REG - United Utilities Grp - Half-year Report
24/11/2021 07:00
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RNS Number : 3400T United Utilities Group PLC 24 November 2021
United Utilities Group PLC
24 November 2021
HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2021
Strong purpose - Performing well for customers and communities
· 6% real reduction in typical household bills since the start of AMP7
· Upper quartile for customer satisfaction; on track for a C-MeX reward
· Backing the Consumer Council for Water's (CCW) drive to launch a
national social tariff
· More than 200,000 customers supported through extensive affordability
schemes
· Welcoming a record 95 apprentices onto our award winning apprentice
scheme for 2021
· Helping 250 young people through the Kickstart scheme
· Committed £300,000 to eight North West charities to improve local
rivers
Protecting the environment - Delivering a low carbon future and enhancing
biodiversity
· Awarded top 4* environmental performance rating for 2020
· 100% of electricity from renewable sources
· First in sector to secure Science Based Targets initiative (SBTi)
approval for carbon emissions targets
· On track to achieve Net Zero by 2030
· Working in partnership with the Environment Agency to deliver
catchment-wide Systems Thinking
· Enhancing biodiversity; planting 1 million trees and restoring 1,000
ha of peatland
A digital utility - Delivering our AMP7 plans while generating value
· Digital transformation continues at pace, delivering value for all
stakeholders
· Accelerating investment to deliver operational improvements earlier
· Delivering reductions in sewer flooding incidents through innovative
applications of Systems Thinking
· On track to deliver c£20m net customer ODI rewards in 2021/22 and
c£150m in total for AMP7
Financial resilience - Robust financial performance and resilient to risks
· Underlying1 operating profit of £333m up 4%
· Cash collection remains strong with household bad debt improving to
1.8% in the first half of the year
· Strong balance sheet; A3 credit rating with Moody's and fully funded
pension schemes
· Hedging policies mitigating risk and delivering sustainable
performance
· Prices locked-in on 80% of AMP7 capital programme
· Around 95% hedged to power commodity price rises for 2021/22
· Interim dividend of 14.50p, in line with AMP7 dividend policy
Key financials
Six months ended
30 September 2021 30 September 2020
Revenue £932.3m £894.4m
Reported operating profit £332.8m £318.5m
Underlying operating profit(1) £332.8m £318.5m
Reported earnings per share (pence) (31.7)p 23.8p
Underlying earnings per share(1) (pence) 28.4p 29.2p
Interim dividend per ordinary share (pence) 14.50p 14.41p
Net regulatory capital spend(2) £303.2m £276.4m
RCV gearing(3) 62% 63%
(1) Underlying measures are defined in the tables within the underlying profit
section and reflect a change in approach to alternative performance measures
(APMs) implemented during the financial year ended March 2021 with prior
period numbers re-presented for comparability
(2) Net regulatory capital spend excludes infrastructure renewals expenditure
(3) Regulatory capital value (RCV) gearing calculated as group net debt/United
Utilities Water Limited's shadow RCV (outturn prices)
Steve Mogford, Chief Executive Officer, said:
"At a time when many families are struggling with a higher cost of living, we
have reduced typical water bills for households in our region by 6 per cent in
real terms over the last two years. We're also offering more help than ever
before for vulnerable customers and households that are struggling to pay.
"Climate change and population growth are challenges we must all confront, and
we will continue to invest to make our services more resilient and strengthen
our ability to respond to, and recover from, extreme weather events. Our £2
billion investment programme will also help our region's economy to grow,
generate jobs and develop skills in our communities.
"We're committed to delivering our six carbon pledges, which will help us
achieve our ambition of net zero by 2030. We have already delivered our pledge
to source 100 per cent of our electricity from renewable sources. As well as
reducing our carbon footprint, we are committed to protecting the natural
environment and ensuring no net loss of biodiversity.
"We've continued with the great start that we've made to AMP7, benefitting
from the acceleration of our capital programme and investment in Systems
Thinking. Our strong operational performance delivers efficiency gains and
improvements to outcome delivery incentives, and is enabling us to drive
further value for our shareholders."
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 Wednesday 24
November 2021, 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
Our digital transformation and investment in long-term sustainable performance
are helping us to deliver improvements in service to customers, and to protect
and enhance the environment we operate in. We have built on the strong start
to AMP7 that we delivered in the first year of the regulatory period and
remain on track to deliver our targets. We continue to deliver our services in
an environmentally sustainable, economically beneficial and socially
responsible manner and believe passionately in leveraging our investment
programme to help keep the North West economy moving as we emerge from the
pandemic.
We continue to help those customers who are struggling most to pay their bills
through our extensive suite of support schemes. The temporary extension to the
social tariff that we secured in the early stages of the pandemic has now been
made permanent, meaning we have an additional £15 million of support
available in each of the remaining years of AMP7 to help customers at risk of
falling into debt. To support these customers longer term, we are backing the
Consumer Council for Water's drive for a national social tariff; a key
development for a region like ours that suffers from extreme deprivation.
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. We report our performance below in line with the key stakeholder groups
for whom we create value, along with the KPI for that stakeholder group.
Communities
Our work puts us at the heart of local communities in the North West of
England, where customers and employees live and work. We understand the impact
our work can have on everyday lives across our region, and we seek to play an
active role in tackling the issues that matter most to these communities. Our
approach is to develop strong relationships and build partnerships where we
work together to generate solutions. We look after beautiful landscapes and
open our land to the public, which supports the regional tourism industry and
offers physical and mental health and wellbeing benefits for communities
through access to relaxation and recreation.
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 between 2010
and 2020. Last year, our direct community investment was £2.1 million
(calculated using the B4SI method) which was slightly lower than we were
targeting to invest, mainly due to lower community activity as a result of the
impact of COVID-19. As we emerge from the pandemic, we expect our community
investment to increase. In addition to the investment covered by the B4SI
method, we make further contributions to our communities such as payments to
our Trust Fund to help those struggling to pay their bills.
· Partnerships
We invest in community partnerships to tackle issues more effectively, to find
new solutions to the challenges we face and to access new funding streams,
driving efficiency and a better overall outcome. Working with a range of
partners can often result in our investment tackling water issues delivering
wider value such as other biodiversity enhancements. This summer we signed two
memorandum of understandings with the RSPB and the Rivers Trust. These
partners, held in high esteem by local communities and with a broad membership
base, enhance the credibility of what we do. The partnership with the RSPB
includes its management of Naddle Farm on our Haweswater estate where we aim
to benefit biodiversity and water quality and develop a sustainable farming
model for the future. If this proves successful, we aim to replicate this
approach on other areas of our catchment land, tapping into natural capital
markets including green finance initiatives and environmental land management
schemes to leverage funding for beneficial land management projects.
· Helping young people
We are supporting the government's Kickstart programme by providing placements
in various roles across the North West. Each Kickstarter has a dedicated
skills coach and receives job-related and employability skills training. Since
April 2021, 45 Kickstarters have joined our business and so far 10 have found
full time employment with us or our suppliers. The government has extended the
scheme to March 2022 and we will continue to provide opportunities to young
people in our region.
In 2021, we have taken on a record 95 apprentices into roles such as process
controllers, field service engineers and customer service agents and 24
graduates have joined us on our future leader, finance and engineering
schemes. We have made good progress in recruiting apprentices from more
diverse backgrounds - 31 per cent of apprentices that started with us in
September are female and 18 per cent are from ethnic minorities and in
addition, 20 per cent of apprentices this year disclosed a disability or
learning difficulty. This represents continued success in our efforts to
recruit a more diverse talent pipeline and is a positive result against a
backdrop of low attrition levels, regional variations in ethnic diversity and
difficulties attracting females for science, technology, engineering and maths
(STEM) roles. We are creating a further 150 jobs, through our entry level
opportunities as either apprentices or graduates who will start with us in
2022 to add to our existing talent pipeline.
· Charitable support
We have committed £300,000 to community groups across the North West as part
of our Catchment Systems Thinking (CaST) fund. This funding is linked to our
catchment management approach and supports projects that deliver community
engagement with nature or help shape and promote natural capital markets. One
of the first projects to receive funding is led by the Mersey Rivers Trust and
focuses on establishing community participation on the lower catchment area of
the River Bollin. It aims to increase the number of people connecting with
nature and accessing local blue-green space for health and wellbeing. The
project will also engage volunteers and landowners in restoring the reed bed
habitat at Tatton Mere, a popular recreational site near Knutsford, in
Cheshire.
