a requirement for water companies to secure a progressive but very
substantial reduction in the average number of spills from storm overflows,
and controlling nutrient pollution by reducing phosphate release from
wastewater treatment works. The Industrial Emissions Directive broadens the
scope of activities covered by compliance requirements, and the Environment
Agency's recent interpretation of Farming Rules for Water restricts the
application of biosolids to land in certain areas at certain times, requiring
more storage capacity or alternative means of disposal.

 

We have delivered significant improvements in environmental performance in
recent years, and through our original plans for AMP7 we will deliver further
improvements, with good progress already having been made. The additional
investment we are making will help accelerate improvements, but there is more
that the industry will need to do.

 

Specific targets for the next regulatory period have not yet been agreed, but
it is already clear that there is an ambition to deliver a fundamental change
in the way drainage network systems were originally configured. The investment
needed to deliver these changes will be significant for the industry as a
whole, but particularly for the North West, where we have a much higher
proportion of combined sewers. We are working with the Government and
regulators to determine how these bold ambitions can be met and by when,
recognising that the pace of change must consider customer affordability.

 

Resilience to climate change and population growth remains a material issue
for many stakeholders, even more so since COP26, and this is something that
will need to be addressed by water companies both regionally and nationally.
Our Systems Thinking approach and investment are helping to deliver increased
resilience across the North West, and longer-term we are involved in strategic
planning for a national water transfer scheme.

 

We have committed to achieve net zero by 2030 with six pledges to reduce our
carbon footprint, underpinned by ambitious science-based targets for reducing
our greenhouse gas emissions, and we are making good progress against these.
We are linking executive remuneration more tightly to our carbon commitments
with four targets added to the Long Term Plan, and in this year's report we
also include nature-related financial disclosures.

 

Haweswater Aqueduct Resilience Programme (HARP)

 

We have continued to develop HARP, an industry-first Direct Procurement for
Customers (DPC) programme to design and build six replacement tunnel sections
of the Haweswater Aqueduct, which transports water from Cumbria to Manchester.

 

We have undertaken extensive market engagement throughout the process -
challenging for a project of this scale during the pandemic - and used
innovative ways to manage stakeholder engagement including the use of digital
channels and a virtual exhibition giving people access to information and the
ability to ask questions remotely.

 

We developed the initial design following extensive ground investigation work
to plot the best route, and planning applications have all been submitted with
decisions expected later this year. During early 2022, we have been finalising
tender documents, and we expect to start procurement in the summer of 2022.

 

Supported by a diverse and highly motivated workforce

 

We pride ourselves on being a quality employer, and are committed to
maintaining a diverse and inclusive team of people, recruiting from every part
of our community. We scored equal to the UK high performance norm with 87 per
cent employee engagement this year, are rated 4.6 out of five by Glassdoor,
and were the leading utility company in The Inclusive Top 50 UK Employers List
2021/22.

 

We believe in the importance of developing younger generations to keep the
talent pool flowing. We have active graduate and apprentice schemes, including
30 green apprentices helping us work towards our climate and environmental
ambitions. We support young people not in education, employment or training
(NEETs), as well as being part of the government's Kickstart scheme providing
opportunities to unemployed 16-24 year olds claiming universal credit.

 

Our commitment to health, safety and wellbeing has been recognised with our
10th consecutive Royal Society for the Prevention of Accidents (RoSPA) gold
standard medal, meaning we have achieved the RoSPA President's award.

 

Thank you to our stakeholders

 

We are grateful to our employees for their continued hard work, and as we look
forward at the many new challenges we and the rest of the sector will be
meeting in the next AMP and beyond, we are delighted to have such a great team
behind us. We would also like to extend our gratitude to our customers and
other stakeholders for their continued support.

 

Our key performance indicators (KPIs)

 

Our purpose, to provide great water and more for the North West, means we aim
to create long-term value for all our stakeholders and, as such, for AMP7 we
are reporting against operational KPIs that are linked to each stakeholder
group for whom we create value. Our performance against these operational KPIs
is reported below.

 

·    Communities

Our key performance indicator to measure value created for communities over
AMP7 is the level of community investment, and we target increasing this by at
least 10 per cent over 2020 to 2025, compared with the average of £2.56
million per annum between 2010 and 2020. This year, our direct community
investment was £2.8 million (calculated using the B4SI method).

 

·    Customers

Our key performance indicator to measure customer satisfaction over AMP7 is
Ofwat's customer measure of experience (C-MeX), in which we target being in
positive reward territory. In 2021/22 we expect to earn a £2.3 million reward
and we continue to be the highest performing listed company.

 

·    Employees

Our key performance indicator to measure value created for our employees over
AMP7 is our engagement score, in which we target being upper quartile against
the UK Utilities Norm benchmark. Our overall engagement is at 87 per cent, 5
per cent higher than the UK Utilities Norm and equal to UK High Performance
levels, which we have now been equal to or above for the last three years.

 

·    Environment

Our key performance indicator to measure value created for the environment
over AMP7 is our performance against the Environment Agency's annual
performance assessment, in which we target being an upper quartile performer.
The most recent assessment was for 2020, in which we achieved our best ever
performance, green across all measures - the first water company to achieve
this level of performance since 2015 - and were awarded the maximum 4 star
industry leading company status. The Environment Agency will publish its
annual performance assessment for 2021 in July 2022.

 

·    Investors

Our key performance indicator to measure value created for our investors over
AMP7 is Return on Regulated Equity (RoRE), and we will update our targets for
individual components of this measure as we progress through the period.
Reported RoRE for 2021/22 was 7.9 per cent on a real, RPI/CPIH blended basis,
double the base return. Underlying RoRE was slightly lower at 7.7 per cent,
and excludes the tax that will be recovered through the regulatory sharing
mechanism.

 

·    Suppliers

Our key performance indicator to measure value created for our suppliers over
AMP7 is payment within 60 days, and we target at least 95 per cent of invoices
to be paid within this timeframe. In 2021/22, we have continued to exceed our
target performance, with over 99 per cent of our invoices paid within 60 days,
and our average time to pay is 13 days.

 

FINANCIAL PERFORMANCE

 

Revenue for the year to 31 March 2022 increased by 3 per cent, mainly driven
by higher non-household consumption as business activity has returned to
pre-pandemic levels. Household bad debt has returned to 1.8 per cent of
regulated revenue, lower than the 2.2 per cent last year and consistent with
the level we were achieving prior to the pandemic, helped by our wide ranging
affordability schemes and effective approach to managing cash collection.
Operating profit was up £8 million as the increase in revenue was largely
offset by inflationary increases in power and other core costs.

 

While inflation has increased our operating costs and net finance expense this
year, it has also led to a higher level of financing outperformance and,
together with the £765 million additional investment we have announced beyond
the scope of our final determination, will deliver higher regulatory capital
value (RCV) growth over the 2020-25 period.

 

We have doubled our base return on regulated equity (RoRE) for 2021/22,
delivering strong performance on financing, tax and customer ODIs.

 

We benefit from having one of the strongest balance sheets in the sector, with
an industry-leading, fully funded pension scheme on a low dependency basis, a
low level of customer debtor risk, and RCV gearing supporting a stable A3
credit rating with Moody's.

 

Revenue

                                                                               £m
 Year to 31 March 2021                                                         1,808.0
 Regulatory revenue changes -1.5 per cent real reduction in allowed wholesale  (13.5)
 revenues and 0.6 per cent uplift in line with CPIH inflation
 Non-household consumption increase                                            105.9
 Household consumption decrease                                                (57.7)
 Property sales                                                                8.0
 Other                                                                         12.0
 Year to 31 March 2022                                                         1,862.7

 

Revenue was up £55 million, at £1,863 million, largely reflecting higher
consumption as business activity returns to pre-pandemic levels.

 

In 2021/22 we have had a £14 million reduction in the revenue cap,
incorporating a 1.5 per cent real reduction in allowed wholesale revenues
partly offset by a 0.6 per cent CPIH-linked increase.

 

With many more businesses able to operate compared with last year, when the
impact of the initial lockdown was significant, non-household revenue has
increased by £106 million. In contrast, consumption from households, although
higher than pre-pandemic norms, has decreased £58 million this year. This is
due to significantly higher consumption particularly during the first half of
last year reflecting the initial impact of people being locked down at home
through the warm weather of late spring 2020.

 

Operating profit

                                                  £m
 Underlying and Reported - year to 31 March 2021  602.1
 Revenue increase                                 54.7
 COVID-related costs in prior year                8.0*
 Costs driving ODI performance                    (17.0)
 Power cost increase                              (16.0)
 Other costs, largely due to inflation            (16.0)
 SaaS costs treated as operating expenses         (5.8)
 Underlying and Reported - year to 31 March 2022  610.0

*  £8m COVID-related costs was an estimate in the year ended 31 March 2021
because, with the passage of time and as conditions brought about by the
pandemic have become embedded into normal business processes, the usefulness
of tracking COVID-related costs specifically has diminished.

 

Underlying and reported operating profit at £610 million was £8 million
higher than last year. The £55 million increase in revenue was mostly offset
by higher power costs and inflationary pressures increasing our underlying
cost base, predominantly in respect of materials and labour.

 

We have a reduction of around £8 million in operating costs as last year saw
additional one-off costs incurred in adapting to operate through the pandemic.

 

The £17 million of additional costs driving ODI performance are targeted at
improving performance against specific customer ODIs, such as spend associated
with Dynamic Network Management.

 

Power costs have increased by £16 million this year, largely in relation to
higher prices. Power is a significant cost for our business, which is why we
manage this risk through a progressive policy of hedging the commodity price
element of power costs to minimise short term volatility (commodity price
makes up around half of our annual power costs, with the other half relating
to the use-of-system charge and other levies). Through this hedging policy and
self-generation, we locked in the cost on the majority of our consumption for
2021/22 before the most recent energy price rises, securing an average rate of
£65 per megawatt hour (MWh) for the year, which is significantly lower than
the current market rate of over £200 per MWh for next year and has been
fundamental to our ability to minimise the impact on our cost base. We are
also locked-in on over 90 per cent of expected consumption for 2022/23, and
around two-thirds of expected consumption across the final two years of AMP7,
at rates that compare favourably to the current market rate.

 

Cost increases of £16 million largely stem from higher inflation in the
period. We are not immune to the impact of the current high inflation
environment, but through hedging, constructive cost challenge and commercial
negotiations, we have managed to mitigate much of the cost increase to date.

 

During the year, the IFRS Interpretations Committee (IFRIC) published
clarifications on how arrangements in respect of a specific part of cloud
technology - Software as a Service - should be accounted for, resulting in £6
million of costs that would previously have been accounted for as fixed asset
additions now being treated as operating costs.

 

Household bad debt is back at our lowest ever level of 1.8 per cent of
regulated revenue, having reduced from 2.2 per cent in the year to 31 March
2021 as we return to pre-pandemic levels.

 

Profit before tax

                                          £m
 Underlying - year to 31 March 2021       460.0
 Underlying operating profit increase     7.9
 Underlying net finance expense increase  (173.5)
 Share of JVs losses decrease             7.5
 Underlying - year to 31 March 2022       301.9
 Adjusted items *                         138.0
 Reported - year to 31 March 2022         439.9

* Adjusted items are set out in the alternative performance measures tables.

 

Underlying profit before tax was £302 million, £158 million lower than last
year. This reflects the £8 million increase in underlying operating profit
and a decrease in the share of losses of joint ventures of £8 million, more
than offset by a £174 million increase in underlying net finance expense.
Underlying profit before tax reflects consistently applied presentational
adjustments.

 

Reported profit before tax decreased by £111 million to £440 million
reflecting the £8 million increase in reported operating profit and an £8
million decrease in the share of losses of joint ventures, more than offset by
a £90 million increase in reported net finance expense (including fair value
movements), and the inclusion last year of a £37 million profit on disposal
of our share in the joint venture AS Tallinna Vesi.

 

·    Net finance expense

The underlying net finance expense of £306 million was £174 million higher
than last year, mainly due to the non-cash impact of significantly higher
inflation on our index-linked debt.

 

The indexation of principal on index-linked debt, excluding the impact of
inflation swaps, amounted to a net charge in the income statement of £228
million, compared with a net charge of £53 million last year, resulting in an
increase of £175 million. Interest on non index-linked debt of £110 million
is consistent with last year, while various smaller year-on-year increases and
decreases broadly offset against one another when considered together.

 

The £306 million underlying net finance expense included in the income
statement for the year compares with £118 million net cash interest paid
included in the statement of cash flows. This £188 million difference is due
to non-cash inflation uplifts on index linked debt and derivatives of £256
million, less capitalised borrowing costs of £53 million and net pension
interest income of £14 million, both of which are non-cash items.

 

Reported net finance expense of £168 million was £90 million higher than
last year, reflecting the £174 million increase in underlying net finance
expense, partially offset by an £84 million increase in net fair value gains
on our debt and derivative portfolio, excluding interest on derivatives and
debt under fair value option, from £54 million last year to £138 million
this year.

 

·    Joint ventures

For the year to 31 March 2022, we recognised a £2 million loss in the income
statement relating to our joint venture Water Plus, compared with a £9
million net share of losses from joint ventures last year, which included a
share of profits from the AS Tallinna Vesi joint venture prior to its
disposal. A profit £37 million was recognised on the disposal of our share in
AS Tallinna Vesi, which was completed on 31 March 2021. In the year to 31
March 2021, we also recognised a £37 million profit on disposal of our share
in AS Tallinna Vesi, which was completed on 31 March 2021.

 

Further details can be found in note 11 of these condensed consolidated
financial statements.

 

Profit/(loss) after tax and earnings per share

                                                                            PAT      Earnings per share

                                                                            £m       Pence/share
 Underlying - year to 31 March 2021                                         383.0    56.2p
 Underlying profit before tax decrease                                      (158.1)
 Tax credit relating to research and development tax allowances             72.5
 Underlying tax decrease, including the impact of capital allowance 'super  69.6
 deductions'
 Underlying - year to 31 March 2022                                         367.0    53.8p
 Adjusted items *                                                           (423.8)
 Reported - year to 31 March 2022                                           (56.8)   (8.3)p

* Adjusted items are set out in the alternative performance measures tables.

 

Underlying profit after tax of £367 million was £16 million lower than last
year, and underlying earnings per share decreased from 56.2 pence to 53.8
pence, as the £158 million reduction in underlying profit before tax is
partly offset by £142 million lower underlying tax (moving from a charge of
£77 million last year to a net credit of £65 million this year). The
reduction in underlying tax reflects a £73 million tax credit relating to
optimising the available research and development UK tax allowances on
innovation-related expenditure we had incurred in prior years, and the impact
of the capital allowance 'super deductions' announced in the March 2021
Chancellors Budget, which lowers the current tax charge significantly in the
current period.

 

The group has a reported loss after tax of £57 million this year, compared
with a £453 million reported profit after tax last year. This £510 million
difference reflects the £111 million decrease in reported profit before tax,
and a £544 million increase in deferred tax largely due to a one-off charge
to restate the brought forward deferred tax liability at the new 25 per cent
future headline rate, partially offset by a £145 million positive movement in
current tax primarily as a result of adjustments in respect of optimising
available tax incentives on our innovation-related expenditure in prior years.
Reported basic earnings per share decreased from 66.5 pence to (8.3) pence.