· Community engagement
Directly engaging with communities gives us a chance to hear what customers
think and the opportunity to highlight ways we can work together to address
issues. One of the first events we attended since pandemic restrictions eased
this year was the RHS Tatton Flower Show where we engaged customers on water
saving tips and sponsored a garden of resilience. The garden addressed the
challenges of extremes of weather and the stresses and strains of the
pandemic. It gave visitors ideas for making outdoor spaces better able to cope
with too much or too little rain and incorporated ideas to encourage people to
take time out and contemplate their own personal resilience. The garden won
three awards at the show and will continue to inspire gardeners at its new
permanent home at the RHS Bridgewater in Salford.
· Access to our land for recreational use
In spring we launched a new podcast series to connect people with the North
West's outdoor spaces. Each themed episode of 'Acres of Nature' takes an
in-depth look at the land we manage through the eyes of people who live, work
and visit there. Available to all on Spotify, Acres of Nature is all about
bringing people closer to nature and podcast themes have included history,
nature and wellbeing.
Since the first COVID-19 lockdown in spring 2020, there has been an increase
in anti-social behaviour on our catchment land with issues such as wild
camping, illegal fires and littering. We have been working with local groups
at several sites to address this. At Macclesfield Forest, we have joined
forces with the rural crime team from Cheshire Police and rangers from the
Peak District National Park to tackle anti-social behaviour by undertaking
joint patrols at busy times to remind visitors to enjoy the area responsibly.
Customers
We put customers at the heart of everything we do. This relentless focus drove
us to deliver significant and continuous improvements over AMP6, ending the
period as a leading water and wastewater company. We have started this AMP
strongly with customer satisfaction remaining high, despite the challenging
environment brought about by the pandemic. Serving many of the most
economically deprived areas in the country, we are always mindful of the need
to help customers who struggle to pay their bills. We have an extensive range
of schemes offering financial assistance and tailored support for customers
struggling with affordability and vulnerability. We have committed to provide
£71 million in financial support to customers over AMP7 and the temporary
extension to the social tariff that we secured at the start of the COVID-19
pandemic to support those customers most affected has now been made permanent
meaning that we have an additional £15 million per annum of support available
for each of the remaining years of AMP7.
Our key performance indicator to measure customer satisfaction over AMP7 is
Ofwat's C-MeX measure, in which we target being in positive reward territory.
In 2020/21 we earned a £2.1 million reward and for the first six months of
this year we are on track to deliver a higher level of reward as we continue
to be the highest performing listed company. We are proud to have been
reaccredited this month with the Institute of Customer Service - Service Mark
with Distinction award and are one of only 15 brands across the UK to achieve
the award with Distinction.
· Customer service
Our customer service metrics have been strong so far this year and we are
pleased that as a result we have seen a 14 per cent reduction in written
complaints.
We continue to see the benefits of increasing the availability and performance
of our digital channels, driving both service improvements and cost
efficiencies. Over 1 million customers engage with us digitally and we are
pleased to have improved our rating on google reviews to 4.3 out of 5 and
customers rate us 4.7 out of 5 on the App store.
We have been proactive and used targeted communications with customers to
offer support to those impacted financially by the pandemic and struggling to
pay. We have achieved all of our reputational performance commitments, most
notably recertification to the enhanced BSI standard 18477:2010 for our
Priority Services scheme that supports over 150,000 customers, along with
recognition as providing the best customer support initiative at the Utilities
and Telecoms Awards for the support provided to customers during the pandemic.
· Operational performance for customers
Our AMP7 business plan includes 46 customer commitments, delivering the
outcomes that are important to customers and measured through customer outcome
delivery incentives (ODIs).
Our performance has been strong across the broad range of our activities with
us achieving over 80 per cent of our performance commitments in 2020/21 - the
highest in the sector. Having benefited from the great start we made to AMP7
and the additional investment we made towards the end of AMP6, our strong
performance so far in the AMP positions us well as the frontier performance
level across common measures inevitably moves forward at PR24.
We have installed a network of 70,000 sensors delivering real-time data to our
integrated control centre (ICC) and allowing us to optimise the performance of
our water network. As a result, leakage is at its all-time lowest ever level
and currently 5 per cent lower than when we started the AMP. Supply
interruptions have halved since the beginning of AMP7; a significant
improvement in the service we provide to customers, with fewer than ever
experiencing the disruption of a water supply interruption. Both leakage and
supply interruptions are key water ODIs.
As part of our plans, we are investing around £100 million in Dynamic Network
Management (DNM) - a ground breaking application of Systems Thinking using
state of the art sensors and predictive machine intelligence to move to a more
proactive management of our wastewater network. Our investment in DNM is on
track and delivering and as a result, we expect to deliver a net positive ODI
reward across our basket of flooding measures for AMP7.
In AMP7 there are more ODIs related to how we interact with and support
customers. Through the development of an in-house app, we can better identify
unbilled but occupied properties, securing an ODI reward on voids of £28
million over the AMP. The affordability support we provide to those who need
it most has enabled us to lift a significant number of customers out of water
poverty. We therefore expect to achieve a maximum reward against this measure.
We continue to work hard to encourage customers to save water through water
efficiency programmes, helping them to preserve this precious resource and
save money on their bills. Customers have spent more time at home during the
pandemic and used more water for sanitation, increasing per capita consumption
(PCC) measures. We have been driving enhanced customer engagement and over
60,000 customers have now signed up for our 'get water fit' app, helping
customers to save water and save money. This, coupled with a programme of
shadow metering combined with our lowest bill guarantee, encourages more
customers to switch to a water meter and is changing customer behaviour to
reduce consumption. Recognising that the long term impact of COVID-19 remains
uncertain and that there may also be a variety of drivers of changes in
behaviour, Ofwat has proposed to assess company performance for the PCC
customer ODI at the end of the AMP when fuller facts and evidence of absolute
and relative company performance are available.
· Haweswater Aqueduct Resilience Programme (HARP)
In November 2020, we successfully completed the replacement of the Hallbank
section of the Haweswater Aqueduct and, along with our framework contractor,
were named Utility Project of the Year by the Pipeline Industries Guild, one
of the world's most respected pipeline associations. The completion of the
work at Hallbank was the first milestone in the much larger Haweswater
Aqueduct Resilience Programme (HARP). Work to replace the tunnel sections of
the aqueduct is expected to be undertaken using a direct procurement for
customers (DPC) approach. Under DPC we are competitively tendering for
services in relation to the delivery of HARP for a third party competitively
appointed provider (CAP) to deliver the design, build, maintenance and also
financing for the replacement of six tunnel sections of the Haweswater
Aqueduct. The contract will be in place for a 25 year term following the
completion of the construction, during which the CAP is paid a monthly Unitary
Charge to recover its costs as well as an end of concession payment at the end
of the term to reflect the residual value of the assets. We have been
progressing our plans to start the DPC tender in 2022. If the tender process
proceeds as planned, contract award is anticipated in 2023, with construction
to begin later in the AMP.
· Cash collection
Despite the challenging economic environment following the COVID-19 pandemic,
our overall cash collection continues to perform well. We are encouraged that
the number of customers that pay by direct debit has been maintained at around
70 per cent and remains one of the highest levels across the industry.
Overall, the proportion of customers on a payment plan has remained stable at
around 80 per cent providing a high level of collection certainty for a
significant proportion of the household customer base.
So far this year we have been extremely pleased to have been shortlisted for
five external awards for our credit management and collections services. Our
industry leading approach to collections and innovative affordability
offerings have ensured we were well placed to respond to the challenges
brought about by the pandemic. We have further enhanced the use of credit
reference agency partnerships, leveraging additional sophisticated credit
insight to inform our collections strategy. This will facilitate continued
improvements in our collections activity supporting our ability to collect
cash from customers who have the ability to pay, but attempt to avoid doing
so.
· Affordability
We have an extensive range of schemes available to help customers and around
200,000 are currently benefitting from that help. Last year we were able to
support 73,000 additional customers through the swift proactive action we took
to secure support and regulatory approval for an extension to the scale and
scope of our social tariff. This temporary extension has now been made
permanent, meaning we have the additional £15 million per annum of support
available for each of the remaining years of AMP7, providing additional
support to help prevent customers from falling into debt. This supplements the
£71 million financial support we committed to provide over AMP7 - the largest
of any water company.