 

·    Tax

The group continues to be fully committed to paying its fair share of tax and
acting in an open and transparent manner in relation to its tax affairs and we
were delighted to have retained the Fair Tax Mark independent certification
for a third year, having been only the second FTSE 100 company to be awarded
the Fair Tax Mark in July 2019.

 

In addition to corporation tax, the group pays significant other contributions
to the public finances on its own behalf as well as collecting and paying over
further amounts for its over 5,000 strong workforce. The total payments for
2021/22 were around £230 million and included business rates, employment
taxes, environmental taxes and other regulatory service fees such as water
abstraction charges as well as corporation tax.

 

In 2021/22, we paid corporation tax of around £9 million, which represents an
effective cash tax rate on underlying profits of 3 per cent, which is 16 per
cent lower than the headline rate of corporation tax of 19 per cent. The key
reconciling item to the headline rate of corporation tax continues to be
allowable tax deductions on capital investment including the new temporary
capital allowance 'super deductions', where the current year tax benefit was
around £40m representing a 13 per cent reduction to the effective cash tax
rate. We expect a similar tax benefit from the temporary super deduction
regime for 2023 as well.

 

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 enables a medium-term cash tax rate forecast. We
expect the average cash tax rate on underlying profits to remain below the
headline rate of tax for the medium term.

 

For 2021/22, the group recognised an overall current tax credit of £66
million in 2021/22. This includes a current tax charge relating to 2021/22 of
£7 million this year, compared with £80 million in the previous year, key
reconciling items being the lower taxable profits and the availability of
capital allowance 'super deductions' for 2021/22. In addition, in the current
year, there were prior period tax credits of £73 million, compared with £1
million in 2020/21. The current year credit mainly relates to optimising the
available research and development UK tax allowances on our innovation-related
expenditure for multiple prior years.

 

For 2021/22, the group recognised a deferred tax charge of £562 million,
compared with £18 million for 2020/21. For 2021/22, £403 million relates to
the government's planned increase in the rate of corporation tax from 19 per
cent to 25 per cent from 1 April 2023. Subject to any legislative or tax
practice changes, we would expect the total effective tax rate to continue to
be broadly in line with the headline rate of corporation tax for the medium
term.

 

In 2021/22, there are £136 million of tax adjustments recorded within other
comprehensive income, primarily relating to remeasurement movements on the
group's defined benefit pension schemes. As in the prior year the rate at
which the deferred tax liabilities are measured on the group's defined benefit
pension scheme is 35 per cent, being the rate applicable to refunds from a
trust.

 

Dividend per share

The Board has proposed a final dividend of 29.0 pence per ordinary share in
respect of the year ended 31 March 2022. Taken together with the interim
dividend of 14.5 pence per ordinary share, paid in February, this results in a
total dividend per ordinary share for 2021/22 of 43.5 pence. This is an
increase of 0.6 per cent compared with the dividend relating to last year, in
line with the group's dividend policy of targeting a growth rate of CPIH
inflation each year through to 2025. The 0.6 per cent increase is based on the
CPIH element included within allowed regulated revenue for the 2021/22
financial year (i.e. the movement in CPIH between November 2019 and November
2020).

 

The final dividend is expected to be paid on 1 August 2022 to shareholders on
the register at the close of business on 24 June 2022. The ex-dividend date is
23 June 2022. The election date for the Dividend Reinvestment Plan is 11 July
2022.

 

Cash flow

Net cash generated from continuing operating activities for year to 31 March
2022 was £934 million, £75 million higher than £859 million last year. The
group's net capital expenditure was £627 million, principally in the
regulated water and wastewater investment programmes. This excludes
infrastructure renewals expenditure, which is treated as an operating cost.

 

Pensions

As at 31 March 2022, the group had an IAS 19 net pension surplus of £1,017
million, compared with a surplus of £689 million at 31 March 2021. This £328
million increase principally reflects an increase in credit spreads during the
year, partially offset by a higher inflation assumption. The group has
de-risked its pension schemes through hedging strategies applied to the
underlying interest rate and future inflation. The IAS 19 position remains
volatile to changes in credit spread and changes in mortality, neither of
which have been hedged at this current time. This is primarily due to
difficulties hedging against credit spread volatility over long durations,
and, for mortality, there is lower volatility in the short term and relatively
high hedging costs. The scheme specific funding basis does not suffer
volatility due to credit spread movements to the same extent as it uses a
prudent, fixed credit spread assumption.

 

Further detail on pensions is provided in note 12 ('Retirement benefit
surplus') of these condensed consolidated financial statements.

 

Financing

 Net debt                              £m
 At 31 March 2021                      7,305.8
 Cash generated from operations        (1,061.6)
 Net capital expenditure               626.7
 Dividends                             295.5
 Indexation                            227.9
 Interest                              118.3
 Fair value movements                  28.7
 Extension of loans to joint ventures  13.0
 Tax                                   8.9
 Other                                 6.8
 At 31 March 2022                      7,570.0

 

Net debt at 31 March 2022 was £7,570 million, compared with £7,306 million
at 31 March 2021. This comprises gross borrowings with a carrying value of
£7,980 million net of cash and short-term deposits of £241 million and net
derivative assets hedging specific debt instruments of £169 million.

 

Underlying movements in net debt are largely a result of net operating cash
inflows offset by our net capital expenditure, dividends, indexation and cash
interest.

 

Gearing, measured as group net debt divided by UUW's shadow (adjusted for
actual spend and timing difference) regulatory capital value of £12.4
billion, was 61 per cent at 31 March 2022. This is slightly lower than gearing
of 62 per cent as at 31 March 2021, and remains comfortably within our target
range of 55 to 65 per cent.

 

·    Cost of debt

As at 31 March 2022, the group had approximately £3.2 billion of RPI-linked
instruments and £0.4 billion of CPI or CPIH-linked instruments held as debt.
In recent years, in response to Ofwat's decision to transition away from RPI
inflation linkage, the group has entered into a number of transactions
swapping RPI-linked cash flows to CPI-linked cash flows or swapping floating
rate cash flows to CPI-linked cash flows. As a result, including these swaps,
the group has RPI-linked debt exposure of £3.1 billion at an average real
rate of 1.3 per cent, and £1.1 billion of CPI or CPIH-linked debt exposure at
an average real rate of -0.6 per cent.

 

A significantly higher RPI inflation charge compared with the same period last
year contributed to the group's average effective interest rate of 5.1 per
cent being higher than the rate of 2.5 per cent last year. The average
underlying interest rate represents the underlying net finance expense
adjusted for capitalised borrowing costs and net pension interest income,
divided by average notional debt.

 

The group has fixed the interest rates on its non index-linked debt in line
with its 10-year reducing balance basis at a net effective nominal interest
rate of 2.2 to 2.4 per cent for the remainder of the AMP7 regulatory period.

 

·    Credit ratings

UUW's senior unsecured debt obligations are rated A3 with Moody's Investors
Service (Moody's), A- with Fitch Ratings (Fitch) and BBB+ with Standard &
Poor's Ratings Services (S&P) and all on stable outlook. United Utilities
PLC's (UU PLC's) senior unsecured debt obligations are rated Baa1 with
Moody's, A- with Fitch and BBB- with S&P, all on stable outlook.

 

·    Debt financing

The group has access to the international debt capital markets through its
£10 billion medium-term note (MTN) programme. The MTN programme is updated at
least annually and this year's update was completed in November 2021, at which
time the previous €7 billion euro programme limit was increased and
redenominated to £10 billion. The MTN programme does not represent a funding
commitment, with funding dependent on the successful issue of the notes.

 

In total over 2020-25, we expect to raise around £2.7 billion to cover
refinancing and incremental debt, supporting our five-year investment
programme. So far in AMP7, we have raised around £1.4 billion, taking
advantage of attractive rates available and extending our liquidity position
(as at 31 March 2022) out to February 2025.

 

In November 2020, we published our new sustainable finance framework, through
which we expect to raise financing based on our strong ESG credentials
alongside conventional issuance. This replaces the green funding we have
previously secured through the European Investment Bank (EIB), which is no
longer available post-Brexit. We issued our debut sustainable bond in January
2021, raising £300 million maturing in October 2029 and subsequently swapped
to CPI-linkage.

 

In August 2021, we raised around £74 million of term funding via the issue
off our MTN programme of a JPY11 billion privately placed note swapped to GBP
with a 9-year maturity, and in September 2021 we priced a £100 million fixed
note with a 7-year maturity, the proceeds of which were received in early
October.

 

In April 2022, we raised £100 million of term funding with an 8-year maturity
via a bilateral loan with Export Development Canada (EDC).  AAA-rated EDC is
the Canadian Government's Export Development Agency that looks to promote
trade with Canadian firms worldwide.  This follows collaboration with EDC in
relation to some of the innovation activities that we have undertaken, and we
expect such collaboration to continue.

 

Since March 2021, we have extended £100 million of revolving credit
facilities for a further year, renewed £100 million of revolving credit
facilities for a further 5-year term and entered into £50 million of new
revolving credit facilities for a 5-year term. The group has also amended the
documentation for all of its existing revolving credit facilities to remove
references to LIBOR and replace with SONIA.

 

·    Interest rate management

Long-term borrowings are structured or hedged to match assets and earnings,
which are largely in sterling, indexed to UK price inflation, and subject to
regulatory price reviews every five years.

 

Long-term sterling inflation index-linked debt provides a natural hedge to
assets and earnings. At 31 March 2022, approximately 41 per cent of the
group's net debt was in RPI-linked form, representing around 25 per cent of
UUW's regulatory capital value, with an average real interest rate of 1.3 per
cent. A further 15 per cent of the group's net debt was in CPI or CPIH-linked
form, representing around nine per cent of UUW's RCV, with an average real
rate of -0.6 per cent. The long-term nature of this funding also provides a
good match to the company's long-life infrastructure assets and is a key
contributor to the group's average term debt maturity profile, which is around
18 years.

 

Our inflation hedging policy is to target around 50 per cent of net debt to be
maintained in index-linked form. This reflects a balanced assessment across a
range of factors.

 

Where nominal debt is raised in a currency other than sterling and/or with a
fixed interest rate, the debt is generally swapped to create a floating rate
sterling liability for the term of the debt. To manage exposure to medium-term
interest rates, the group fixes underlying interest costs on nominal debt out
to ten years on a reducing balance basis.

 

·    Liquidity

Short-term liquidity requirements are met from the group's normal operating
cash flow and its short-term bank deposits and supported by committed but
undrawn credit facilities. Our MTN programme provides further support.

 

At 31 March 2022, we had liquidity out to February 2025, comprising cash and
short-term deposits, plus committed undrawn revolving credit facilities. This
gives us flexibility in terms of when and how further debt finance is raised
to help refinance maturing debt and support the delivery of our regulatory
capital investment programme. In October 2021, UUW prepaid a £100 million
floating rate loan a year ahead of its scheduled maturity, this being
efficient use of our available liquidity.

 

We consider that we operate a prudent approach to managing banking
counterparty risk. Counterparty risk, in relation to both cash deposits and
derivatives, is controlled through the use of counterparty credit limits. Our
cash is held in the form of short-term money market deposits with prime
commercial banks.

 

We operate a bilateral rather than a syndicated approach to our core
relationship banking facilities.  This approach spreads maturities more
evenly over a longer time period, thereby reducing refinancing risk and
providing the benefit of several renewal points rather than a large single
refinancing requirement.

 

Return on Regulated Equity (RoRE)

Reported RoRE for 2021/22 was 7.9 per cent on a real, RPI/CPIH blended basis.

 

This comprises the base return of 3.9 per cent (including our 11 basis point
fast track reward that we receive in each of the five years of the AMP), tax
outperformance of 2.7 per cent, financing outperformance of 1.6 per cent, and
customer ODI outperformance of 0.5 per cent, partially offset by the total
expenditure (totex) impact on RoRE of -0.8 per cent as a result of our
additional investment.

 

Underlying RoRE was slightly lower at 7.7 per cent, and excludes the tax that
will be recovered through the regulatory sharing mechanism.

 

·    Totex performance

The totex impact on RoRE of -0.8 per cent, on both a reported and underlying
basis, largely reflects the year two impact of the additional investment we
are making outside the scope of our Final Determination (FD), for example our
investment in Dynamic Network Management.

 

Our AMP7 business plan was assessed by Ofwat as being amongst the most
efficient in the sector, and our performance improvements over AMP6 meant we
started AMP7 at a totex run rate that supported delivery of the stretching
efficiency challenge in our FD allowance. We are not immune to the impact of
inflation, both directly and indirectly through our supply chain, with many of
our costs rising above the headline rate. Our totex allowance does increase
with inflation, which helps to mitigate some of this cost pressure, and we
continue to exploit technology and innovation to help us deliver our
investment efficiently.

 

In this second year of AMP7, we have invested £645 million in net regulatory
capital expenditure (excluding infrastructure renewals expenditure),
representing the continued acceleration of our AMP7 investment programme and
early expenditure against the extension to our original totex plans as set out
above. Cumulatively, this is £1.3 billion in the first two years of the
period, which represents a good start to the delivery of our AMP7 programme.
We have been able to deliver this expenditure effectively, maintaining our
high performance scores against our Time, Cost and Quality index (TCQi) at
over 95 per cent.

 

Our investment strategy delivers long-term efficiency and sustainable
performance improvements, and the additional £765 million investment we are
making beyond the scope of our FD will drive further enhancements for customer
and environmental performance. £265 million of this investment we expect to
be fully recovered through regulatory mechanisms, including Green Recovery and
projects that form part of our Water Industry National Environment Programme
(WINEP). £250 million of this investment is improving environmental outcomes,
funded through investment of outperformance, and subject to regulatory sharing
mechanisms. The final £250 million of this investment will drive improved
performance against customer outcomes and is supported on a business case
basis, delivering improved customer ODI performance.

While we continue to strive to deliver our investment efficiently, as we have
demonstrated through this additional investment, we will invest where we are
confident we can deliver improved customer or environmental outcomes and
better customer ODI performance.

 

·    Customer outcome delivery incentives (ODIs)

Customer ODI outperformance of 0.5 per cent, on both a reported and underlying
basis, reflects a net reward of £25 million(1). This is our highest ever
one-year net reward against customer ODIs, reflecting our continued
improvements in performance for customers.

Our customer ODI performance has been strong across the board, meeting or
beating over 80 per cent of our performance commitments, giving us the
confidence to increase our total AMP7 ODI guidance by a third, targeting a
cumulative net ODI reward over the five-year period of around £200 million.

 

The additional investment we are making will help improve performance in areas
where we want to do better. This includes £100 million investment in Dynamic
Network Management, which will help us improve performance on sewer flooding,
and around £100 million investment in improving water quality.

 

Customer ODI rewards and penalties in AMP7 will be adjusted in revenues on a
two-year lag, therefore the net reward earned this year will be reflected in
an increase to revenues earned in 2023/24 through allowed increases in the
rates charged to customers in that financial year, in accordance with the
regulatory mechanism.

 

·    Financing outperformance

We earned financing outperformance this year of 1.6 per cent, on both a
reported and underlying basis, compared with 1.2 per cent last year. This
increase mainly results from recent high levels of inflation, which increases
the benefit of the roughly £3 billion fixed rate debt we have locked in.

 

We have consistently issued debt at efficient rates that compare favourably
with the industry average, thanks to our leading treasury management, clear
and transparent financial risk management policies, and ability to act swiftly
to access pockets of opportunity as they arise. This delivered significant
financing outperformance during AMP6 and the rates we have locked-in for AMP7
compare favourably with the price review assumptions.

 

·    Tax outperformance

The 2.7 per cent outperformance on tax on a reported basis reflects our
optimisation of available government tax incentives, including research and
development tax allowances and the temporary capital allowance 'super
deductions', net of the tax impact of financing outperformance. The 2.5 per
cent outperformance on tax on an underlying basis excludes the tax that will
be recovered through the regulatory sharing mechanism.

 

OUTLOOK

 

We have delivered another good year of performance, maintaining high levels of
customer satisfaction underpinned by our Systems Thinking approach, improving
operational performance, and long-term financial resilience, giving us
confidence in our ability to continue to create value for customers, the
environment, and other stakeholders.

 

We are accelerating our AMP7 capital programme and investing an additional
£765 million over the regulatory period to help us deliver even more
sustainable improvements in customer and environmental performance, and to get
ahead of the requirements coming into force through the Environment Act. This
investment, together with latest views of inflation, contributes to RCV growth
over AMP7 of 21 per cent on a nominal basis, more than 10 per cent higher than
we expected at the beginning of the period.

 

Our sustained high level of operational performance is earning outperformance,
and we have increased our target of cumulative net outperformance against
customer ODIs by a third to around £200 million in total over AMP7. As a
consequence of our performance in AMP7 and the additional investment we are
making, we are generating around £750 million of value that we expect to
receive through an RCV uplift and additional revenues in AMP8.

 

2022/23 FULL YEAR GUIDANCE

 

·     Revenue is expected to be around 1 per cent higher than 2021/22,
largely reflecting the November 2021 CPIH inflation of 4.6 per cent, largely
offset by the regulatory revenue reduction of 1.3 per cent and over-recovery
in the current year due to higher than anticipated consumption.

·     Underlying operating costs are expected to be around £100 million
higher year-on-year. Approximately half of this increase relates to
inflationary cost pressures on labour, chemicals and other costs, while the
other half largely reflects the 2022/23 operating cost impact of the £765
million additional investment.

·     Underlying finance expense is expected to be around £150 million
higher year-on-year based on our current inflation forecast. As at 31 March
2022, we had £4.3 billion of index-linked debt exposure, therefore every 1
per cent increase in inflation equates to an around £43 million higher
interest charge. Our cash interest in 2021/22 was £118 million and we expect
this to be broadly the same in 2022/23, with the overall increase in
underlying net finance expense largely relating to the non-cash indexation of
our index-linked debt. Our cash metrics therefore remain strong and the higher
inflation will also apply to our RCV, of which 70 per cent is exposed to the
benefits of higher inflation, giving shareholders around a 1.75 times
leveraged position to inflation.

·     Underlying tax is expected to be a small charge of up to £10
million in 2022/23, as we continue to optimise the use of capital allowance
'super deductions'.

·     Capital expenditure (capex) in 2022/23 is expected to be in the
range of £640 million to £690 million, including the 2022/23 element of
incremental capital expenditure in relation to the £765 million additional
investment.

·     We are targeting a net customer ODI reward of around £30 million,
which is consistent with our updated investment plans and guidance of around
£200 million reward in total over AMP7.

·     Our AMP7 dividend policy is to grow the dividend in line with CPIH
inflation out to 2025, which for 2022/23 would equate to an increase of 4.6
per cent based on November 2021 CPIH inflation.

 

Underlying profit

The underlying profit measures in the following table represent alternative
performance measures (APMs) as defined by the European Securities and Markets
Authority (ESMA). These measures are linked to the group's financial
performance as reported in accordance with UK-adopted international accounting
standards and the requirements of the Companies Act 2006 in the group's
consolidated income statement. As such, they represent non-GAAP measures.

 

These APMs have been presented in order to provide a more representative view
of business performance. The group determines adjusted items in the
calculation of its underlying measures against a framework which considers
significance by reference to profit before tax, in addition to other
qualitative factors such as whether the item is deemed to be within the normal
course of business, its assessed frequency of reoccurrence and its volatility
which is either outside the control of management and/or not representative of
current year performance.

 

In addition, a reconciliation of the group's average effective interest rate
has been presented, together with a prior period comparison. In arriving at
net finance expense used in calculating the group's effective interest rate,
underlying net finance expense is adjusted to add back net pension interest
income and capitalised borrowing costs in order to provide a view of the
group's cost of debt that is better aligned to the return on capital it earns
through revenue.

 

 Adjusted item                                                            Rationale
 Adjustments not expected to recur
 Profit on disposal of joint ventures                                     This relates to the disposal of the group's 35.3% stake in its Estonian joint
                                                                          venture, AS Tallinna Vesi, which represents a significant, atypical event and
                                                                          as such is not considered to be part of the normal course of business.
 Consistently applied presentational adjustments
 Fair value (gains)/losses on debt and derivative instruments, excluding  Fair value movements on debt and derivative instruments can be both very
 interest on derivatives and debt under fair value option                 significant and volatile from one period to the next, and are therefore
                                                                          excluded in arriving at underlying net finance expense as they are determined
                                                                          by macro-economic factors which are outside of the control of management and
                                                                          relate to instruments that are purely held for funding and hedging purposes
                                                                          (not for trading purposes). Included within fair value movement on debt and
                                                                          derivatives is interest on derivatives and debt under fair value option. In
                                                                          making this adjustment it is appropriate to add back interest on derivatives
                                                                          and debt under fair value option to provide a view of the group's cost of debt
                                                                          which is better aligned to the return on capital it earns through revenue.
                                                                          Taking these factors into account, management believes it is useful to adjust
                                                                          for these fair value movements to provide a more representative view of
                                                                          performance.
 Deferred tax adjustment                                                  Management adjusts to exclude the impact of deferred tax in order to provide a
                                                                          more representative view of the group's profit after tax and tax charge for
                                                                          the year given that the regulatory model allows for cash tax to be recovered
                                                                          through revenues, with future revenues allowing for cash tax including the
                                                                          unwinding of any deferred tax balance as it becomes current. By making this
                                                                          adjustment, the group's underlying tax charge does not include tax that will
                                                                          be recovered through revenues in future periods, thus reducing the impact of
                                                                          timing differences.
 Tax in respect of adjustments to underlying profit before tax            Management adjusts for the tax impacts of the above adjusted items to provide
                                                                          a more representative view of current year performance.

 

 

 Underlying profit                                                             Year ended      Year ended

                                                                               31 March 2022   31 March 2021
                                                                               £m              £m

 Operating profit per published results                                        610.0           602.1
 Underlying operating profit                                                   610.0           602.1

 Net finance expense
                                                                               £m              £m
 Finance expense                                                               (187.7)         (103.5)
 Investment income                                                             19.4            25.0
 Net finance expense per published results                                     (168.3)         (78.5)
 Adjustments:
 Fair value (gains) on debt and derivative instruments, excluding interest on  (138.0)         (54.3)
 derivatives and debt under fair value option
 Underlying net finance expense                                                (306.3)         (132.8)

                                                                               £m              £m

 Share of (losses) of joint ventures                                           (1.8)           (9.3)

 Profit on disposal of joint ventures                                          -               36.7
 Adjustments:
 Profit on disposal of AS Tallinna Vesi joint venture                          -               (36.7)
 Underlying profit on disposal of joint ventures                               -               -

 Profit before tax per published results                                       439.9           551.0
 Adjustments:
 In respect of operating profit                                                -               -
 In respect of net finance expense                                             (138.0)         (54.3)
 In respect of profit on disposal of joint ventures                            -               (36.7)
 Underlying profit before tax                                                  301.9           460.0

 (Loss)/Profit after tax per published results                                 (56.8)          453.4
 Adjustments:
 In respect of profit before tax                                               (138.0)         (91.0)
 Deferred tax adjustment                                                       562.5           18.4
 Tax in respect of adjustments to underlying profit before tax                 (0.7)           2.2

 Underlying profit after tax                                                   367.0           383.0

 Earnings per share
                                                                               £m              £m
 (Loss)/profit after tax per published results (a)                             (56.8)          453.4
 Underlying profit after tax (b)                                               367.0           383.0
 Weighted average number of shares in issue, in millions (c)                   681.9m          681.9m

 Earnings per share per published results, in pence (a/c)                      (8.3)           66.5
 Underlying earnings per share, in pence (b/c)                                 53.8            56.2

 Dividend per share, in pence                                                  43.50p          43.24p

 

In arriving at net finance expense used in calculating the group's effective
interest rate, management adjusts underlying net finance expense to add back
pension income and capitalised borrowing costs in order to provide a view of
the group's cost of debt that is better aligned to the return on capital it
earns through revenue.

 

                                                  Year ended     Year ended
 Average effective interest rate                  31 March 2022  31 March 2021
                                                  £m             £m

 Underlying net finance expense                   (306.3)        (132.8)
 Adjustments:
 Net pension interest income                      (14.3)         (17.5)
 Adjustment for capitalised borrowing costs       (52.7)         (30.4)
 Net finance expense for effective interest rate  (373.3)        (180.7)

 Average notional net debt                        (7,368)        (7,315)

 Average effective interest rate                  5.1%           2.5%

 

The table below provides a reconciliation between group underlying operating
profit and United Utilities Water Limited (UUW) historical cost regulatory
underlying operating profit (non-GAAP measures) as follows:

 

 Continuing operations
 Underlying operating profit
                                                                                            Re-presented   As reported
                                                                             Year ended     Year ended     Year ended
                                                                             31 March 2022  31 March 2021  31 March 2021
                                                                             £m             £m             £m
 Group underlying operating profit                                           610.0          602.1          602.1
 Underlying operating profit not relating to UUW                             (8.3)          (0.4)          (0.4)

 UUW statutory underlying operating profit (unaudited)                       601.7          601.7          601.7
 Revenue recognition                                                         6.2            8.2            8.2
 Capitalised borrowing costs                                                 7.8            6.8            6.8
 Reclassification of regulatory other income (not included in UUW operating  (26.9)         (21.5)         (21.5)
 profit)
 Reversal of the innovation fund                                             15.4           6.2            -
 Other differences (including non-appointed business)                        (0.8)          (1.0)          (1.0)
 UUW regulatory underlying operating profit (unaudited)                      603.1          600.4          594.2

 

Reflecting Ofwat's guidance in relation to the reversal of innovation fund
provisions, prior year numbers have been re-presented for comparative
purposes.

 

Return on Regulated Equity (RoRE)

 

UUW's RoRE, presented on a real return basis:

 

                                                 Year ended     AMP7
                                                 31 March 2022  To date
 Base return                                     3.94%          3.93%
 Totex performance                               (0.84)%        (0.65)%
 Customer ODI performance                        0.52%          0.43%
 Financing performance                           1.58%          1.37%
 Tax performance                                 2.71%          1.13%
 Reported RoRE1                                  7.91%          6.21%
 Adjustment for impact of tax true up mechanism  (0.24)%        (0.06)%
 Underlying RoRE                                 7.67%          6.15%

 

1 Calculated in accordance with RAG 4.10, published in March 2022.

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

Our approach to risk and resilience

Successful management of risks and uncertainties enables us to deliver on our
purpose to provide great water and more for the North West, and be more
resilient across our corporate, financial and operational structures. A key
objective of our approach is to support the sustainable achievement of the
strategic themes that underpin our vision to be the best UK water and
wastewater company delivering:

·     the best service to customers;

·     at the lowest sustainable cost; and

·     in a responsible manner.

 

Our risk and resilience framework provides the foundation for the business to
anticipate threats to delivering an effective service in these challenging
times, and to respond and recover effectively when risks materialise. Key
components of the framework include:

·     An embedded group-wide risk management process, which is aligned to
ISO 31000:2018 risk management guidelines;

·     A board-led approach to risk appetite, based on strategic goals;

·     A strong and well-established governance structure giving the board
oversight of the nature and extent of risks the group faces, as well as the
effectiveness of risk management processes and controls; and

·     A portfolio of policies, procedures, guidance and training to
enable consistent, group-wide participation by our people.

 

Continuous improvement is a key feature of the framework, which incorporates a
maturity assessment model to identify areas to enhance. Based on risk
management capabilities relative to five levels of maturity, a recent
assessment has supported the development of a road map of improvements. This
includes further enhancement to risk appetite and tolerance, greater focus and
analysis of cross-cutting themes and improved escalation of data from
operational risk management systems.

 

Risk appetite and tolerance

Focused on supporting decision-making, the risk appetite and tolerance
framework consists of a package of measures. The General Risk Appetite
represents financial limits against which event-based risks are compared at
each full and half-year assessment and reporting cycle. In parallel are a
series of strategic statements which align directly to the principal risks.
Each statement reflects the strategic intent, strategic theme, relevant
stakeholders and governance, but fundamentally emphasises the attitude to risk
taking and control relative to four descriptors:

·     Averse: A strong opposition to accept risk within business strategy
or operational activity.

·     Prudent: A reluctance to accept risk within business strategy or
operational activity, but careful acceptance within tight boundaries.

·     Moderate: Willingness to accept risk with regard to business
strategy or operational activity provided this is within reasonable limits.

·     Accepting: Willingness to accept risk with regard to business
strategy or operational activity.

 

As a regulated company providing essential public services none of the
principal risks have risk accepting as a strategic direction or approach.

 

Underpinning each strategic statement, and currently under development, are a
series of more tangible, tactical statements with specific levels and limits.

 

How we identify and assess risk

We have a number of mechanisms in place to identify risk. These include a risk
universe, cross-business horizon scanning forums, consultations with third
parties, and comparison with National Risk Registers.

 

Each risk is event based and is sponsored by a senior manager who is
responsible for the analysis of the corresponding causal factors, consequences
and the control effectiveness, taking account of both the internal and
external business environment. This process determines the likelihood of the
event occurring and the full range of potential impacts from a minimum (best
case) to a maximum (worst case). Comparing this position against the desired
target state, in combination with the strengths, weaknesses and gaps of the
control environment, supports the decisions for further mitigation as
appropriate. This ongoing analysis culminates in the biannual business unit
risk assessment (BURA) which forms part of the governance and reporting
process to ensure consistency of approach and a true reflection of the risk
facing the company. It also serves to calibrate the most significant risks
from a financial and reputational context and to assess how these relate to
our risk appetite.

 

Governance and reporting process

The board ensures that its oversight of risk remains effective and in
compliance with the UK Corporate Governance Code, through a number of
established reporting routes.

 

Twice yearly the board receives an extensive update on the risk profile as
part of the full and half-year reporting cycle. This provides an overview of
the nature and extent of risk exposure in the context of the group's principal
risks, and emphasises the most significant event-based risks in both their
current state relative to the risk appetite, and target state of acceptable
exposure. The board is also advised of new and emerging risks.  In addition
to the biannual risk reporting, specific risk topics are reported to the board
to support decision-making. The board is, therefore, able to:

·     make decisions on the level of risk it is prepared to manage
relative to risk appetite and tolerance in order to deliver on the group's
strategy;

·     engage with the business to ensure appropriate controls and
mitigation are in place, and test the appropriateness of plans;

·     report externally on the long-term viability of the company in an
informed manner; and

·     monitor and review the effectiveness of risk management procedures
and internal control systems.

 

Risk-specific governance and steering groups manage ongoing individual risks.
The operational risk and resilience board provides oversight of asset and
operational process, risk and resilience capability, escalates risks and
issues to the group audit and risk board (GARB) and contributes to the BURA
process.