We continually look for ways to enhance our affordability processes, to make
it easier for customers to access the support that is available to them. We
are proud to be the first UK water company to roll out a real-time Open
Banking income verification tool that makes it easier for us to understand
customer eligibility for reduced-rate social tariffs. This modernises and
drives efficiency into our income verification process with over 40 per cent
of customers we speak to now using this capability. As a result, we are able
to passport customers immediately onto the right affordability schemes,
enhancing the customer experience and enabling savings on processing costs.
Following the success of this initial phase, we are exploring the wider use of
Open Banking in other customer interactions, for example enhancing payment
conversations with customers to improve the overall sustainability of payment
plans.
We share data with the Department for Work and Pensions (DWP) - leveraging the
new provisions under the Digital Economy Act - to assist people living in
poverty. In doing so, we are able to identify customers in receipt of state
benefits and offer support to those customers who need our help the most. It
is particularly beneficial in identifying customers eligible for our Help to
Pay tariff as older customers who are struggling to pay are typically harder
to engage with. These new provisions help us to proactively apply the reduced
tariff to their account. The DWP data share arrangement will also enhance our
audit and customer reapplication processes. The ability to include a benefit
check at the point of on-boarding and reapplication means eligible customers
can automatically continue to benefit from low bill support.
The Consumer Council for Water (CCW) published its independent Affordability
Review in the summer in which it made recommendations on how to improve the
help available to customers who may struggle to pay their water bills. We are
backing CCW's drive for a national social tariff; a key development for a
region like ours that suffers from extreme deprivation. We are currently
working with CCW on two pilots coming out of the Affordability Review, the
first of which is a trial of a new digital payment plan giving customers more
flexibility over how and when they make their payments. This gives customers
the option to pay at whatever frequency suits their personal circumstances as
long as they meet agreed payment milestones. We are also leading the Universal
Credit transition pilot; increasing promotion of the support we have available
for customers who are transitioning onto Universal Credit. We are relaunching
the scheme to raise awareness of the help available for customers struggling
to pay while waiting for their first Universal Credit payment.
Employees
Our people are critical to the success of our business and it is important we
give them the opportunity to develop their skills and knowledge and support
them with the most effective technology. We made over 300 changes to working
arrangements during the pandemic and we have been focusing in recent months on
reviewing what future ways of working will look like and how hybrid working
may look for some of our employees. We continue to build on our diversity and
inclusion agenda, which underpins all aspects of our organisation. Increasing
the diversity of our workforce ensures we have access to a broader set of
views and we want colleagues to feel valued, supported and respected in the
workplace.
Our key performance indicator to measure value created for our employees over
AMP7 is our engagement score, in which we target being at least as good as the
UK High Performance Norm benchmark. Our last survey scored 89 per cent
engagement, which is five per cent above the UK High Performance Norm and is
the highest engagement score we have achieved while comparatively tracking
engagement over the last six years. It is also a five per cent increase from
2020 engagement levels and is 15 per cent better than the UK Norm and nine per
cent better than the Utilities Norm. We are extremely proud that our recent
Glassdoor rating has increased to 4.7 out of 5, placing us as the leading UK
utility company and is an excellent position for achieving a ranking in
Glassdoor's 'Best Company to Work' index. In addition, we have been
shortlisted as finalists for Employer of the Year, Utility Awards 2021 all
testimony to our great employees and the focus on making United Utilities a
brilliant place to work.
· Committed to equality, diversity and inclusion
We continue to play an important role in evolving our inclusive culture, with
a growing membership and executive sponsors for each of the four employee
network groups. We have a strong focus on educating, raising awareness and
celebrating cultural events. Recognising that our leaders are pivotal to
creating the right environment for inclusion right across the business, we
have invested in inclusive leadership training for all leaders and managers.
We have been bringing the outside in with guest speakers to stimulate and
challenge ourselves.
We are building an inclusive culture to ensure our employees can bring their
whole selves to work. In July 2021, we launched our first diversity survey,
'All About Me', with over 2,000 employees sharing data about themselves beyond
their role. We will continue to build on our diversity data, collecting
information as part of our ongoing recruitment approach. This will help inform
what we might do differently to support employees, such as launching an
Employee Ability Passport, and it creates a strong baseline for any future
diversity reporting.
We have made bold public commitments such as the Race at Work Charter, the
Valuable 500 pledge and joining the 10,000 Black Intern Programme, offering 40
roles to black students next summer across many different business areas. For
the second year running, we are listed in the Financial Times Diversity
Leaders Ranking which recognises Europe's most inclusive companies, reflecting
our focus on inclusive leadership.
Achieving the Armed Forces Gold Award once again, United Utilities has had
its Employer Recognition Scheme (ERS) reaccredited, recognising our
considerable commitment to supporting the Armed Forces community.
· Training and development
Our award winning technical training centre continues to go from strength to
strength. We are the only technical training centre in the water sector
accredited by Ofsted meaning we can maximise the apprentice levy. As part of
our further capability development we have launched our Digital Skills
Academy, a new learning portal for employees to access digital learning
content to upskill them for their roles now and in the future. This helps to
ensure we have skilled and competent colleagues able to embrace new and next
ways of working.
· Adapting to a hybrid way of working
We have an active Employee Voice Panel, chaired by Alison Goligher, one of our
Non-Executive Directors, with representatives from across the business areas
and at all levels. The panel has continued to meet during the pandemic,
holding virtual sessions with invites extended to all our Non-Executive
Directors. In the last panel in September, key topics discussed included next
ways of working and the key strategic challenges for the Board. After
facilitating home working for over 3,000 of our employees, over 330 colleagues
have piloted new ways of working, shaping a new hybrid way of working that
maintains business performance, enhances engagement and aligns to our digital
utility strategy without impacting on productivity or wellbeing.
Environment
We are fortunate to have many areas of natural beauty within our region, and
these are important in offering health, fitness and wellbeing benefits to
local communities and drivers for tourism in the area, as well as being
essential for us to deliver our services to customers. We have a deep,
symbiotic relationship with the environment in which we operate and it is of
great importance that we continue to protect and enhance the environment
across the North West, and manage our land responsibly to improve the
environment in our region for future generations. We have agreed an
environmental improvement programme to be delivered in AMP7 that will continue
to improve the river, bathing and shellfish water quality for the benefit of
customers and visitors to the North West as well as society as a whole. We
remain on track for the improvements we have committed to.
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.
In the assessment for 2020, we were awarded the maximum 4 stars, with high
performance on every measure, and we are classed by the Environment Agency as
an industry leading company.
· Pollution performance
Our pollution performance continues to be industry leading, and in 2020, we
had no serious pollution incidents for the second year running in line with
the Environment Agency's stated expectation for the sector to trend to zero by
2020. We have been green in our serious incident performance for the last
seven consecutive years - the only company to have achieved this. We also had
our best ever performance on minimising the total number of pollution
incidents, with our largest ever reduction, all delivered whilst we maintained
our excellent self-reporting performance.
During storm conditions, when sewers and treatment plants are operating at
full capacity, we are permitted to spill excess storm water from Combined
Sewer Overflows (CSOs) to help prevent the flooding of streets, homes and
businesses. Since 2000, we have invested £1.2 billion to improve overflow
discharges to reduce spill frequency, volume and impact upon the natural
environment. Our existing plans are focused on securing further improvement
and have been supplemented by our Green Recovery proposals. The quality of
water in rivers and the sea in the North West is impacted by many
stakeholders, and we are working collaboratively with farmers, government,
regulators and others to secure the healthy, thriving rivers that everyone
wants.
Earlier this month, the Environment Agency and Ofwat launched an investigation
into possible unpermitted sewage discharges into rivers and watercourses
involving sewage treatment works across the country. We take our environmental
responsibilities very seriously and are highly transparent about our
performance as evidenced by our high levels of self-reporting on pollution.
· Carbon reduction
As part of our commitment to tackling climate change, in 2020 we made six
climate pledges covering emission targets and action on energy, transport and
emissions removal schemes such as creating woodland and peatland restoration.