 

The executive-led GARB focuses on: the adequacy, effectiveness and performance
of governance processes; risk management and internal control; monitoring
compliance and assurance activities; identification of emerging themes and
trends; and resilience across the group.

 

The audit committee is also a fundamental component of the governance
structure. Supported by company secretariat and the corporate audit teams, the
audit committee reviews the effectiveness of risk management and internal
controls before these are agreed by the board.

 

Risk profile

The business risk profile is based on the value chain of the company, with the
ten principal risks representing inherent risk areas (primary and supportive)
where value can be gained, preserved or lost relative to the performance,
future prospects or reputation of the company. Underpinning the principal
risks, the profile consists of approximately 100 event-based risks, each of
which is allocated to one of the ten inherent risk areas based on the context
of the event, enabling the company to consider interdependency and correlation
of common themes and control effectiveness

 

Common themes

Each of the event-based risks has multiple causes and consequences, which in
turn lead to financial and/or reputational impact. Preventative and responsive
controls, which incorporate the four components of resilience (resistance;
reliability; redundancy; and response/recovery), are applied to reduce the
likelihood of the event occurring and limit the impact if the event were to
materialise. New and emerging circumstances in respect of causes, consequences
and controls make the profile multifaceted and dynamic. Analysis of the
profile highlights common themes, notably associated with the causes and
consequences. These common themes can then be considered more holistically,
which combined with the analysis of the strengths, weaknesses, gaps and
interdependency of control across the business, enables a more integrated
approach to risk mitigation.

 

Common causal themes

The event-based risks include multiple causal factors, which individually or
in combination, could trigger the risk event to occur. Categorisation
illustrates six common causal themes:

·     Extreme weather/climate change: In the majority of cases our water
resources, asset base and operations can cope with extreme weather conditions,
although these can become overwhelmed in intense situations. Climate change
projections highlight increased temperatures, rainfall, wind and more frequent
extreme variations in weather patterns. This means that climate change remains
a key focus for us, because of its impact on our capacity and capability for
service delivery, and because of the effect on the environment that we strive
to protect and enhance. We are committed to the principles set by the
Financial Stability Board's Task Force on Climate-related Financial
Disclosures (TCFD).

·     Demographic changes: Demographic changes, including population
growth and evolving age profiles, can impact the capacity and capability of
water and wastewater treatment and network assets; can affect demand on water
resources; and increase uncertainty in relation to pension obligations.

·     Legislative and regulatory change: Changes in legislation and/or
regulation can have implications for the business model, asset base and ways
of working. For example: the anticipated post-Brexit changes in law bring an
element of uncertainty; and the introduction of competition, while positive to
customers and markets, can affect ongoing revenue and the asset base.

·     Economic conditions: Macro events can have multiple financial
implications, including: lower revenue; increased bad debt; increased
operational cost; increased cost of borrowing; and a reduction in the
Regulatory Capital Value. The events can also impact the wider supply chain
with knock-on effects to our service delivery and cost to serve.

·     Asset health: General use, exposure to natural hazards, pressure
and load all contribute to the deterioration of assets. In addition, other
factors such as technological obsolescence and operating assets beyond their
optimal capacity to cope with increased demand (population growth and/ or
climate change) also affect asset health. Ageing assets, therefore, provide an
underlying and cross-business risk and uncertainty both to efficiency and for
the long-term resilience of asset integrity and the associated service
capability.

·     Culture: Embedded through processes, reward mechanisms, values and
behaviours, corporate culture is important to maintain high performance and
cuts across the majority of risks in the profile. In an increasingly
challenging business environment, our focus is to continue to embed a culture
of innovation, customer service and behaving in a responsible manner at the
same time as being open and transparent.

 

Common consequence themes

Each consequence is analysed for the financial and reputational implications
relative to multiple stakeholders. Categorisation of the consequences
illustrates four common impact themes:

·     Customer: Customers are impacted through our service offering, the
quality of their experience when dealing with us, and how our operational and
capital schemes affect them in the community.

·     Environment: Our assets, operations and capital programmes can have
a significant impact on the environment in both rural and urban settings. As a
major land owner and operator of a large fleet of vehicles, the way we manage
these also has environmental implications.

·     Investors: The vast majority of risks in the profile have financial
implications that could affect shareholder investment in the short and long
term. Reputational impact associated with ethics, environmental protection and
efficiency is also relevant for investors' interest in the company.

·     Employees: Our employees are fundamental to delivering our service
requirements as well as our strategic objectives. Equally, our employees can
be affected by multiple risks across the business, but primarily in relation
to employment and health, safety and wellbeing risks.

 

Our principal risks

 

1. Water service - risk stable

A failure to provide a secure supply of clean, safe drinking water and the
potential for a negative impact on public confidence in water supply.

 

Causal factors themes (Drivers/influences of risk)

·     Climate change

·     Demographic change

·     Legal and regulatory change

·     Asset health

 

Consequence themes and stakeholder groups

·     Customer

·     Environment

·     Investors

 

Appetite and tolerance

·     Water - Averse

 

Control/mitigation

·     Strict quality controls and sampling regime

·     Physical and chemical treatment with automation

·     Cleaning, maintenance and replacement of assets

·     Water resources and production planning

·     Pressure/flow management and leak detection

·     Integrated network and response capability

 

Top five event-based business risk (*most significant group risks)

·     Failure of Haweswater Aqueduct*

·     Water sufficiency*

·     Failure to treat water

·     Failure of the distribution system (leakage)

·     Dam failure

 

2. Wastewater service - risk increasing

The failure to remove, treat and return water to the environment and recycle
sludge to land.

 

Causal factors themes (Drivers/influences of risk)

·     Climate change

·     Demographic change

·     Legal and regulatory change

·     Asset health

 

Consequence themes and stakeholder groups

·     Customer

·     Environment

·     Investors

 

Appetite and tolerance

·     Wastewater - Prudent

·     Bioresources - Moderate

 

Control/mitigation

·     Physical and chemical treatment

·     Odour management systems

·     Drainage and wastewater management plans

·     Wastewater network operating model

·     Cleaning, maintenance and replacement of assets

·     Customer campaigns

 

Top five event-based business risk (*most significant group risks)

·     Wastewater network failure (sewer flooding)*

·     Failure to treat sludge*

·     Recycling biosolids to agriculture*

·     Wastewater treatment (permits)

·     Mersey Valley Sludge Pipeline

 

3. Retail and commercial - risk stable

Failing to provide good and fair service to domestic customers and third-party
retailers or a failure of or issue in relation to non-United Utilities Water
operations or businesses.

 

Causal factors themes (Drivers/influences of risk)

·     Legal and regulatory change

·     Economic conditions

·     Asset health

·     Culture

 

Consequence themes and stakeholder groups

·     Customer

·     Investors

 

Appetite and tolerance

·     Retail - Prudent

·     Commercial - Moderate

 

Control/mitigation

·     Customer-focused initiatives

·     Best practice collection techniques

·     Customer segmentation

·     Priority Services scheme

·     Data management and data sharing

·     Non-regulated operation governance

 

Top five event-based business risk (*most significant group risks)

·     Customer experience

·     Cash collection

·     Billing accuracy

·     Wholesale revenue collection

·     Developer services

 

4. Supply chain and programme delivery - risk increasing

The potential ineffective delivery of capital, operational or functional
processes/programmes including change.

 

Causal factors themes (Drivers/influences of risk)

·     Legal and regulatory change

·     Economic conditions

 

Consequence themes and stakeholder groups

·     Customer

·     Investors

·     Environment

·     Community

·     Suppliers

 

Appetite and tolerance

·     Supply Chain - Prudent

·     Capital Delivery - Moderate

 

Control/mitigation

·     Category management

·     Supplier relationship management

·     Capital, change and operational programme management

·     Portfolio, programme and project risk management

 

Top five event-based business risk (*most significant group risks)

·     Price volatility*

·     Unfunded developer programmes

·     Security of the supply chain

·     Dispute with supplier

·     Capital delivery programme

 

5. Resource - risk stable

The potential failure to provide appropriate resources (human, technological
or physical) required to support business activity.

 

Causal factors themes (Drivers/influences of risk)

·     Climate Change

·     Legal and regulatory change

·     Economic conditions

·     Asset health

·     Culture

 

Consequence themes and stakeholder groups

·     Customer

·     Investors

·     Employees

 

Appetite and tolerance

·     Resource - Moderate

 

Control/mitigation

·     Adoption of effective technology

·     Multiple communication channels

·     Training and personal development

·     Talent, apprentice and graduate schemes

·     Change programmes and innovative strategies

·     Maintenance, replacement or renovation of assets

 

Top five event-based business risk (*most significant group risks)

·     Land management

·     IT asset support

·     Loss or failure of NIS systems

·     Business critical data

·     Employee relations

 

6. Finance - risk stable

The potential inability to finance the business appropriately.

 

Causal factors themes (Drivers/influences of risk)

·     Demographic change

·     Legal and regulatory change

·     Economic conditions

·     Asset health

 

Consequence themes and stakeholder groups

·     Customer

·     Investors

·     Employees

 

Appetite and tolerance

·     Finance - Prudent

 

Control/mitigation

·     Long-term refinancing

·     Liquidity reserves

·     Counterparty credit exposure and settlement limits

·     Hedging strategies

·     Sensitivity analysis

·     Monitoring of the markets

 

Top five event-based business risk (*most significant group risks)

·     Credit ratings*

·     Pension scheme funding deficit*

·     Financial outperformance*

·     Tax efficiency/fair share*

·     Totex efficiency challenge*

 

7. Health, safety and environmental - risk increasing

The potential harm to employees, contractors, the public or the environment.

 

Causal factors themes (Drivers/influences of risk)

·     Climate change

·     Asset health

·     Culture

 

Consequence themes and stakeholder groups

·     Employee

·     Environment

·     Investors

·     Communities

 

Appetite and tolerance

·     Health, safety and welfare - Averse

·     Environment - Averse

 

Control/mitigation

·     Strong governance and management systems

·     Certification to ISO 45001 and ISO 14001

·     Benchmarking, auditing and inspections

·     Targeted engagement and improvement programmes

·     Carbon reduction initiatives

·     Self-generation of energy

 

Top five event-based business risk (*most significant group risks)

·     Carbon commitments*

·     Disease pandemic*

·     Occupational health exposure

·     Minor injuries

·     Process safety (bioresources and wastewater)

 

8. Security - risk stable

The potential for malicious activity (physical or technological) against
people, assets or operations.

 

Causal factors themes (Drivers/influences of risk)

·     Environmental Conditions

·     Asset health

·     Culture

 

Consequence themes and stakeholder groups

·     Customer

·     Investors

·     Employees

·     Community

 

Appetite and tolerance

·     CNI and SEMD - Averse

·     Other - Prudent

 

Control/mitigation

·     Physical and technological security measures

·     Strong governance, inspections and audits

·     Security authority liaison and NIS compliance

·     System and network integration

·     Business continuity and disaster recovery

·     Insurance

 

Top five event-based business risk (*most significant group risks)

·     Cyber*

·     Terrorism*

·     Criminality

·     Fraud

·     Data protection

 

9. Conduct and compliance - risk stable

The failure to adopt or apply ethical standards, or to comply with legal and
regulatory obligations and responsibilities.

 

Causal factors themes (Drivers/influences of risk)

·     Climate change

·     Demographic change

·     Legal and regulatory change

·     Economic conditions

·     Asset health

·     Culture

 

Consequence themes and stakeholder groups

·     Customer

·     Environment

·     Investors

·     Employees

·     Community

·     Suppliers

 

Appetite and tolerance

·     Legislation - Averse

·     Other - Prudent

 

Control/mitigation

·     Ethical supply chain, diversity and inclusivity policies

·     Data classification and levels of authorisation

·     Stakeholder engagement activities

·     Audits and peer reviews

·     Governance, risk assessment and horizon scanning

·     Brand comparisons and dashboard of culture metrics

 

Top five event-based business risk (*most significant group risks)

·     Water Plus

·     Bribery

·     Non-regulated asset

·     Procurement compliance

·     Corporate governance and listing rules compliance

 

10. Political and regulatory - risk increasing

Developments connected with the political, regulatory and legislative
environment.

 

Causal factors themes (Drivers/influences of risk)

·     Legal and regulatory change

·     Economic conditions

 

Consequence themes and stakeholder groups

·     Customer

·     Environment

·     Investors

·     Employees

 

Appetite and tolerance

Appetite or tolerance cannot be determined due to no genuine choice or control

 

Control/mitigation

·     Consultation with government and regulators

·     Communicate with customers

 

Top five event-based business risk (*most significant group risks)

·     Price Review 2024 outcome*

·     Upstream competition (bioresources)

·     DPC exit - HARP

·     ASHE index

·     Upstream competition (water resource)

 

The company's most significant event-based risks

The most significant event-based risks represent the ten highest-ranked risks
by exposure (likelihood of occurrence of the event multiplied by the most
likely financial impact) and those risks which have been assessed as having a
significantly high impact, but low likelihood.

 

Depending on the circumstances, financial impacts will include loss of
revenue, additional or extra cost, fines, regulatory penalties and
compensation. Reputational impact relative to our multiple stakeholders is
also assessed, reported and considered as part of the mitigation.

 

Summarised below are the top ten ranking risks (1-10), and those assessed as
having high impact, but low likelihood (A-F):

 

1. Price Review 2024 Outcome

Risk exposure: This risk focuses on the capacity and capability to develop a
business plan that creates value for customers, communities, and the
environment that is sustainable and resilient for the long term relative to
the unique characteristics of the region we serve, in light of multiple
influencing factors notably changing demographics, climate change and asset
health.

 

Control/mitigation: We have established cross-cutting work streams and theme
owners to identify the products and evidence required for the submission and
we will maintain a close dialogue with Ofwat throughout the process.

 

Assurance: Extensive customer research and several external providers have
been commissioned for technical optioneering. Second line assurance is
provided through a dedicated price review team and a PR24 programme board. An
internal audit is scheduled and external assurance is currently under
procurement.

 

 

2. Failure of the Haweswater Aqueduct

Risk exposure: The Haweswater Aqueduct is a key asset with current low
resilience due to deterioration, with failure potentially resulting in water
quality issues and/or supply interruptions to a large proportion of the United
Utilities customer base.

 

Control/mitigation: A capital project to replace the tunnel sections of the
aqueduct has already commenced with the completion in November 2020 of one
section. The remaining sections are due to be replaced as part of Haweswater
Aqueduct Resilience Programme (HARP) by 2029.

 

Assurance: Technical and geological advice and modelling have been sought
throughout the programme development, with second line assurance including
Engineering Technical Governance. Independent assurance is provided by
cyclical internal audits and external assurance over the competitively
appointed provider.

 

3. Wastewater network failure (sewer flooding)

Risk exposure: Equipment failure, collapses/bursts or inadequate
hydraulic/operational capacity to cope with extreme weather and population
growth, resulting in sewer flooding.

 

Control/mitigation: Preventative maintenance and inspection regimes, customer
campaigns and sewer rehabilitation programmes.

 

Assurance: Second line assurance provided by Wholesale Assurance, Engineering
Technical Governance and Flood Review Panel. Subject to regular internal
audits and external assurance of regulatory reporting.

 

4. Cyber

Risk exposure: Data and technology assets compromised due to malicious or
accidental activity, leading to a major impact to key business processes and
operations.