Central to these pledges was to set science-based targets for all emission
scopes and we are proud that these targets have been approved by the Science
Based Targets initiative (SBTi) and that we were the first UK water company to
have done so. Our scope 1 and 2 emissions target is to reduce emissions by 42
per cent from our 2019/20 baseline by 2030 and to continue to reduce this
towards zero emissions by 2050. We have set a scope 3 target that 66 per cent
of our capital goods suppliers (by emissions) will have science-based targets
by 2025. For all other scope 3 categories, we will work with our supply chain
to achieve a 25 per cent reduction in emissions by 2030 from a 2019/20
baseline. We are also part of the global movement of 'Business Ambition for
1.5°C: Our Only Future', are signatories to the UN Race to Zero campaign and
are proud to be contributing to the UK water industry's commitment to be net
zero by 2030.
We have demonstrated our capability to reduce our greenhouse gas emissions
having reduced them by over 70 per cent since 2005/06, largely from working to
balance our energy consumption, self-generation and being smart about how we
operate our assets to get best value while maintaining security of supply. In
2020/21 we generated the equivalent of 205 GWh of renewable electricity with a
mix of generation from wind, hydro, solar photovoltaics and energy recovery
from bioresources (using sewage sludge to power combined heat and power
generators). 100 per cent of the electricity we use is now from renewable
technologies from either self-generated power or certified green electricity
purchase.
In working towards meeting our other carbon pledges we are restoring peatland
and planting new woodlands which will have a net greenhouse gas emission
reduction, trialling alternatives to fossil fuels in our treatment processes
and transportation, innovating to create made-to-measure objects out of
sustainable concrete alternatives on site through 3D printing and encouraging
employees to understand and do more to limit their impact through carbon
education.
In the last six months, the Environment Agency has sought to restrict the
disposal to land of organic matter such as farmyard manures, slurry and
biosolids from wastewater treatment. This will potentially require the water
industry to manage the recycling of biosolids in a different way, such as
incineration. Given the impact on both investment costs and carbon emissions,
the industry has challenged the Environment Agency on this and is working to
develop a long term strategy for sludge and bioresources.
· Climate resilience
In recent years we have felt the impact of climate change through wetter
winters and drier summers. Through our investment in becoming a digital
utility, we have demonstrated we are better placed to deal with the extremes
of weather that we are experiencing more frequently. In AMP6 we invested an
additional £250 million targeted to increase resilience against climate
change, and we continue to invest across our business to protect and enhance
the climate resilience of our assets, processes and customer services. We are
working to further mature our already advanced level of climate risk
understanding. In the coming months we will be publishing an overview of our
climate risks and plans in our third adaptation report. This will be followed
by a period of consultation and engagement with stakeholders on how to
maximise value as we take account of these risks in our long term business
planning process leading up to our next price control submission. We expect
our third adaptation report to be a key feature of our business plan for PR24,
driving ongoing investment needs and growth as the sector and society more
broadly tackles this critical issue.
The summer of 2021 was one of the driest on record in the Lake District. This,
combined with higher consumption as many customers continued to work from home
and consumption from businesses returned to pre-pandemic levels, meant that
the storage levels in our strategic water resources in the Lake District
reduced to below their operating norm. We supplemented our usual water
resources operations with actions outlined in our statutory drought plan, and
this, together with rainfall in October, has resulted in resources now having
recovered to average autumn levels.
· Biodiversity
As the largest private land owner in the UK, and an organisation delivering
significant development in the North West, we have made significant investment
over the last two decades in improving biodiversity on our 56,000 hectare
estate. We are committed to deliver net gain for biodiversity in the delivery
of our capital programme and across our landholdings. This approach includes
all development activities we undertake. We are working closely to understand
the additional requirements that are expected through the Environment Bill and
will ensure that we will meet these requirements and deliver at least a 10 per
cent net gain in biodiversity and the provision of a 30 year maintenance plan
for biodiversity gains where needed.
Investors
Our clear and enduring investment strategy and focus on digital
transformation, underpinned by our pioneering Systems Thinking approach, is
delivering long-term sustainable improvement in the service we provide. Last
year was our best year of operational performance for customers and the
environment, manifesting itself in a net reward against our customer ODIs for
the year of around £20 million. Our strategy will help us to deliver strong
ODI performance throughout AMP7 and also provides the foundations for
continued high levels of performance in AMP8 and beyond. We continue to
accelerate our AMP7 investment programme to deliver benefits for customers
earlier which brings significant capital investment into this year and next
that is eligible for the super deductibility of capital allowances. We have
already locked-in around 80 per cent of our total AMP7 programme, helping to
mitigate risk in terms of supply issues and inflation. We have delivered
another year of robust financial performance and we continue to raise finance
effectively, locking-in rates favourable to the price review assumptions.
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. RoRE
is an annual measure so we will report on our performance for 2021/22 at the
end of the financial year.
· Total expenditure (totex)
In our AMP7 final determination, we were given a £5.3 billion totex allowance
to deliver the required level of service to our customers and we are confident
that we can deliver the scope of the final determination within this
allowance. Our investment strategy delivers long-term sustainable performance
improvements and efficiency. Subsequent to our AMP7 final determination, we
have had regulatory approvals for extensions to our investment programme to
allow for the confirmed need of schemes at Bolton and Vyrnwy amounting to
around £150 million, and a further £65 million in relation to our Green
Recovery proposals. These are schemes that will deliver improvements for
customers and the environment during this AMP. In addition, we have elected to
spend a further £150 million on Dynamic Network Management and other projects
driving ODI performance. While this expenditure is subject to the totex
sharing mechanism meaning 50 per cent is company funded, it is more than
compensated for by improved ODI performance in AMP7 and beyond and a
proportion of the spend is also eligible for capital allowances super
deductions in this year and next, providing further benefits. Our financial
strength and balance sheet headroom enable us to fund this investment now,
improving performance for customers and the environment today, while also
generating value for shareholders.
In the first half of 2021/22, we have invested £303 million in net regulatory
capital expenditure (excluding infrastructure renewals expenditure (IRE)),
representing the continued acceleration of our AMP7 investment programme and
bringing significant capital investment into this year and next that is
eligible for the super deductibility of capital allowances. A further benefit
of our decision to accelerate our investment profile is the mitigation of risk
in terms of supply issues and inflation with 80 per cent of our capital
programme already locked-in and contracted for with our delivery partners.
· Customer outcome delivery incentives (ODIs)
In the first year of AMP7 we earned a net ODI reward of around £20 million,
representing upper quartile performance in the sector both in terms of
absolute reward earned and as a percentage of return on regulated equity.
The Customer section above provides more detail on our customer ODI
performance. We continue to see opportunities across a number of ODI targets,
and our investment in Dynamic Network Management (DNM) is helping to drive
improvements in some of our most challenging areas. Our investment in DNM is
on track and delivering with 4,500 sensors installed across the region
providing enhanced monitoring at 600 sites. Across these areas, we have
achieved a significant improvement in performance, with over 400 operational
issues identified and resolved proactively. We anticipate that as a result of
this investment, we will be able to deliver a net ODI reward across our basket
of flooding measures.
Any ODI reward earned this year will be reflected in an increase to revenues
in 2023/24 through allowed increases in the rates charged to customers in that
financial year, in accordance with the regulatory mechanism. We are targeting
a further reward of around £20 million for 2021/22, and around £150 million
for the 2020-25 period in total. We will continue to focus on driving
operational performance improvements and investing where we see the
opportunity to deliver improved customer or environmental outcomes and better
customer ODI performance.
· Financing
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, we have consistently issued debt at rates that
compare favourably with the industry average.
Our debut sustainable bond issued in January 2021 generated a huge amount of
interest in the company and our ESG credentials. We published our first
allocation and impact report in July 2021, detailing how the proceeds are
funding projects with a positive ESG impact. In further evidence of the link
between ESG performance and investor value, our debut sustainable bond
outperformed the index used for regulatory assumptions for AMP7 new cost of
debt by around 150 basis points, securing around £40 million of shareholder
value through financing outperformance.
At a time when we observe significant volatility in short-term inflation
forecasts, our transparent and consistent approach to hedging, including our
defined benefit pension schemes being fully hedged for inflation, continues to
mitigate risk for shareholders and delivers long-term sustainable value
through financing outperformance that is well understood.
· ESG performance
We actively participate in a broad range of global ESG ratings, indices and
frameworks to benchmark our approach against best practice and emerging
sustainability challenges and we are consistently assessed as a leader in this
space.
In April this year, we were ranked ninth out of 604 global utilities in the
Sustainalytics ESG Risk Rating assessment, positioning us as the leading water
utility in the index. CDP is a global disclosure system for environmental
reporting and in 2020, our CDP climate change rating improved from B to A-,
demonstrating leadership-level reporting and disclosure. In February, we
received an MSCI ESG rating of AA recognising our ability to manage
industry-specific ESG risks relative to peers and from an employee
perspective, we achieved a significant improvement in the Workforce Disclosure
Initiative, scoring well above the overall average and receiving special
recognition in the 'COVID-19 transparency' category at its Workforce
Transparency Awards.
Suppliers
Suppliers play an important role in maintaining supply for key parts of our
business, and contractors, as well as direct employees, act as the face of our
business for many customers and communities. Through our capital programme we
invest in North West infrastructure, generating jobs, skills and income across
the region, with the acceleration of around £500 million of capital
expenditure into the first three years of AMP7 helping to support the economy
as the country emerges from the COVID-19 pandemic. Treating our supply chain
fairly, through prompt payments and adequate guidance and support, is
something we are fully committed to.
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 the six months to September 2021, in
excess of 99 per cent of invoices were paid within 60 days with the average
number of days taken to pay suppliers being 13 days.
· Delivering prompt payments to our suppliers
We act fairly and transparently with all our suppliers and are a signatory to
the Prompt Payment Code, fully complying with the reporting requirements. As a
signatory to this Code we are working to pay 95 per cent of our SME suppliers
within 30 days, a new guideline that came into effect in July 2021. Our
efforts have not gone unnoticed and we have recently been awarded one of the
first 'Fast Payer Awards' by Good Business Pays. This award recognises FTSE350
companies who are fast payers of their invoices and can demonstrate that over
the past 12 months they have paid their suppliers in less than 30 days as well
as paying 95 per cent or more of all invoices on time.
· Responsible sourcing through our United Supply Chain
Our new approach to responsible supply chain management for AMP7, called
United Supply Chain (USC), was launched in 2020 and we are continuing to embed
this strategy amongst our supply chain. USC recognises suppliers as an
extension of the United Utilities family. Suppliers are asked to become a
signatory to our Responsible Sourcing Principles as a minimum, or for those
who are integral to our operation we encourage to become leaders and to work
jointly with us to deliver improvements across environmental, social and
governance areas and improve value to customers. In September 2021 we held a
small USC event where we acknowledged the efforts of our suppliers and awarded
our first USC award in Customer, Innovation and Integrity.
At the beginning of October 2021 we had signed 88 per cent of our targeted
suppliers to our Responsible Sourcing Principles and continue to pursue the
remaining suppliers to reach our target of 100 per cent. Our partnership with
the Supply Chain Sustainability School has been useful in sharing knowledge of
our Responsible Sourcing Principles with both our commercial colleagues and
supply chain partners.
· Helping more innovative businesses grow through Innovation Lab 4.0
We set up our Innovation Lab with the aim of attracting new entrants to United
Utilities, finding ideas that others miss and, by fast-tracking them to trial
and adoption, supporting their growth. With previous participants in the
programme going on to great things, we are supporting the development of some
of the most successful outcomes in the water industry. Typhon won a UK Water
Industry Award for Drinking Water Initiative of the Year, for a UV LED
disinfection system and FIDO Tech, the world's only AI to detect water leaks
and their size by the noise signal from acoustic loggers, was the UK
nomination and recently announced as runner up in the KPMG Global Tech
innovation competition at the Web Summit in Lisbon. Both suppliers have
contracts with us for ongoing optimisation and new idea development, with UU
having first mover advantage.
With the UK hosting the COP26 global summit on climate change earlier this
month, one of the areas we are keen to delve into for our fourth Innovation
Lab programme is net zero and natural solutions. We are working in partnership
with the Environment Agency to explore topics such as biodiversity, natural
flood management and community engagement and we have received another high
volume of ideas to review to support our low carbon mission to net zero.
FINANCIAL PERFORMANCE
Revenue for the six months to 30 September 2021 was up 4 per cent on the same
period last year, largely reflecting higher consumption as business activity
returns to pre-pandemic levels. Household cash collection and our bad debt
position have remained robust, and we are providing further financial
assistance to customers with the extension to our social tariff providing an
additional £15 million of support per annum to customers struggling with the
effects of the pandemic now having been made permanent.
For the year ended 31 March 2021, we simplified our approach to alternative
performance measures (APMs) and will no longer, as a matter of course, adjust
our underlying earnings for restructuring costs, net pension interest,
capitalised borrowing costs and routine prior years' tax matters. In the
commentary that follows in relation to underlying measures, we show the prior
period results based on the latest definition of APMs for comparative
purposes. The reconciliation in the underlying profit section shows the APMs
for the prior period based on the latest definition of APMs.
We continue to invest in our asset base and we are bringing forward capital
expenditure in the five year regulatory period. Underlying operating profit
has increased 4 per cent compared with the same period last year, largely
reflecting higher revenue partly offset by small increases in our core costs.
Our financing performance remains strong and we continue to benefit from our
robust financial risk management, delivering long-term sustainable performance
and shareholder value through financing outperformance.
Our balance sheet remains one of the strongest in the sector, with an
industry-leading, fully funded pension scheme on a low dependency basis, and
RCV gearing supporting a stable A3 credit rating with Moody's.
Revenue
£m
Six months to 30 September 2020 894.4
Regulatory revenue changes -1.5 per cent real reduction in allowed wholesale (6.3)
revenues and 0.6 per cent uplift in line with CPIH inflation
Non-household consumption increase 67.8
Household consumption decrease (20.3)
Other (3.3)
Six months to 30 September 2021 932.3
Revenue was up £38 million, at £932 million, largely reflecting higher
consumption as business activity returns to pre-pandemic levels.
In the first half of 2021/22 we have had a £6 million reduction in the
revenue cap, incorporating a 1.5 per cent real reduction in allowed wholesale
revenues and a 0.6 per cent CPIH-linked increase.
With many more businesses able to operate compared with the first half of last
year, when the impact of the initial lockdown was significant, non-household
revenue has increased by £68 million. In contrast, consumption from
households, although higher than pre-pandemic norms, has decreased £20
million in the first half of this year. This is due to significantly higher
consumption 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 - six months to 30 September 2020 318.5
Revenue increase 37.9
Inflationary cost increases (9.2)
Depreciation and amortisation increase (4.8)
Increased costs driving ODI performance (3.9)
Innovation fund increase (3.1)
Other underlying operating costs increase (2.6)
Underlying and Reported - six months to 30 September 2021 332.8
Underlying and reported operating profit at £333 million were £14 million
higher than the first half last year. This principally reflects the £38
million increase in revenue partly offset by inflationary increases on our
core costs along with other smaller cost increases.
Since the onset of the COVID-19 pandemic we, and many companies right across
the country, have experienced inflationary pressures on input costs such as
power, chemicals and labour. Through hedging, constructive cost challenge and
commercial negotiations, we have managed to mitigate much of the cost increase
to date. We are seeing inflationary increases coming through our core costs
resulting in an increase of £9 million compared with the first half of last
year. This is a relatively modest increase reflecting our robust control of
costs and hedging policies, particularly on power where we have hedged around
95 per cent of the power commodity price for the current year. We will
continue to actively manage our cost base in the second half of the year to
mitigate inflationary cost pressures.
Depreciation was £5 million higher, principally reflecting the ongoing
commissioning of our asset base. We expect that depreciation will be
relatively flat for the full year when compared with the prior year. The rate
of increase in depreciation across the remaining years of the AMP is expected
to be much lower than observed in previous AMPs due to the lower AMP7 capex
programme. We have incurred £4 million of costs associated with driving ODI
performance and that will be compensated through ODI incentive payments.
In AMP7, Ofwat has introduced an Innovation Fund whereby companies collect an
additional amount of revenue from customers and which is allocated to a
central pot which is subsequently reallocated to companies successfully
bidding for funding for innovative projects. In the first half of this year,
we accrued £3 million of costs which is an increase on the first half of last
year as in 2020/21 we did not accrue costs until the full year. Our total
contribution to the central pot since the beginning of AMP7 is £9 million. In
contrast, we have led or supported on projects that have secured funding from
the scheme of over £30 million, which will reimburse companies funding the
successful projects that drive forward the innovation agenda.