 

Control/mitigation: Multiple layers of control, including a secure perimeter,
segmented internal network zones, access controls, constant monitoring and
forensic response capability.

 

Assurance: Security stance reflects multiple sources of threat intelligence.
The Security

Steering Group provides second line assurance, with independent assurance
provided by cyclical internal audits and various technical audits by external
specialists.

 

5. Water sufficiency

Risk exposure: Water sufficiency is one of the most sensitive risks to
climate, with the frequency of recent periods of extended hot, dry weather
being evidence of changing circumstance and the potential for implementation
of water use restrictions on customers.

 

Control/mitigation: We produce a Water Resources Management Plan (WRMP) every
five years, which forecasts future demand and water availability under repeats
of historic droughts, adjusted for climate change. A statutory Drought Plan is
also developed every five years setting out the actions we will take in a
drought situation.

 

Assurance: The WRMP and Drought Plan are subject to various second and third
line assurance activities prior to publication.

 

6. Carbon Commitments

Risk exposure: This risk focuses on the capacity and capability to decarbonise
water and wastewater activity relevant to the Public Interest Commitments
(PIC) to achieve net zero by 2030 in light of the growth pressures, lack of
technological advances or innovation and the fundamental change of approach
required.

 

Control/mitigation: We will continue to develop near-term initiatives to
address process and energy emissions, and create woodland and restore
peatland, while responding to an evolving policy and technological landscape.
We are also developing a long-term strategy to reduce emissions and to fully
understand and optimise potential decarbonisation initiatives and pathways.

 

Assurance: Water industry research and technical support combined with a
Climate Change Mitigation Steering Group provides second line assurance. An
internal audit is scheduled and external assurance of emissions, regulatory
reporting lines and science-based targets has been established.

 

7. Failure to treat sludge

Risk exposure: This risk relates to the interdependency between wastewater and
bioresource treatment activity in light of changing demographics, asset health
and legislative/regulatory change. Industrial Emissions Directive (IED) now
applying to biological treatment of sewage sludge within AMP 7, with no
investment assigned to this requirement is a key factor.

 

Control/mitigation: The Throughput, Reliability, Availability, and
Maintainability (T-RAM) of our facilities is a key area of mitigation, with
formal Service Level Agreements between the two core activities. In relation
to IEDs, discussions at national level are being held to move the high capital
cost improvements into PR24.

 

Assurance: Wholesale Assurance and Engineering Technical Governance provide
second line assurance. Subject to cyclical internal audit and ad-hoc external
strategic reviews.

 

8. Recycling of biosolids to agriculture

Risk exposure: This risks represents various impact scenarios including
operational failures, increased restrictions or total ban of recycling
biosolids to agriculture. Referencing the EA's interpretation of the Farming
Rules for Water (FRfW) regulations and the increasing threat to recycling a
large proportion of biosolids.

 

Control/mitigation: United Utilities is accredited to the UK Biosolids
Assurance Scheme (BAS), which certifies that our treatment and recycling
activities meet regulatory requirements and best practice. We also work
closely with farmers and landowners and have robust standard operating
procedures established with contractors.

 

Assurance: Wholesale Assurance and Engineering Technical Governance provide
second line assurance. Subject to both cyclical internal and external audit.

 

9. Price volatility

Risk exposure: This risk reflects the inflationary pressures across all
commodities notably Energy, associated with the post COVID-19 economic bounce
back which have been exacerbated further by the conflict in the Ukraine.

 

Control/mitigation: Contract provision with suppliers, hedging policy and
supply agreements manage volatility and minimise vulnerability in the contract
and price risk with the suppliers including periods of agreed fixed pricing
and negotiation of CPI/H uplift on an annual basis.

 

Assurance: Market analysis and supplier engagement, combined with quarterly
business reviews provide second line assurance. Due to the scale of
procurement an energy governance panel has oversight over procurement and use.

 

10. Credit rating

Risk exposure: Credit ratings below internal targets, due to deterioration in
financial and/or operational performance and/or external factors (such as
inflation) resulting in more expensive funding.

 

Control/mitigation: Continuous monitoring of markets, and the management of
key financial risks within defined policy parameters

 

Assurance: Second line assurance provided by Financial Control and Quarterly
Business Reviews, with oversight provided by the treasury committee. The
treasury function is subject to regular internal audits.

 

A. Pensions deficit

Risk exposure: The potential for the pension scheme funding deficit to
increase because of life expectancy rates leading to additional contributions.

 

Control/mitigation: Constant monitoring combined with hedging against interest
rates, inflation and growth asset risk.

 

Assurance: Policy and oversight is led by the Pensions Review Management
Group, taking into account advice from accountancy and law firms. Pension
governance is subject to periodic internal audits.

 

B. Financial Outperformance

Risk exposure: Failure to achieve financial outperformance due to
macro-economic conditions and efficiency challenges, impacting the cost of
debt and delivery of the company business plan.

 

Control/mitigation: Interest rate and inflation management, ongoing monitoring
of markets and regulatory developments, and company business planning.

 

Assurance: Second line assurance and oversight is provided by the board and
treasury committee in addition to executive quarterly business reviews.
Subject to cyclical internal audit reviews.

 

C. Dam failure

Risk exposure: Uncontrolled release of a significant volume of water from
reservoirs due to flood damage, overtopping, earthquake or erosion leading to
catastrophic impacts downstream.

 

Control/mitigation: Each reservoir is regularly inspected by engineers. Where
appropriate, risk reduction interventions are implemented through a
prioritised investment programme.

 

Assurance: Various sources of second line assurance, including Supervising
Engineers, Dam Safety Group, Wholesale Assurance and regular board reviews.
Independent assurance is provided by Panel Engineers and internal audit.

 

D. Fair payment of tax

Risk exposure: Failure to maximise the available tax efficiencies and reliefs
due to changing mechanisms.

Control/mitigation: Tax policies and objectives cover: efficient structuring
of commercial activities; maintaining a robust governance and risk management
framework; and an open and transparent relationship with tax authorities.

 

Assurance: Tax policies are based on advice from multiple sources, including
accountancy firms. Third-party assurance is provided by internal audit and
accountancy firms.

 

E. Disease pandemic

Risk exposure: Serious illness in a large proportion of the UK population and
consequences to our workforce, the wider supply chain and macro economy.

 

Control/mitigation: The incident management process would be invoked,
supported by the Pandemic Response Plan. This includes the implementation of
multi-channel communication with non-pharmaceutical interventions as per
government guidance.

 

Assurance: Wholesale Assurance provide second line assurance, with internal
audit undertaking various reviews.

 

F. Terrorism

Risk exposure: A significant asset to be compromised by terrorist activity
leading to loss of supply, contamination and/or pollution.

 

Control/mitigation: A risk-based protection of assets in line with the
Security and Emergency Measures Direction (SEMD) and close liaison with the
Centre for the Protection of National Infrastructure (CPNI), regional counter
terrorist units, local agencies and emergency services.

 

Assurance: Security posture is based on various threat advisors. Second line
assurance is provided by the Security Steering Group. In addition, internal
audit undertake cyclical audits with external technical assurance being
delivered by specialists.

 

New and emerging risk

Following horizon scanning activity undertaken by the business, a watching
brief is held over risks/issues which are worthy of note due to their new,
emerging or reputational status, and typically have too high levels of
uncertainty or complexity to quantify.

 

·     Plastics: Attention on single-use plastic and microplastic
(plastics less than 5 mm) pollution is ongoing, with their presence in the
environment being linked to the water cycle. We are responding proactively and
have formed a two pillar approach to addressing plastics, focusing on
operational plastic waste and plastic in the water cycle.

 

·     Perfluoroalkyl and polyfluoroalkyl substances (PFAS): There is a
growing focus on PFAS chemicals including from our public liability insurers
who are looking to exclude related liability claims. PFAS are manufactured
chemicals used in everyday products. Known as 'forever chemicals', they are
persistent, bio accumulate and may be toxic even at low levels. We have
completed an assessment of the likely presence of PFAS in raw water sources,
the results of which are incorporated into the Drinking Water Safety Plan and
aligned to the requirements set out by the Drinking Water Inspectorate.

 

Conflict in Ukraine

The conflict in Ukraine has led to a number of risks emerging (growing,
developing or becoming more prominent) from a security and economic
perspective.

 

·     Cyber: The likelihood of the cyber risk has been increased to
reflect the rising tensions between Russia and the west, while taking into
account the adoption of increased security measures which include security
operations teams on extended high alert and the rapid deployment of technical
blocking of critical indicators of compromise.

·     Price volatility: This risk reflects inflationary uplift across
multiple commodities with energy the most volatile.

·     Security of the supply chain: This risk reflects the knock on
impact of inflationary pressure on manufacturing output with some production
facilities reducing operations. It also reflects sanctions imposed against
Russia and Belarus and the restriction or prevention of access to certain
goods.

·     Cash collection: Inflationary pressure is having a significant
impact on the cost of living, affecting customers' ability to pay bills.

·     Supplier viability: This risk reflects the impact the unprecedented
price increases are having on suppliers who cannot honour locked prices in
contracts and the threat of suppliers going into administration with a
knock-on effect to operations and the capital delivery programme.

·     Credit rating: Whilst underlying credit quality is not a concern,
the impact of high inflation on finance expense results in the potential for
Credit Agency thresholds to be breached when combined with other factors such
as additional investment spend to meet environmental and service improvements
over and above price review allowances.

 

Legislative/regulatory change

In addition to the emerging economic conditions exacerbated by the conflict in
Ukraine, legislative and regulatory change is also a prominent emerging theme
which impacts a number of event-based risks.

 

Relatively recent developments include uncertainty associated with the
Environment Agency's interpretation of the Industrial Emissions Directive
(IED) and Farming Rules for Water (FRfW) and implications for ongoing
compliance, process and investment across wastewater and bioresources risk.

 

As a responsible company, United Utilities is committed to the protection and
enhancement of the environment and can demonstrate many previous and current
initiatives, the most recent being the road map to 'better river health'
including a pledge to invest £230 million into 184 kilometres of rivers by
2025. We will continue to work closely with all our regulators and partners to
deliver better solutions including full cooperation with the ongoing industry
wide investigation by Ofwat and the Environment Agency into possible
unpermitted sewage discharges into rivers and watercourses.

 

The Environment Act, which was enacted in November 2021, has potentially far
more significant implications for the water sector, due to it being the UK's
new framework of environmental protection. Depending on how the new
legislation will be interpreted and applied, meeting its requirements may
demand a fundamental shift in the water industry's approach to environmental
risks, requiring significant investment across multiple AMPs.

 

Material litigation

The group robustly defends litigation where appropriate and seeks to minimise
its exposure by establishing provisions and seeking recovery wherever
possible. Litigation of a material nature is regularly reported to the group
board.

 

In relation to the Manchester Ship Canal Company matter reported in previous
years, a hearing was held in the Court of Appeal at the end of March 2022. A
decision is expected during summer 2022, which may provide further clarity in
relation to the rights and remedies afforded to the parties and others in
relation to discharges by water companies into the canal and other
watercourses.

 

Beyond this, there is nothing to report regarding material litigation,
including in respect of the Argentina multiparty 'class action' reported on in
previous years, and to which there have been no material developments.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This financial report contains certain forward-looking statements with respect
to the operations, performance and financial condition of the group. By their
nature, these statements involve uncertainty since future events and
circumstances can cause results and developments to differ materially from
those anticipated. These forward-looking statements include without limitation
any projections or guidance relating to the results of operations and
financial conditions of the group as well as plans and objectives for future
operations, expected future revenues, financing plans, expected expenditure
and any strategic initiatives relating to the group, as well as discussions of
our business plan and our assumptions, expectations, objectives and resilience
with respect to climate scenarios. The forward-looking statements reflect
knowledge and information available at the date of preparation of this
financial report and the company undertakes no obligation to update these
forward-looking statements. Nothing in this financial report should be
construed as a profit forecast.

 

Certain regulatory performance data contained in this financial report is
subject to regulatory audit.

 

This announcement contains inside information, disclosed in accordance with
the Market Abuse Regulation which came into effect on 3 July 2016 and for UK
Regulatory purposes the person responsible for making the announcement is
Simon Gardiner, Company Secretary.

 

LEI 2138002IEYQAOC88ZJ59

Classification - Full Year Results

 

Consolidated income statement

 

                                                                     Year ended  Year ended

31 March
31 March

2022
2021
                                                                     £m          £m

 Revenue                                                             1,862.7     1,808.0

 Staff costs (note 4)                                                (184.3)     (173.4)
 Other operating costs (note 5)                                      (461.7)     (420.3)
 Allowance for expected credit losses - trade and other receivables  (23.4)      (28.7)
 Other income                                                        4.4         3.6
 Depreciation and amortisation expense                               (418.2)     (422.3)
 Infrastructure renewals expenditure                                 (169.5)     (164.8)
 Total operating expenses                                            (1,252.7)   (1,205.9)

 Operating profit                                                    610.0       602.1
 Investment income (note 6)                                          19.4        25.0
 Finance expense (note 7)                                            (187.8)     (107.2)
 Allowance for expected credit losses - loans to joint ventures      0.1         3.7
 Investment income and finance expense                               (168.3)     (78.5)

 Profit on disposal of joint venture (note 11)                       -           36.7
 Share of profits of joint ventures (note 11)                        (1.8)       (9.3)

 Profit before tax                                                   439.9       551.0

 Current tax credit/(charge)                                         65.8        (79.2)
 Deferred tax charge                                                 (562.5)     (18.4)
 Tax (note 8)                                                        (496.7)     (97.6)

 (Loss)/Profit after tax                                             (56.8)      453.4

 All of the results shown above relate to continuing operations.