Household bad debt was 1.8 per cent of regulated revenue, and has therefore
reduced from the 2.2 per cent we reported for the year to 31 March 2021. This
represents a return to pre-pandemic levels as we continue to manage the impact
of COVID-19.
Profit before tax
£m
Underlying - six months to 30 September 2020 238.2
Underlying operating profit increase 14.3
Underlying net finance expense increase (51.4)
Share of JVs losses (4.3)
Underlying - six months to 30 September 2021 196.8
Adjusted items * 15.9
Reported - six months to 30 September 2021 212.7
* Adjusted items are set out within the underlying profit section.
Underlying profit before tax was £197 million, £41 million lower than the
first half of last year. This reflects the £14 million increase in underlying
operating profit, more than offset by a £51 million increase in underlying
net finance expense and an increase in the share of underlying losses of joint
ventures of £4 million, (from a £2 million share of gains in the first half
of 2020/21 to a £2 million loss in the first half of this year).
Underlying profit before tax reflects consistently applied presentational
adjustments as outlined below. Reported profit before tax increased by £12
million to £213 million reflecting the £14 million increase in reported
operating profit and a £2 million reduction in reported net finance expense
(including fair value movements), partly offset by the £4m increase in the
share of underlying losses of joint ventures.
· Net finance expense
The underlying net finance expense of £134 million was £51 million higher
than the first half of last year, when we compare on a consistent basis,
mainly due to the impact of higher RPI inflation on the group's index-linked
debt partly offset by lower interest on index-linked debt.
The indexation of principal on index-linked debt, including the impact of
inflation swaps, amounted to a net charge in the income statement of £103
million, compared with a net charge of £41 million last year. Interest on
index-linked debt of £17 million was £8 million lower than the first half of
last year while interest on non-index linked debt of £42 million is the same
as it was for the first half of last year. The remaining £3 million decrease
from the last half year primarily relates to movements in capitalised
borrowing costs and pension interest.
Reported net finance expense of £118 million was £2 million lower than the
first half of last year, reflecting the £51 million increase in underlying
net finance expense with this being offset by a £53 million increase in net
fair value gains on our debt and derivative portfolio, excluding interest on
derivatives and debt under fair value option, from a £37 million net loss in
the first half of last year to a £16 million net gain in the first half of
this year.
· Joint ventures
For the six months to 30 September 2021, we recognised a £1.8 million loss in
the income statement relating to our joint venture Water Plus. For the six
months to 30 September 2020, our share of joint venture profits of £2.5
million related solely to our share in AS Tallinna Vesi. On 31 March 2021, the
group completed the disposal of its stake in AS Tallinna Vesi.
Further details can be found in note 10 of these condensed consolidated
financial statements.
Profit after tax and earnings per share
PAT Earnings per share
£m Pence/share
Underlying - six months to 30 September 2020 199.1 29.2p
Underlying profit before tax decrease (41.4)
Underlying tax decrease 36.2
Underlying - six months to 30 September 2021 193.9 28.4p
Adjusted items * (410.1)
Reported - six months to 30 September 2021 (216.2) (31.7)p
* Adjusted items are set out within the underlying profit section.
Underlying profit after tax of £194 million was £5 million lower than the
first half of last year, and underlying earnings per share decreased from 29.2
pence to 28.4 pence, principally reflecting the £41 million reduction in
underlying profit before tax partly offset a £36 million lower underlying tax
charge largely due to the impact of the capital allowances super deductions,
announced in the March 2021 Chancellors Budget and lowering the current tax
charge significantly in the current period.
The group reported a loss after tax of £216 million for the first half of
this year, compared with a £162 million reported profit after tax in the
first half of last year. This £378 million reduction largely reflects the
one-off deferred tax charge of £382 million to restate the brought forward
tax liability at the new 25 per cent future headline rate. Reported basic
earnings per share decreased from 23.8 pence to a reported basic earnings per
share of (31.7) pence.
· Tax
We continue to be fully committed to paying our fair share of tax and acting
in an open and transparent manner in relation to our tax affairs, and are
delighted to have been accredited with the Fair Tax Mark again in 2021 for the
third year running.
In addition to corporation tax, the group makes further contributions to the
public finances, typically of around £200 million per annum, in the form of
business rates, employer's national insurance contributions, environmental
taxes, other regulatory service fees such as water abstraction charges as well
as employment taxes on behalf of our 5,000 strong workforce.
We paid corporation tax of £7 million in the period, which represents an
effective cash tax rate on underlying profits of 3 per cent, 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, these being deductions put in place by
successive governments to encourage such investment and thus reflecting
responsible corporate behaviour in relation to taxation. For the current
period, the cash tax is significantly lower due to the impact of the capital
allowances super deductions, announced in the March 2021 Chancellors Budget
and affecting our eligible plant and machinery additions in 2022 and 2023.
The current tax charge was £5 million in the six months to 30 September 2021,
compared with £34 million in the previous half year.
For the six months to 30 September 2021, we recognised a deferred tax charge
of £42 million, compared with £5 million for the same period last year. This
excludes the £382 million one-off deferred tax charge reflecting the new 25
per cent future headline rate.
The total effective tax rate, after adjusting for the one-off deferred tax
charge for changes in the headline rate of tax was 22 per cent for the six
months to 30 September 2021, compared with 19 per cent in the previous half
year; the increase reflecting the current year deferred tax charge being
calculated at 25 per cent.
In the period, there were £56 million of tax adjustments taken to equity,
primarily relating to remeasurement movements on the group's defined benefit
pension schemes.
Dividend per share
The Board has proposed an interim dividend of 14.50 pence per ordinary share
in respect of the six months ended 30 September 2021. This is an increase of
0.6 per cent compared with the interim dividend relating to last year, in line
with the group's dividend policy of targeting a growth rate of CPIH inflation
each year through to 2025. The inflationary increase of 0.6 per cent is based
on the CPIH element included within the allowed regulated revenue increase for
the 2021/22 financial year (i.e. the movement in CPIH between November 2019
and November 2020).
The interim dividend is expected to be paid on 1 February 2022 to shareholders
on the register at the close of business on 17 December 2021. The ex-dividend
date is 16 December 2021. The election date for the Dividend Reinvestment Plan
is 11 January 2022.
Cash flow
Net cash generated from continuing operating activities for the six months to
30 September 2021 was £471 million, £72 million higher than the £399
million in the first half of last year. The group's net capital expenditure
was £288 million, principally in the regulated water and wastewater
investment programmes. This excludes infrastructure renewals expenditure which
is treated as an operating cost. Cash flow capex differs from regulatory
capex, since the latter is based on capital work done in the period, rather
than actual cash spent.
Pensions
As at 30 September 2021, the group had an IAS 19 net pension surplus of £821
million, compared with a net pension surplus of £689 million at 31 March
2021. This £132 million increase principally reflects increases in asset
returns partly offset by an increased RPI 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 use a
prudent, fixed credit spread assumption.
Further detail on pensions is provided in note 11 ('Retirement benefit
surplus') of these condensed consolidated financial statements.
Financing
Net debt £m
At 31 March 2021 7,305.8
Cash generated from operations (535.5)
Fair value movements (17.6)
Net capital expenditure 288.0
Dividends 196.6
Indexation 92.8
Interest 58.2
Tax 6.7
Other 5.8
At 30 September 2021 7,400.8
The group's gross borrowings at 30 September 2021 had a carrying value of
£8,463 million. The fair value of these borrowings was £10,088 million. This
£1,625 million difference principally reflects the significant fall in real
interest rates compared with the rates at the time we raised a portion of the
group's index-linked debt. This difference has increased from £1,404 million
at 31 March 2021 due primarily to a decrease in credit spreads.
Cash and short-term deposits at 30 September 2021 amounted to £656 million.
Net debt at 30 September 2021 was £7,401 million, compared with £7,306
million at 31 March 2021. This comprises gross borrowings of £8,463 million
net of cash of £656 million and net derivative assets hedging specific debt
instruments of £406 million.
Underlying movements in net debt are largely a result of net operating cash
inflows offset by our net capital expenditure, dividends, cash interest,
indexation interest and tax.
Gearing, measured as group net debt divided by UUW's shadow (adjusted for
actual spend) regulatory capital value, was 62 per cent at 30 September 2021.
This is the same level of gearing as at 31 March 2021 and remains within our
target range of 55 to 65 per cent.
· Cost of debt
As at 30 September 2021, the group had approximately £3.1 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 £3.0 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 higher RPI inflation charge compared with the same period last year
contributed to the group's average effective interest rate of 4.4 per cent
being higher than the rate of 3.0 per cent for the six months to 30 September
2020. 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
€7 billion euro medium-term note (EMTN) programme. The EMTN programme is
updated at least annually and this year's update is expected to be completed
shortly, which will include an increase to the programme limit and
redenomination to £10 billion. The EMTN 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 £2.4 billion to cover
refinancing and incremental debt, supporting our five-year investment
programme. So far in AMP7, we have raised around £1.1 billion, taking
advantage of attractive rates available and extending our liquidity position
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 £73 million of term funding via the issue
off our EMTN Programme of 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.
Since March 2021, we have extended £100 million of revolving credit
facilities for a further year. 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 30 September 2021, 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 9 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 EMTN programme provides further support.
At 30 September 2021, we had liquidity out to February 2025, comprising cash
and short-terms 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.
OUTLOOK
We have continued with the great start that we have made to AMP7, benefitting
from the acceleration of our AMP7 investment programme. This investment,
coupled with our Systems Thinking approach, is delivering operational
excellence and regulatory outperformance, and is enabling us to drive further
value for our shareholders. We remain confident in our target of cumulative
net outperformance of around £150 million against our customers ODIs for
AMP7.
2021/22 FULL YEAR GUIDANCE
· Revenue is expected to be around 2 per cent higher than 2020/21,
largely reflecting higher overall consumption by our customer base.
· Underlying operating costs are expected to be higher year-on-year
reflecting inflationary increases net of efficiencies coming through core
costs and IRE is expected to increase as we continue to invest in DNM. We
remain confident that we can deliver our AMP7 scope within our Final
Determination totex allowance.
· Underlying finance expense is expected to be higher year-on-year as
higher inflation impacts our index-linked debt.
· Capex in 2021/22 is expected to be in the range of £625 million to
£675 million reflecting the ongoing acceleration of our AMP7 programme, the
extension to our AMP7 totex allowance and our continued investment in
long-term sustainable performance.
· We remain confident in targeting a net customer ODI reward of around
£20 million, which is consistent with our overall target for AMP7 of around
£150 million reward.
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 international accounting standards
in conformity with the requirements of the Companies Act 2006, and in
accordance with International Financial Reporting Standards (IFRSs) adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union
as well as adopted by the UK, 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.
We simplified our approach to APMs and no longer, as a matter of course,
adjust our underlying earnings for restructuring costs, net pension interest,
capitalised borrowing costs and routine prior years' tax matters. These
changes first came into effect for the full year to March 2021. In the tables
that follow we show the prior period APMs on the updated basis based on our
new definition of APMs for comparative purposes.
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 6 months ended Re-presented Year ended
30 September 2021 6 months ended 31 March 2021
30 September 2020
£m £m £m
Operating profit per published results 332.8 318.5 602.1
Underlying operating profit 332.8 318.5 602.1
Net finance expense
£m £m £m
Finance expense (127.5) (132.0) (103.5)
Investment income 9.2 12.1 25.0
Net finance expense per published results (118.3) (119.9) (78.5)
Adjustments:
Fair value (gains)/losses on debt and derivative instruments, excluding (15.9) 37.1 (54.3)
interest on derivatives and debt under fair value option
Underlying net finance expense (134.2) (82.8) (132.8)
£m £m £m
Share of (losses)/profits of joint ventures (1.8) 2.5 (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 212.7 201.1 551.0
Adjustments:
In respect of operating profit - - -
In respect of net finance expense (15.9) 37.1 (54.3)
In respect of profit on disposal of joint ventures - - (36.7)
Underlying profit before tax 196.8 238.2 460.0
(Loss)/Profit after tax per published results (216.2) 162.0 453.4
Adjustments:
In respect of profit before tax (15.9) 37.1 (91.0)
Deferred tax adjustment 423.9 5.1 18.4
Tax in respect of adjustments to underlying profit before tax 2.1 (5.1) 2.2
Underlying profit after tax 193.9 199.1 383.0
Earnings per share
£m £m £m
(Loss)/profit after tax per published results (a) (216.2) 162.0 453.4
Underlying profit after tax (b) 193.9 199.1 383.0
Weighted average number of shares in issue, in millions (c) 681.9m 681.9m 681.9m
Earnings per share per published results, in pence (a/c) (31.7) 23.8 66.5
Underlying earnings per share, in pence (b/c) 28.4 29.2 56.2
Dividend per share, in pence 14.50p 14.41p 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.
Average effective interest rate 6 months ended 6 months ended Year ended
30 September 2021 30 September 2020 31 March
2021
£m £m £m
Underlying net finance expense (134.2) (82.8) (132.8)
Adjustments:
Net pension interest income (7.3) (8.7) (17.5)
Adjustment for capitalised borrowing costs (21.4) (17.0) (30.4)
Net finance expense for effective interest rate (162.9) (108.5) (180.7)
Average notional net debt (7,372) (7,257) (7,315)
Average effective interest rate 4.4% 3.0% 2.5%
PRINCIPAL RISKS AND UNCERTAINTIES
Our approach to risk management
Our approach to risk management, including how we identify and assess risk and
the oversight and governance process, remains unchanged from that detailed on
pages 100 to 102 of our Annual Report for the year ended 31 March 2021.
Key developments
Continuous improvement is a key feature of our business risk management
framework. In the past six months we have continued to promote the cross
cutting causal factor and consequence themes (see page 102 of our Annual
Report) in risk assessments to improve maturity and to enable better
understanding of interdependency and correlation. We have also improved our
position on aligning contingency plans to risk.
Profile features
The risk profile is based on ten principal risks that reflect the primary and
secondary business activities from which value can be gained, preserved or
lost relative to the group's business model, future performance, solvency,
liquidity and reputation. These principal risks are reported within our Annual
Report for the year ended 31 March 2021 (see pages 103 to 107).
They are underpinned by approximately 100 event-based risks which have been
subject to half year risk assessment reflecting influences such as climate
change; legislative and regulatory developments; asset deterioration; growth
pressures; and challenges within the supply chain post Brexit and the after
effects of the global pandemic, whilst also looking ahead to the next price
review and our carbon reduction commitments.
The group's most significant event based risks
The most significant event-based risks represent the ten highest-ranked risks
(see 1 to 10 below) 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 (see A
to F below). Depending on the circumstances, financial impacts will include
loss of revenue, additional cost, fines, regulatory penalties and
compensation. Reputational impact relative to our multiple stakeholders is
also assessed, reported and considered as part of the mitigation.
1. Carbon Commitments: This risk focuses 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 such as process and energy emissions, woodland and
peatland restoration, while responding to changing 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.
2. Price Review 2024: This risk focuses 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 dialog with Ofwat throughout the
process.
3. Failure of the Haweswater Aqueduct: 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 UU 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.
4. Flooding of the Wastewater Network (sewer flooding): 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.
5. Water Sufficiency event (Dry Weather): 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: UU produces a Water Resources Management Plan 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 5 years setting out the actions UU will take in a drought
situation.
6. Failure to treat Sludge: 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.
7. Cybercrime: 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.
8. Recycling of Biosolids to agriculture: 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: UU 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.
9. Failure to treat Wastewater: Inadequate capacity and capability of
wastewater treatment works, leading to environmental permit breaches.
Control/mitigation: Improved Effective Operations and Maintenance (EO&M)
programme and operating procedures including proactive maintenance, operative
training and compliance audits.
10. Mersey Valley Sludge Pipeline: A key asset with current low resilience
due to deterioration, with failure potentially resulting in serious pollution.
Control/Mitigation: Overland inspections, flow and pressure monitoring take
place to detect bursts. Incident response plans are in place and strategic
planning is underway to determine a long term solution.
High impact, low likelihood risks
A. Pension deficit: 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.
B. Dam failure: 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.
C. Fair payment of tax: 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.
D. Disease pandemic: 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.
E. Terrorism: 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.
F. Process safety: The unintentional generation and/or release of
dangerous substances and explosive atmospheres in sludge digestion or other
processes, resulting in a catastrophic incident Control/mitigation: The design
and engineering of facilities, training and maintenance of equipment.