 Earnings per share (note 9)
 Basic                                                               (8.3)p      66.5p
 Diluted                                                             (8.3)p      66.3p

 Dividend per ordinary share (note 10)                               43.50p      43.24p

 

Consolidated statement of comprehensive income

 

                                                                                 Year ended  Year ended

31 March
31 March

2022
2021
                                                                                 £m          £m

 (Loss)/profit after tax                                                         (56.8)      453.4

 Other comprehensive income
 Items that may be reclassified to profit or loss in subsequent periods:
 Cashflow hedge effectiveness                                                    106.7       9.3
 Tax on items recorded within other comprehensive income (note 8)                (26.8)      (1.8)
 Foreign exchange adjustments (note 11)                                          -           (1.6)
 Foreign exchange adjustments reclassified to profit on disposal of joint        -           4.0
 ventures (note 11)
 Other comprehensive income that may be reclassified to profit or loss           79.9        9.9

 Items that will not be reclassified to profit or loss in subsequent periods:
 Remeasurement gains/(losses) on defined benefit pension schemes (note 12)       313.6       (82.7)
 Change in credit assumption for debt reported at fair value through profit and  (4.1)       (43.3)
 loss
 Cost of hedging - cross currency basis spread adjustment                        -           (12.7)
 Deferred tax adjustments in respect of prior years on net fair value gains      -           -
 Tax on items recorded within other comprehensive income (note 8)                (109.4)     36.6
 Other comprehensive income that will not be reclassified to profit or loss      200.1       (102.1)

 Total comprehensive income                                                      223.2       361.2

 

Consolidated statement of financial position

 

                                                              Year ended  Year ended

31 March
31 March

2022
2021
                                                              £m          £m
 ASSETS
 Non-current assets
 Property, plant and equipment                                12,147.5    11,799.0
 Intangible assets                                            160.8       181.1
 Interests in joint ventures and other investments (note 11)  16.6        0.1
 Inventories                                                  0.4         -
 Trade and other receivables                                  81.7        86.7
 Retirement benefit surplus (note 12)                         1,016.8     689.0
 Derivative financial instruments                             399.4       410.3
                                                              13,823.2    13,166.2

 Current assets
 Inventories                                                  17.8        18.3
 Trade and other receivables                                  222.7       229.2
 Current tax asset                                            74.4        6.9
 Cash and short-term deposits                                 240.9       744.1
 Derivative financial instruments                             58.0        14.4
                                                              613.8       1,012.9

 Total assets                                                 14,437.0    14,179.1

 LIABILITIES
 Non-current liabilities
 Trade and other payables                                     (835.2)     (798.3)
 Borrowings (note 13)                                         (7,671.0)   (7,797.0)
 Deferred tax liabilities                                     (2,148.1)   (1,449.5)
 Derivative financial instruments                             (136.7)     (107.8)
                                                              (10,791.0)  (10,152.6)

 Current liabilities
 Trade and other payables                                     (365.8)     (322.7)
 Borrowings (note 13)                                         (308.8)     (654.8)
 Provisions                                                   (13.5)      (11.1)
 Derivative financial instruments                             (0.5)       (6.9)
                                                              (688.6)     (995.5)

 Total liabilities                                            (11,479.6)  (11,148.1)

 Total net assets                                             2,957.4     3,031.0

 EQUITY
 Share capital                                                499.8       499.8
 Share premium account                                        2.9         2.9
 Other reserves (note 17)                                     416.2       336.3
 Retained earnings                                            2,038.5     2,192.0
 Shareholders' equity                                         2,957.4     3,031.0

 

Consolidated statement of changes in equity

 

 Year ended 31 March 2022                                                        Share capital  Share premium account  ((1))Other reserves  Retained earnings  Total

                                                                                 £m             £m                     £m                   £m                 £m
 At 1 April 2021                                                                 499.8          2.9                    336.3                2,192.0            3,031.0
 Loss after tax                                                                  -              -                      -                    (56.8)             (56.8)
 Other comprehensive income
 Remeasurement gains on defined benefit pension schemes (note 12)                -              -                      -                    313.6              313.6
 Change in credit assumption for debt reported at fair value through profit and  -              -                      -                    (4.1)              (4.1)
 loss
 Cashflow hedge effectiveness                                                    -              -                      106.7                -                  106.7
 Tax on items recorded within other comprehensive                                -              -                      (26.8)               (109.4)            (136.2)

 income (note 8)
 Total comprehensive income                                                      -              -                      79.9                 143.3              223.2
 Dividends (note 10)                                                             -              -                      -                    (295.5)            (295.5)
 Equity-settled share-based payments                                             -              -                      -                    4.8                4.8
 Exercise of share options-purchase of shares                                    -              -                      -                    (6.1)              (6.1)
 At 31 March 2022                                                                499.8          2.9                    416.2                2,038.5            2,957.4

 

 Year ended 31 March 2021                                                       Share capital  Share premium account  ((1))Other reserves  Retained earnings  Total

                                                                                £m             £m                     £m                   £m                 £m
 At 1 April 2020                                                                499.8          2.9                    336.7                2,122.7            2,962.1
 Profit after tax                                                               -              -                      -                    453.4              453.4
 Other comprehensive income
 Remeasurement losses on defined benefit pension schemes (note 12)              -              -                      -                    (82.7)             (82.7)
 Change in credit assumption for debt reported at fair value through profit or  -              -                      -                    (43.3)             (43.3)
 loss
 Cash flow hedge effectiveness                                                  -              -                      9.3                  -                  9.3
 Cost of hedging - cross currency basis spread adjustment                       -              -                      (12.7)               -                  (12.7)
 Tax on items recorded within other comprehensive income (note 8)               -              -                      0.6                  34.2               34.8
 Foreign exchange adjustments                                                   -              -                      (1.6)                -                  (1.6)
 Foreign exchange adjustments reclassified to profit on disposal of joint       -              -                      4.0                  -                  4.0
 venture
 Total comprehensive income                                                     -              -                      (0.4)                361.6              361.2
 Dividends (note 10)                                                            -              -                      -                    (291.9)            (291.9)
 Equity-settled share-based payments                                            -              -                      -                    3.6                3.6
 Exercise of share options - purchase of shares                                 -              -                      -                    (4.0)              (4.0)
 At 31 March 2021                                                               499.8          2.9                    336.3                2,192.0            3,031.0

 

( )

((1))Other reserves comprise the group's cumulative exchange reserve, capital
redemption reserve, merger reserve, cost of hedging reserve, and cash flow
hedging reserve. Further detail of movements in these reserves is included in
note 17.

 

Consolidated statement of cash flows

 

                                                            Year ended  Year ended

31 March
31 March

2022
2021
                                                            £m          £m
 Operating activities
 Cash generated from operations (note 15)                   1,061.6     1,037.2
 Interest paid                                              (121.9)     (136.7)
 Interest received and similar income                       3.6         7.4
 Tax paid                                                   (8.9)       (75.4)
 Tax received                                               -           26.9
 Net cash generated from operating activities               934.4       859.4

 Investing activities
 Purchase of property, plant and equipment                  (609.0)     (610.4)
 Purchase of intangible assets                              (19.5)      (33.6)
 Grants and contributions received                          1.8         5.0
 Extension of loans to joint ventures (note 19)             (13.0)      (2.0)
 Dividends received from joint ventures (note 11)           -           6.4
 Proceeds from disposal of investments (note 11)            -           85.3
 Net cash used in investing activities                      (639.7)     (549.3)

 Financing activities
 Proceeds from borrowings net of issuance costs             173.7       909.7
 Repayment of borrowings                                    (681.8)     (703.5)
 Dividends paid to equity holders of the company (note 10)  (295.5)     (291.9)
 Exercise of share options - purchase of shares             (6.1)       (4.0)
 Net cash used in financing activities                      (809.7)     (89.7)
 Effects of exchange rate changes                           1.5         -
 Net increase/(decrease) in cash and cash equivalents       (513.5)     220.4
 Cash and cash equivalents at beginning of the year         733.6       513.2
 Cash and cash equivalents at end of the year               220.1       733.6

 

 

NOTES

 

1. Basis of preparation and accounting policies

 

The condensed consolidated financial statements for the year ended 31 March
2022 have been prepared in accordance with the Disclosure and Transparency
Rules of the Financial Conduct Authority.

 

The condensed consolidated financial statements do not include all of the
information and disclosures required for full annual financial statements and
do not comprise statutory accounts within the meaning of section 434 of the
Companies Act 2006, but are derived from the audited financial statements of
United Utilities Group PLC for the year ended 31 March 2022, for which the
auditors have given an unqualified opinion.

 

The comparative figures for the year ended 31 March 2021 do not comprise the
group's statutory accounts for that financial year. Those accounts have been
reported upon by the group's auditor and delivered to the registrar of
companies. The report of the auditor was unqualified and did not include a
reference to any matters to which the auditor drew attention by way of
emphasis without qualifying their report and did not contain a statement under
section 498(2) or (3) of the Companies Act 2006.

 

The condensed consolidated financial statements have been prepared in
accordance with the requirements of the Companies Act 2006, and with
UK-adopted international accounting standards. They have been prepared on the
going concern basis under the historical cost convention, except for the
revaluation of financial instruments, accounting for the transfer of assets
from customers and the revaluation of infrastructure assets to fair value on
transition to IFRS.

 

The accounting policies, presentation and methods of computation are prepared
in accordance with International Financial Reporting Standards as adopted by
the United Kingdom, and are consistent with those applied in the audited
financial statement of United Utilities Group PLC for the year ended 31 March
2021.

 

Going concern

 

The financial statements have been prepared on the going concern basis as the
directors have a reasonable expectation that the group has adequate resources
for a period of at least 12 months from the date of the approval of the
financial statements and that there are no material uncertainties to disclose.

 

In assessing the appropriateness of the going concern basis of accounting the
directors have reviewed the resources available to the group in the form of
cash and committed facilities as well as consideration of the group's capital
adequacy, along with a baseline plan that incorporates latest views of the
current economic climate, including high levels of inflation in the near term.
The directors have considered the magnitude of potential impacts resulting
from uncertain future events or changes in conditions, and the likely
effectiveness of mitigating actions that the directors would consider
undertaking. The baseline position has been subjected to a number of severe
but reasonable downside scenarios in order to assess the group's ability to
operate within the amounts and terms (including relevant covenants) of
existing facilities. These scenarios consider: the potential impacts of
increased totex costs, including a significant one-off totex impact arising in
the assessment period; lower CPIH inflation; elevated levels of bad debt;
outcome delivery incentive penalties; and the impact of these factors
materialising on a combined basis. Mitigating actions were considered to
include deferral of capital expenditure; a reduction in other discretionary
totex spend; the close out of derivative asset balances; and the deferral or
suspension of dividend payments.

 

Consequently, the directors are satisfied that the group will have sufficient
funds to continue to meet its liabilities as they fall due for at least 12
months from the date of approval of the financial statements, and that the
severe but plausible downside scenarios indicate that the group will be able
to operate within the amounts and terms (including relevant covenants) of
existing facilities. The financial statements have therefore been prepared on
a going concern basis.

 

Update on critical accounting judgements and key sources of estimation
uncertainty associated with Covid-19 and increases in the cost of living

 

Following the onset of the Covid-19 pandemic at the beginning of the 2020
calendar year, the group has disclosed a number of associated critical
accounting judgements and key sources of estimation uncertainty in its annual
reports and financial statements for the years ended 31 March 2020 and 31
March 2021. The most significant of these related to revenue recognition and
the group's allowance for expected credit losses in respect of receivables,
and accounting for the group's joint venture, Water Plus, although the level
of judgement and estimation associated with the latter of these has reduced
markedly following the restructuring of Water Plus's financing arrangements by
its shareholders as described in note 11.

 

These judgements and estimates have been kept under review during the year to
31 March 2022 in order to ensure that they reflect the most up-to-date
information available as the situation has developed, including changes in the
broader economic outlook; increased power and food costs, due in large part to
the ongoing conflict in Ukraine, are likely to have a significant impact on
many of the group's customers. The significant increases in the cost of living
have largely superseded the direct effects of the Covid-19 pandemic as the key
source of uncertainty. An update on these judgements and estimates is as
follows:

 

Accounting estimate - unbilled revenue in respect of measured customers: The
amount of revenue recognised for measured services (where customers have a
water meter) is directly impacted by their level of consumption. Estimation is
required in relation to the volume of water and wastewater services provided
to these customers where recent meter read data is not available.

 

Estimated usage is based on historical meter read data, judgement, and
assumptions. Since 2020, consumption patterns have been significantly impacted
by changes brought about by the Covid-19 pandemic. Household consumption has
been above levels normally seen due to customers spending more time at home,
while non-household consumption has been below normal levels as a result of
temporary business closures resulting from lockdown measures.

 

While lockdown measures have now eased, household consumption remains higher
than pre-pandemic levels. Customer behaviours appear to have changed as a
result of the pandemic, with many household customers choosing to spend more
time at home during the year for a number of reasons, including international
travel restrictions that have been in place, businesses transitioning to
hybrid working arrangements that facilitate increased levels of working from
home, and other businesses moving employees to permanent home working.
However, levels of household consumption have fallen in the final quarter of
the reporting period, suggesting that patterns of future usage in the longer
term are yet to fully crystallise.

 

However, over the course of the previous financial year, and through the year
to 31 March 2022, the group has seen an increase in the volume of household
meter reads, which have now returned to pre-pandemic levels. Meter read data
collected during the period therefore reflect the increased consumption
brought about by the pandemic, together with current usage patterns. This in
turn has been captured in actual bills and therefore the level of estimation
has steadily reduced, with the system generated revenue accrual now largely
aligned to independent automated meter read (AMR) data. AMR data is captured
for around 25 per cent of all measured household customers, and has been
extrapolated across the remaining measured household customer base. The
reasonableness of this approach has been validated through an assessment of
bills raised in the period.

 

During the prior year a number of code changes were introduced by Ofwat and
MOSL in relation to the non-household retail market. These included the
introduction of annual consumption adjustments which allowed retailers to
reduce or suspend volumetric charges for customers impacted by the lockdown of
their activities. As many of these adjustments were initially applied by
retailers to broad sector groups, this inevitably included some end users who
continued to consume above their yearly volume estimate. This resulted in a
higher level of estimation being required in relation to non-household
consumption than would normally be the case. These estimates were based on the
latest available consumption information, considering the vacancy status of
all premises during the period and recognising the number and timing of meter
reads received. In the year to 31 March 2022, we have seen retailers begin to
remove consumption adjustments, which together with an increase in meter reads
has reduced the level of estimation required. Non-household wholesale revenue
recognised during the period is around £10 million higher than the total
in-period revenue estimated in the CMOS system as part of the normal
settlement process (around £14 million higher at 31 March 2021).

 

Accounting estimate - allowance for expected credit losses in respect of
household trade receivables: The onset of the Covid-19 pandemic introduced a
high level of uncertainty around how economic conditions may impact the
recoverability of household receivables. This uncertainty has continued
throughout the year to 31 March 2021 and is further compounded in the year to
31 March 2022 and to date by increases in the cost of living that are likely
to impact a significant proportion of the group's customer base.

 

Cash collection during the year has been stronger than previously anticipated,
and is higher than the current year collection rate in the prior year,
although the economic situation remains uncertain. This is particularly the
case given increases in the cost of living that may further impact the ability
of some customers to pay. A range of collection scenarios have been used to
inform the bad debt charge applied. These take account of current year cash
collection rates as well as collection of prior year and legacy debt and
consider experience before the onset of the Covid-19 pandemic, periods of
lockdown, and periods of recovery, as well as current levels of economic
uncertainty. This supports a bad debt charge of 1.8 per cent of household
revenue at the reporting date, which compares with a charge equivalent to 2.2
per cent of household revenue recognised for the year ended 31 March 2021.

 

2. Segmental reporting

 

The board of directors of United Utilities Group PLC (the board) is provided
with information on a single segment basis for the purposes of assessing
performance and allocating resources. The group's performance is measured
against financial and operational key performance indicators which align with
its three strategic themes to deliver the best service to customers, at the
lowest sustainable cost, in a responsible manner. The board reviews revenue,
operating profit, and gearing, along with operational drivers, at a
consolidated level. In light of this, the group has a single segment for
financial reporting purposes.

 

3. Revenue

 

                               2022     2021
                               £m       £m

 Wholesale water charges       776.5    751.0
 Wholesale wastewater charges  946.3    941.5
 Household retail charges      68.9     64.1
 Other                         71.0     51.4
                               1,862.7  1,808.0

 

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
removal and treatment 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.

 

Wholesale water and wastewater charges relate to services provided to
household customers and non-household retailers. Household retail charges
relate solely to the margin applied to the wholesale amounts charged to
residential customers. These wholesale charges and the applicable retail
margin are combined in arriving at the total revenues relating to water and
wastewater services provided to household customers. No margin is applied to
wholesale water and wastewater services provided to non-household retailers.

 

Other revenues comprise a number of smaller non-core income streams including
those relating to energy generation and export, property sales, 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. Staff costs

 

In order to give a clearer view of the group's total staff costs, these now
include the cost of non-permanent staff who have worked for the group, whose
costs were previously included within hired and contracted services presented
within other operating costs, which have also been re-presented (see note 5).
Accordingly, staff costs and other operating costs for the year ended 31 March
2021 have been re-presented, which has resulted in an increase in staff costs
and a reduction in the cost of hired and contracted services of £11.6 million
compared with what was presented in the published financial statements for
that year.

 

Staff costs have increased during the year due primarily to an increase in the
average number of staff employed by the group, including the impact of
in-sourcing of certain activities that were previously carried out by third
parties.

 

Included within staff costs were £0.4 million (2021: £1.9 million) of
restructuring costs.

 

5. Other operating costs

 

                                                    2022   2021
                                                    £m     £m

 Power                                              99.6   83.6
 Hired and contracted services                      95.4   84.7
 Materials                                          90.8   82.2
 Property rates                                     90.5   89.4
 Regulatory fees                                    28.4   28.0
 Insurance                                          16.9   13.1
 Accrued innovation costs                           5.9    6.2
 Loss on disposal of property, plant and equipment  3.9    10.7
 Cost of properties disposed                        3.0    2.6
 Other expenses                                     27.3   19.8
                                                    461.7  420.3

 

During the year ended 31 March 2022, the group experienced inflationary
pressures across much of its operating cost base. This was most notable in
relation to power costs, which increased by £16.0 million compared with the
prior year, largely due to price increases. Through its progressive hedging
policy the group was able to lock in the commodity price on the majority of
its consumption for the year ended 31 March 2022 before the most recent energy
price rises, and therefore secured an average rate over the year of £78 per
MWh. This compares favourably with the market rate of over £200 per MWh as at
the year-end reporting date and has been fundamental to the group's ability to
minimise the impact of price rises on its cost base.

 

Incremental costs totalling £5.8 million have been incurred during the year
in relation to the implementation of Software as a Service (SaaS)
arrangements, which are increasingly expected to be recognised within
operating costs in accordance with clarifications on the appropriate
accounting treatment issued by the IFRS Interpretations Committee (IFRIC)
during the year. The majority of SaaS implementation costs in previous years
have been accounted for as intangible asset additions. These prior year
amounts have not been restated to reflect the group's updated approach as they
have not been material.

 

Research and development expenditure for the year ended 31 March 2022 was
£1.2 million (2021: £1.0 million).  In addition, £5.9 million (2021: £6.2
million) of costs have been accrued by United Utilities Water Limited in
relation to the Innovation in Water Challenge scheme operated by Ofwat for
AMP7. These expenses directly offset amounts recognised in revenue during each
year intended to fund innovation projects across England and Wales as part of
an industry-wide scheme to promote innovation in the sector. The amounts
accrued will either be spent on innovation projects that the group
successfully bids for or will be transferred to other successful water
companies in accordance with the scheme rules.

 

6. Investment income

                                        2022  2021
                                        £m    £m

 Interest receivable                    5.1   7.5
 Net pension interest income (note 12)  14.3  17.5
                                        19.4  25.0

 

7. Finance expense

 

                                                          2022     2021
                                                          £m       £m

 Interest payable                                         330.7    181.7
 Net fair value gains on debt and derivative instruments  (142.9)  (74.5)
                                                          187.8    107.2

 

Interest payable is stated net of £52.7 million (2021: £30.4 million)
borrowing costs capitalised in the cost of qualifying assets within property,
plant and equipment and intangible assets during the year. Interest payable
includes a £227.9 million (2021: £52.6 million) non-cash inflation expense
in relation to the group's index-linked debt.

 

In addition to the £192.6 million finance expense, the allowance for expected
credit losses in relation to loans extended to the group's joint venture,
Water Plus, has decreased by £0.1 million during the current year (2021:
decrease of £3.7 million).

 

Net fair value gains on debt and derivative instruments includes £33.2
million income (2021: £21.5 million income) due to net interest on
derivatives and debt under fair value option, and £28.3 million expense
(2021: £1.3 million expense) due to non-cash inflation changes on the group's
index-linked derivatives.

 

Underlying finance expense, which forms part of the group's alternative
performance measures (APMs) is calculated by adjusting net finance expense and
investment income of £168.3 million (2021: £78.5 million) reported in the
Income Statement to exclude the £138.0 million of fair value gains (2021:
£54.3 million fair value gains) on debt and derivative instruments included
in the above table.

 

8. Tax

 

During the year ended 31 March 2022 there was a current tax credit of £72.5
million (31 March 2021: £0.6 million) and a deferred tax charge of £66.9
million (31 March 2021: £1.8 million credit) relating to prior years. The
current year figure mainly relates to optimising the available tax incentives
on our innovation related expenditure, for multiple earlier years.

 

The split of the total tax charge between current and deferred tax was due to
ongoing timing differences in relation to deductions on capital investment,
and unrealised gains and losses on treasury derivatives. Going forward, we
expect the total effective tax rate, ignoring non-recurring items such as the
current year rate change adjustment, to remain broadly in line with the
headline rate.

 

The tax adjustments taken to equity primarily relate to remeasurement
movements on the group's defined benefit pension schemes. As in the prior year
the rate at which the deferred tax liabilities are measured on the group's
defined benefit pension scheme is 35 per cent, being the rate applicable to
refunds from a trust.

 

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 year.

                                                                        2022    2021
                                                                        £m      £m

 (Loss)/Profit after tax attributable to equity holders of the company  (56.8)  453.4

 Weighted average number of shares in issue in millions
 Basic                                                                  681.9   681.9
 Diluted                                                                683.8   683.5

 Earnings per share in pence
 Basic                                                                  (8.3)   66.5
 Diluted                                                                (8.3)   66.3

 

10. Dividends

                                                         2022   2021
                                                         £m     £m
 Dividends relating to the year comprise:
 Interim dividend                                        98.9   98.3
 Final dividend                                          197.8  196.6
                                                         296.7  294.9

 Dividends deducted from shareholders' equity comprise:
 Interim dividend                                        98.9   98.3
 Final dividend                                          196.6  193.6
                                                         295.5  291.9

 

The proposed final dividends for the years ended 31 March 2022 and 31 March
2021 were subject to approval by equity holders of United Utilities Group PLC
as at the reporting dates, and therefore have not been included as liabilities
in the consolidated financial statements as at 31 March 2022 and 31 March 2021
respectively.

 

The final dividend of 29.00 pence per ordinary share (2021: 28.83 pence per
ordinary share) is expected to be paid on 1 August 2022 to shareholders on the
register at the close of business on 24 June 2022. The ex-dividend date for
the final dividend is 23 June 2022.

 

The interim dividend of 14.50 pence per ordinary share (2021: 14.41 pence per
ordinary share) was paid on 1 February 2022 to shareholders on the register at
the close of business on 17 December 2021.

 

11. Joint ventures and other investments

                                                                   2022   2021
                                                                   £m     £m

 Joint ventures at the start of the year                           -      46.8
 Additions*                                                        18.3   -
 Share of losses of joint ventures                                 (1.8)  (9.3)
 Less: losses allocated to other components of long-term interest  -      14.2
 Dividends received from joint ventures                            -      (6.4)
 Currency translation differences                                  -      (1.6)
 Disposal of joint venture                                         -      (43.7)
 Joint ventures at the end of the year                             16.5   -
 Other investments                                                 0.1    0.1
 Interest in joint ventures and other investments                  16.6   0.1

 

*Additions of £18.3 million comprise a £32.5 million subscription in the
equity share capital of Water Plus during the year, net of £14.2 million of
the group's share of joint venture losses recognised in prior years that were
allocated against its long-term interest in Water Plus previously recognised
within amounts owed by related parties (see below).

 

Following the disposal of the group's overseas investment in AS Tallinna Vesi
(Tallinn Water) in March 2021, the group's interests in joint ventures mainly
comprises its 50 per cent interest in Water Plus Group Limited (Water Plus),
which is jointly owned and controlled by the group and Severn Trent PLC under
a joint venture agreement.

 

The group's total share of Water Plus losses for the year was £1.8 million
(2021: £8.9 million share of losses), all of which has been recognised in the
income statement.

 

As reported in the group's annual report and financial statements for the year
ended 31 March 2021, at that date a fully drawn £32.5 million revolving
credit facility extended to Water Plus by United Utilities PLC was considered
to form part of the group's long-term interest in the Water Plus joint venture
as there was a clear expectation that it would be converted into additional
equity share capital. As such, the group's £14.2 million share of losses
recognised in the income statement for the year then ended (comprising the
group's share of Water Plus losses for the year of £8.9 million and £5.3
million of the group's previously unrecognised share of losses related to
prior years) was allocated against this fully drawn facility, resulting in a
net reported balance of £18.3 million at 31 March 2021, which was included in
amounts owed by related parties. The conversion of this facility to equity
share capital was executed on 23 April 2021 and therefore the brought forward
balance of £18.3 million has been included as an addition to the group's
joint ventures balance during the year.

 

Details of transactions between the group and its joint ventures are disclosed
in note 19.

 

12. 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:

 

                                                 2022  2021
                                                 %pa   %pa

 Discount rate                                   2.80  2.05
 Pension increases                               3.75  3.35
 Pensionable salary growth (pre-2018 service):
 ESPS                                            3.75  3.35
 UUPS                                            3.75  3.35
 Pensionable salary growth (post-2018 service):
 ESPS                                            3.75  3.35
 UUPS                                            3.20  2.75
 Price inflation - RPI                           3.75  3.35
 Price inflation - CPI((1))                      3.20  2.75

 

Note:

((1))The CPI price inflation assumption represents a single weighted average
rate derived from an assumption of 2.85 per cent pre-2030 and 3.65 per cent

post-2030 (31 March 2021: 2.45 per cent pre-2030 and 3.25 per cent post-2030).

 

The discount rate is consistent with a high quality corporate bond rate, with
2.80 per cent being equivalent to gilts plus 110 basis points (2021: 2.05 per
cent being equivalent to gilts plus 75 basis points).

 

In September 2019, the Chancellor of the Exchequer highlighted the UK
Statistics Authority's proposals to change RPI to align with CPIH (Consumer
Prices Index, including housing costs). Plans to reform RPI and bring it in
line with CPIH from 2030 were confirmed on 25 November 2020, though this is
subject to judicial review. Broadly CPIH increases are expected to average
around 1 per cent per annum below RPI in the long term (about the same as
CPI), so this change could have a significant impact on many pension schemes.
In arriving at the company's best estimate for RPI, an inflation risk premium
of 0.2 per cent (2021: 0.2 per cent) has been deducted from the breakeven
inflation rate for the year ended 31 March 2022. The deduction of this 0.2 per
cent inflation risk premium has resulted in a reduction in the fair value of
defined benefit obligations of around £90 million, and therefore an increase
in the net retirement benefit surplus of around £90 million, compared with no
inflation risk premium being deducted. There is no allowance for any change in
the inflation risk premium post 2030 as a result of RPI reform.

 

The assumption for CPI inflation also includes a 0.2 per cent inflation risk
premium (2021: 0.2 per cent) and is set by deducting a 'wedge' from the RPI
inflation assumption to reflect structural differences. For pre-2030 inflation
this wedge has been estimated at 0.9 per cent per annum, reducing to 0.1 per
cent per annum post-2030 given that RPI and CPI are expected to converge. The
impact of this reduction in the post-2030 wedge as a result of the
confirmation of RPI reforms is a circa £8 million increase to the defined
benefit obligation and therefore a decrease in the defined benefit surplus
compared with the wedge remaining at 0.9 per cent per annum after 2030. A
reduction in RPI will result in a reduction to pension scheme liabilities.
However, as the group's pension schemes are hedged for RPI inflation, this
will also result in a comparable reduction to pension scheme assets.

 

At 31 March 2022, the base tables used for the mortality in retirement
assumption are the Continuous Mortality Investigation's (CMI) S3PA (2021:
S2PA) year of birth tables, with a scaling factor of 109 per cent (2021: 106
per cent) and 115 per cent (2021: 109 per cent) for male pensioners and
non-pensioners respectively and 110 per cent (2021: 104 per cent) and 111 per
cent (2021: 105 per cent) for female pensioners and non-pensioners
respectively, reflecting the profile of the membership. At 31 March 2022,
future improvements in mortality are based on the extended CMI 2021 (2021: CMI
2020) projection model, with a long-term annual rate of improvement of 1.25
per cent (2021: 1.25 per cent). The long-term annual rate of improvement is a
subjective estimate, and an increase in this rate to 1.50 per cent would have
resulted in a circa £30 million increase in the fair value of defined benefit
obligations, and therefore a reduction in the overall retirement benefit
surplus.

 

To adjust for the impact of circumstances arising as a result of the COVID 19
pandemic on future mortality trends for the schemes' membership, an adjustment
has been made to reflect an expectation that the direct and indirect
consequences of the pandemic will have an adverse impact on longevity in the
short to medium term. Accordingly, in arriving at the mortality assumptions
for the current year the group has included a w2021 parameter of 10 per cent
within the CMI2021 projections, which is a subjective estimate that has an
impact of circa £30 million decrease in the defined benefit obligation.  All
other parameters within the future improvements model are consistent with
prior year.

 

To adjust for the impact of circumstances arising as a result of the COVID 19
pandemic on future mortality trends for the schemes' membership, an adjustment
has been made to reflect an expectation that the direct and indirect
consequences of the pandemic will have an adverse impact on longevity in the
short to medium term.

 

The net pension income before tax in the income statement in respect of the
defined benefit schemes is summarised as follows:

 

                                                              2022    2021
                                                              £m      £m

 Current service cost                                         7.5     4.9
 Curtailments/settlements                                     -       0.6
 Administrative expenses                                      2.1     3.0
 Pension expense charged to operating profit                  9.6     8.5
 Net pension interest credited to investment income (note 6)  (14.3)  (17.5)
 Net pension income credited before tax                       (4.7)   (9.0)

 

The reconciliation of the opening and closing net pension surplus included in
the statement of financial position is as follows:

 

                                                                     2022       2021
                                                                     £m         £m

 At the start of the year                                            689.0      754.1
 Income recognised in the income statement                           4.7        9.0
 Contributions                                                       9.5        8.6
 Remeasurement gains/(losses) gross of tax                           313.6      (82.7)
 At the end of the year                                              1,016.8    689.0

 The closing surplus at each reporting date is analysed as follows:
                                                                     2022       2021
                                                                     £m         £m

 Present value of defined benefit obligations                        (3,018.9)  (3,295.7)
 Fair value of schemes' assets                                       4,035.7    3,984.7
 Net retirement benefit surplus                                      1,016.8    689.0

 

The IAS 19 remeasurement gain of £313.6 million (2021: £82.7 million loss)
has largely resulted from an increase in credit spreads during the year
partially offset by an RPI inflation assumption increase of 0.4 per cent
(2021: 0.55 per cent increase). The impact of movements in credit spreads is
less pronounced on a scheme funding basis compared with the remeasurement gain
recognised on an IAS 19 accounting basis as the discount rate used for valuing
obligations utilises a fixed credit spread assumption.

 

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 2022.

 

The latest finalised funding valuation was carried out as at 31 March 2021,
and determined that the schemes were fully funded on a low-dependency basis
without any funding deficit that requires additional contributions from the
company over and above those related to current service and expenses.

 

Member data used in arriving at the liability figure included within the
overall IAS 19 surplus has been based on the finalised actuarial valuation as
at 31 March 2021 for both the group's ESPS and UUPS schemes.

 

Defined contribution schemes

During the year, the group made £26.1 million (2021: £23.4 million) of
contributions to defined contribution schemes which are included in staff
costs.

 

13. Borrowings

 

New borrowings raised during the year ended 31 March 2022, all of which were
issued under the Euro medium-term note programme, were as follows:

 

·    On 27 August 2021, the group issued JPY11 billion fixed rate notes
due August 2030.

·    On 27 September 2021, the group traded £100 million fixed rate notes
due October 2028.

 

On issue, the JPY bond was immediately swapped to £73.7 million of principal
outstanding.

 

In April 2022, the group issued a £100 million term loan facility to Export
Development Canada due April 2030.

 

The group renewed four of its undrawn committed borrowing facilities in the
period and extensions to existing facilities were approved on a further four,
with amounts available under these facilities totalling £200 million. Two
further facilities were entered into after the period end with a total amount
available of £50 million.

 

Borrowings at 31 March 2022 include £60.9 million in relation to lease
liabilities (2021: £60.0 million), of which £57.6 million (2021: £56.7
million) was classified as non-current and £3.3 million (2021: £3.3 million)
was classified as current.

 

14. Fair values of financial instruments

 

The fair values of financial instruments are shown in the table below.

                                                                                 2022                        2021
                                                                                 Fair value  Carrying value  Fair value  Carrying value
                                                                                 £m          £m              £m          £m
 Financial assets at fair value through profit or loss
 Derivative financial assets - fair value hedge                                  156.3       156.3           275.6       275.6
 Derivative financial assets - held for trading                                  190.1       190.1           142.6       142.6
 Derivative financial assets - cash flow hedge                                   111.0       111.0           6.5         6.5
 Investments                                                                     0.1         0.1             0.1         0.1
 Financial liabilities at fair value through profit or loss                                                  -           -
 Derivative financial liabilities - fair value hedge                             (87.4)      (87.4)          (12.6)      (12.6)
 Derivative financial liabilities - held for trading                             (49.8)      (49.8)          (102.1)     (102.1)
 Derivative financial liabilities - cash flow hedge                              -           -               -           -
 Financial liabilities designated as fair value through profit or loss           (369.9)     (369.9)         (373.6)     (373.6)
 Financial instruments for which fair value does not approximate carrying value                              -           -
 Financial liabilities in fair value hedge relationships                         (2,511.5)   (2,494.0)       (2,913.6)   (2,895.5)
 Other financial liabilities at amortised cost                                   (6,283.7)   (5,115.9)       (6,568.1)   (5,182.7)
                                                                                 (8,844.8)   (7,659.5)       (9,545.2)   (8,141.7)

 

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 £2,206.6
million (2021: £2,766.0 million) for financial liabilities in fair value
hedge relationships, and £2,383.8 million (2021: £2,321.6 million) for other
financial liabilities at amortised cost.

 

The £497.2 million decrease (2021: £2,906.2 million increase) in 'level 1'
fair value liability measurements primarily reflects the maturity of the 5.75%
£375 million bond in March 2022, which was classified as a 'level 1' fair
value measurement in the prior financial year, and a reduction in the number
of observable quoted bond prices in active markets at 31 March 2022.

 

In the absence of an appropriate quoted price, the group has applied
discounted cash flow valuation models utilising market available data, which
are classified as 'level 2' valuations. More information in relation to the
valuation techniques used by the group and the IFRS 13 hierarchy can be found
in the audited financial statements of United Utilities Group PLC for the year
ended 31 March 2022.

 

The reason for the decrease in the difference between the fair value and
carrying value of the group's borrowings at 31 March 2022 compared with the
position at 31 March 2021 is due to an increase in both the risk free rate and
credit spreads.

 

15. Cash generated from operations

                                                                              2022     2021
                                                                              £m       £m

 Operating profit                                                             610.0    602.1
 Adjustments for:
 Depreciation of property, plant and equipment                                377.0    379.8
 Amortisation of intangible assets                                            41.2     42.5
 Loss on disposal of property, plant and equipment                            3.9      10.7
 Amortisation of deferred grants and contributions                            (15.8)   (15.0)
 Equity-settled share-based payments charge                                   4.8      3.6
 Changes in working capital:
 Increase/(decrease) in inventories                                           0.1      (1.7)
 Decrease in trade and other receivables                                      13.2     18.1
 Increase in trade and other payables                                         24.7     2.5
 Decrease/(increase) in provisions                                            2.4      (5.3)
 Pension contributions paid less pension expense charged to operating profit  0.1      (0.1)
 Cash generated from operations                                               1,061.6  1,037.2

 

16. Net debt

                                                                 2022       2021
                                                                 £m         £m

 At the start of the year                                        7,305.8    7,227.5
 Net capital expenditure                                         626.7      639.0
 Dividends (note 10)                                             295.5      291.9
 Interest                                                        118.3      129.3
 Inflation expense on index-linked debt (note 7)                 227.9      52.6
 Tax                                                             8.9        48.5
 Non-cash movements in lease liabilities                         2.4        4.1
 Extension of loans to joint ventures                            13.0       2.0
 Proceeds from disposal of joint ventures and other investments  -          (85.3)
 Dividends from joint ventures                                   -          (6.4)
 Other                                                           4.4        5.3
 Fair value movements                                            28.7       34.5
 Cash generated from operations (note 15)                        (1,061.6)  (1,037.2)
 At the end of the year                                          7,570.0    7,305.8

 

Fair value movements includes the indexation expense relating to the group's
inflation swap portfolio of £29.9 million (2021: a credit of £0.7 million).
The remaining fair value and foreign exchange movements in the year on the
group's bond and bank borrowings are materially hedged by the fair value swap
portfolio.

 

Notional net debt totals £7,534.3 million as at 31 March 2022 (2021:
£7,268.5 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.

 

17. Other reserves

 

Year ended 31 March 2022

 

                                                                          Cumulative exchange reserve  Capital redemption reserve  Merger reserve  Cost of hedging reserve  Cash flow hedge reserve  Total
                                                                          £m                           £m                          £m              £m                       £m                       £m
 At 1 April 2021                                                          -                            1,033.3                     (703.6)         0.4                      6.2                      336.3
 Changes in fair value recognised in other comprehensive income                                                                                                             108                      108

                                                                          -                            -                           -               -
 Amounts reclassified from other comprehensive income to profit and loss  -                            -                           -               -                        (1.3)                    (1.3)
 Tax on items recorded within other comprehensive income                  -                            -                           -               -                        (26.8)                   (26.8)
 At 31 March 2022                                                         -                            1,033.3                     (703.6)         0.4                      86.1                     416.2

 

Year ended 31 March 2021

 

                                                                           Cumulative exchange reserve  Capital redemption reserve  Merger reserve  Cost of hedging reserve  Cash flow hedge reserve  Total
                                                                           £m                           £m                          £m              £m                       £m                       £m
 At 1 April 2020                                                           (2.4)                        1,033.3                     (703.6)         10.7                     (1.3)                    336.7
 Changes in fair value recognised in other comprehensive income            -                            -                           -               (12.7)                   9.3                      (3.4)
 Tax on items recorded within other comprehensive income                   -                            -                           -               2.4                      (1.8)                    0.6
 Foreign exchange adjustments                                              (1.6)                        -                           -               -                        -                        (1.6)
 Foreign exchange adjustments reclassified to profit on disposal of joint  4.0                          -                           -               -                        -                        4.0
 ventures
 At 31 March 2021                                                          -                            1,033.3                     (703.6)         0.4                      6.2                      336.3

 

The capital redemption reserve arose as a result of a return of capital to
shareholders following the reverse acquisition of United Utilities PLC by
United Utilities Group PLC in the year ended 31 March 2009. The merger reserve
arose in the same year on consolidation and represents the capital adjustment
to reserves required to effect the reverse acquisition.

 

The group recognises the cost of hedging reserve as a separate component of
equity. This reserve reflects accumulated fair value movements on
cross-currency swaps resulting from changes in the foreign currency basis
spread, which represents a liquidity charge inherent in foreign exchange
contracts for exchanging currencies and is excluded from the designation of
cross-currency swaps as hedging instruments.

 

The group designates a number of swaps hedging non-financial risks in cash
flow hedge relationships in order to give a more representative view of
operating costs. Fair value movements relating to the effective part of these
swaps are recognised in other comprehensive income and accumulated in the cash
flow hedging reserve.

 

18. Commitments and contingent liabilities

 

At 31 March 2022, there were commitments for future capital expenditure
contracted but not provided for of £292.8 million (2021: £336.7 million).

 

Since 2016, the group has received indications from a number of property
search companies (PSCs) that they intend to claim compensation for amounts
paid in respect of CON29DW water and drainage search reports, which they
allege should have been provided to them either free of charge or for a
nominal fee in accordance with the Environmental Information Regulations. In
April 2020, a group of over 100 PSCs, comprising companies within the groups
that had previously issued notice of intended claims, served proceedings on
all of the water and sewerage undertakers in England and Wales, including
United Utilities Water Limited, for an unspecified amount of compensation.
This is an industry-wide issue, and while the litigation has progressed during
the year it remains in its early stages. The litigation's likely direction and
the quantum of any compensation being claimed is uncertain at this stage;
however, based on the information currently available, the likelihood of the
claim's success is considered to be low, and any potential outflow is not
expected to be material.

 

The group has credit support guarantees as well as general performance
commitments and potential liabilities under contract that may give rise to
financial outflow. The group has determined that the possibility of any
outflow arising in respect of these potential liabilities is remote and, as
such, there are no contingent liabilities to be disclosed in this regard
(2021: none).

 

19. Related party transactions

 

The related party transactions with the group's joint ventures during the
period and amounts outstanding at the period end date were as follows:

 

                                                                      2022   2021
                                                                      £m     £m

 Sales of services                                                    363.1  362.9
 Charitable contributions advanced to related parties                 0.1    -
 Purchases of goods and services                                      -      -
 Costs recharged at nil margin under transitional service agreements  -      -
 Interest income and fees recognised on loans to related parties      2.8    3.7

 Amounts owed by related parties                                      116.4  113.8
 Amounts owed to related parties                                      -      2.4

 

Sales of services to related parties during the year mainly represent
non-household wholesale charges to Water Plus that were billed and accrued
during the period. These transactions were on market credit terms in respect
of non-household wholesale charges, which are governed by the wholesale
charging rules issued by Ofwat.

 

Charitable contributions advanced to related parties during the prior 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 31 March 2022, amounts owed by joint ventures, as recorded within trade and
other receivables in the statement of financial position, were £116.4 million
(March 2021: £113.8 million), comprising £28.5 million (March 2021: £27.1
million) of trade balances, which are unsecured and will be settled in
accordance with normal credit terms, and £80.4 million (March 2021: £86.7
million) relating to loans. £6.1 million owed by Water Plus relating to the
repayment of amounts surrendered as consortium relief tax losses is also
included within the amounts owed by joint ventures as at 31 March 2022.

 

Included within these loans receivable were the following amounts owed by
Water Plus:

 

·    £79.4 million (2021: £66.3 million) outstanding on a £100.0
million revolving credit facility provided by United Utilities PLC, with a
maturity date of December 2023, bearing a floating rate interest rate of the
Bank of England base rate plus a credit margin. This balance comprises £80.5
million outstanding, net of a £1.1 million allowance for expected credit
losses (2021: £67.5 million net of a £1.2 million allowance for expected
credit losses); and

 

·    £1.0 million (2021: £0.7 million) receivable being the £10.6
million (2021: £10.3 million) fair value of amounts owed in relation to a
£12.5 million unsecured loan note held by United Utilities PLC, with a
maturity date of 28 March 2027, net of a £0.1 million (2021: £0.1 million)
allowance for expected credit losses and £9.5 million of the group's share of
joint venture losses relating to historic periods as the loan note is deemed
to be part of the group's long-term interest in Water Plus. This is a zero
coupon shareholder loan with a total amount outstanding at 31 March 2022 and
31 March 2021 of £12.5 million, comprising £10.6 million (2021:
£10.3million) receivable measured at fair value, and £1.9 million (2021:
£2.2 million) recorded as an equity contribution to Water Plus recognised
within interests in joint ventures.

 

In the prior year, amounts owed by Water Plus also included £18.3 million
outstanding on a £32.5 million revolving credit facility provided by United
Utilities PLC, comprising £32.5 million outstanding net of the group's £14.2
million share of Water Plus losses allocated against this amount as at 31
March 2021. At that date, the facility formed part of the group's long-term
interest in the Water Plus joint venture given that there was a clear
expectation that this revolving credit facility would be replaced with
additional share capital, with this transaction subsequently executed in April
2021. Accordingly, this £18.3 million balance ceased to be treated as a
related party receivable and was recognised as an addition to the group's
joint ventures balance during the year ended 31 March 2022 (see note 11).

 

A further £1.4 million (2021: £1.4 million) of non-current receivables was
owed by other related parties at 31 March 2022.

 

During the year, 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 £54.1 million, of which £32.1 million related to
guarantees to United Utilities Water Limited.

 

At 31 March 2022, amounts owed to related parties were nil (March 2021: £2.4
million). The amount outstanding at 31 March 2021 included £1.1 million due
to Water Plus for the surrender of consortium relief tax losses, and a small
amount of trade balances settled in accordance with normal credit terms. These
amounts were paid during the current year bringing this balance to a nil
position.

 

 20. Events after the reporting period

 

In March 2022, the process to market the group's renewable energy business,
United Utilities Renewable Energy Limited (UURE), for sale commenced having
been approved by the group's board of directors earlier in the year. As at the
31 March 2022 reporting date, the criteria for presenting the assets and
liabilities of the UURE disposal group as held for sale in accordance with
IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' had not
yet been met as the active programme to locate a buyer and complete the
planned sale was only subsequently initiated in May 2022. The assets that are
subject to the sales process primarily comprise property, plant and equipment
with a carrying value of £64.6 million in the group's consolidated statement
of financial position as at 31 March 2022.

 

In addition to this, after the reporting period the group raised new
borrowings and entered into new undrawn committed borrowing facilities as
described in note 13.

 

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The responsibility statement below has been prepared in connection with the
group's full annual report for the year ended 31 March 2022. Certain parts
thereof are not included within this announcement.

 

Responsibilities Statement

We confirm that to the best of our knowledge:

-     the financial statements have been prepared in accordance with
UK-adopted international accounting standards; give a true and fair view of
the assets, liabilities, financial position and profit or loss of the company
and the undertakings included in the consolidation taken as a whole; and

-     the strategic report includes a fair review of the development and
performance of the business and the position of the issuer and the
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face.

 

We consider the annual report, taken as a whole, is fair, balanced and
understandable and provides the information necessary for shareholders to
assess the group's position and performance, business model and strategy.

 

The directors of United Utilities Group PLC at the date of this announcement
are listed below:

 

Sir David Higgins

Steve Mogford

Phil Aspin

Mark Clare

Louise Beardmore

Liam Butterworth

Stephen Carter

Kath Cates

Alison Goligher

Paulette Rowe

Doug Webb

 

This responsibility statement was approved by the board and signed on its
behalf by:

 

 

 Steve Mogford              Phil Aspin
 25 May 2022                25 May 2022
 Chief Executive Officer    Chief Financial Officer

 

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