Effective control points exist with alarms monitored remotely and statutory
inspections.
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. Beyond that reported in previous years on the Argentina multiparty
'class action' and the Manchester Ship Canal Company matters (to which there
have been no material developments), there is nothing specific to report on
material litigation.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This financial report contains certain forward-looking statements with respect
to the operations, performance and financial condition of the group. By their
nature, these statements involve uncertainty since future events and
circumstances can cause results and developments to differ materially from
those anticipated. The forward-looking statements reflect knowledge and
information available at the date of preparation of this financial report and
the company undertakes no obligation to update these forward-looking
statements. Nothing in this financial report should be construed as a profit
forecast.
Certain regulatory performance data contained in this financial report is
subject to regulatory audit.
This announcement contains inside information, disclosed in accordance with
the Market Abuse Regulation which came into effect on 3 July 2016 and for UK
Regulatory purposes the person responsible for making the announcement is
Simon Gardiner, Company Secretary.
LEI 2138002IEYQAOC88ZJ59
Classification - Half Year Results
Consolidated income statement
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m £m £m
Revenue (note 3) 932.3 894.4 1,808.0
Employee benefits expense (82.4) (78.6) (161.8)
Other operating costs (note 4) (217.3) (201.0) (431.9)
Allowance for expected credit losses - trade and other receivables (12.1) (11.7) (28.7)
Other income 2.5 1.5 3.6
Depreciation and amortisation expense (207.6) (202.8) (422.3)
Infrastructure renewals expenditure (82.6) (83.3) (164.8)
Total operating expenses (599.5) (575.9) (1,205.9)
Operating profit 332.8 318.5 602.1
Investment income (note 5) 9.2 12.1 25.0
Finance expense (note 6) (127.5) (132.0) (107.2)
Allowance for expected credit losses - loans to joint ventures - - 3.7
Investment income and finance expense (118.3) (119.9) (78.5)
Share of (losses)/profits of joint ventures (note 10) (1.8) 2.5 (9.3)
Profit on disposal of joint venture - - 36.7
Profit before tax 212.7 201.1 551.0
Current tax charge (5.0) (34.0) (79.2)
Deferred tax charge (42.3) (5.1) (18.4)
Deferred tax charge - change in tax rate (381.6) - -
Tax (note 7) (428.9) (39.1) (97.6)
(Loss)/profit after tax (216.2) 162.0 453.4
All of the results shown above relate to continuing operations.
Earnings per share (note 8)
Basic (31.7)p 23.8p 66.5p
Diluted (31.6)p 23.7p 66.3p
Dividend per ordinary share (note 9) 14.50p 14.41p 43.24p
Consolidated statement of comprehensive income
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m £m £m
(Loss)/Profit after tax (216.2) 162.0 453.4
Other comprehensive income
Items that may be reclassified to profit or loss in subsequent periods:
Cash flow hedge effectiveness 42.9 4.9 9.3
Tax on items taken directly to equity (note 7) (10.7) (0.9) (1.8)
Foreign exchange adjustments - 1.3 (1.6)
Foreign exchange adjustments reclassified to profit on disposal of joint - - 4.0
ventures
Other comprehensive income that may be reclassified to profit or loss 32.2 5.3 9.9
123.4 (109.3)
Items that will not be reclassified to profit or loss in subsequent periods:
Remeasurement gains/(losses) on defined benefit pension
schemes (note 11) (82.7)
Change in credit assumptions for debt reported at fair value through profit or (7.5) (30.0)
loss
(43.3)
Cost of hedging - cross currency basis spread adjustment 1.8 (7.5) (12.7)
Tax on items taken directly to equity (note 7) (44.8) 43.9 36.6
Other comprehensive income that will not be reclassified to profit or loss 72.9 (102.9) (102.1)
Total comprehensive income (111.1) 64.4 361.2
Consolidated statement of financial position
30 September 30 September 31 March
2021 2020 2021
£m
£m
£m
ASSETS
Non-current assets
Property, plant and equipment 11,956.3 11,648.9 11,799.0
Intangible assets 170.4 175.8 181.1
Interests in joint ventures and other investments (note 10) 16.6 44.4 0.1
Trade and other receivables 68.6 126.6 86.7
Retirement benefit surplus (note 11) 821.1 654.3 689.0
Derivative financial instruments 458.3 661.8 410.3
13,491.3 13,311.8 13,166.2
Current assets
Inventories 18.9 19.0 18.3
Trade and other receivables 244.4 244.7 229.2
Current tax asset 8.6 36.6 6.9
Cash and short-term deposits 655.9 899.0 744.1
Derivative financial instruments 23.0 0.1 14.4
950.8 1,199.4 1,012.9
Total assets 14,442.1 14,511.2 14,179.1
LIABILITIES
Non-current liabilities
Trade and other payables (825.5) (782.5) (798.3)
Borrowings (note 12) (7,802.1) (8,092.8) (7,797.0)
Deferred tax liabilities (1,928.9) (1,426.6) (1,449.5)
Derivative financial instruments (106.3) (184.2) (107.8)
(10,662.8) (10,486.1) (10,152.6)
Current liabilities
Trade and other payables (380.6) (323.4) (322.7)
Borrowings (note 12) (660.7) (853.4) (654.8)
Provisions (13.1) (13.1) (11.1)
Derivative financial instruments (3.2) (3.9) (6.9)
(1,057.6) (1,193.8) (995.5)
Total liabilities (11,720.4) (11,679.9) (11,148.1)
Total net assets 2,721.7 2,831.3 3,031.0
EQUITY
Share capital 499.8 499.8 499.8
Share premium account 2.9 2.9 2.9
Other reserves (note 16) 369.8 335.9 336.3
Retained earnings 1,849.2 1,992.7 2,192.0
Shareholders' equity 2,721.7 2,831.3 3,031.0
Consolidated statement of changes in equity
Six months ended 30 September 2021
Share capital Share premium account Retained earnings Total
£m £m ((1))Other £m £m
reserves
£m
At 1 April 2021 499.8 2.9 336.3 2,192.0 3,031.0
Loss after tax - - - (216.2) (216.2)
Other comprehensive income/(expense)
Remeasurement gains on defined benefit pension schemes (note 11) - - - 123.4 123.4
Change in credit assumption for debt reported at fair value through profit or - - - (7.5) (7.5)
loss
Cash flow hedge effectiveness - - 42.9 - 42.9
Cost of hedging - cross currency basis spread adjustment - - 1.8 - 1.8
Tax on items taken directly to equity (note 7) - - (11.2) (44.3) (55.5)
Foreign exchange adjustments - - - - -
Total comprehensive income - - 33.5 (144.6) (111.1)
Dividends (note 9) - - - (196.6) (196.6)
Equity-settled share-based payments - - - 2.6 2.6
Exercise of share options - purchase of shares - - - (4.2) (4.2)
At 30 September 2021 499.8 2.9 369.8 1,849.2 2,721.7
Six months ended 30 September 2020
Share capital Share premium account Retained earnings Total
£m £m ((1))Other £m £m
reserves
£m
At 1 April 2020 499.8 2.9 336.7 2,122.7 2,962.1
Profit after tax - - - 162.0 162.0
Other comprehensive income/(expense)
Remeasurement gains on defined benefit pension schemes (note 11) - - - (109.3) (109.3)
Change in credit assumption for debt reported at fair value through profit or - - - (30.0) (30.0)
loss
Cash flow hedge effectiveness - - 4.9 - 4.9
Cost of hedging - cross currency basis spread adjustment - - (7.5) - (7.5)
Tax on items taken directly to equity (note 7) - - 0.5 42.5 43.0
Foreign exchange adjustments - - 1.3 - 1.3
Total comprehensive income - - (0.8) 65.2 64.4
Dividends (note 9) - - - (193.7) (193.7)
Equity-settled share-based payments - - - 1.4 1.4
Exercise of share options - purchase of shares - - - (2.9) (2.9)
At 30 September 2020 499.8 2.9 335.9 1,992.7 2,831.3
Year ended 31 March 2021
Share capital Share premium account ((1))Other reserves Retained earnings Total
£m £m £m £m £m
At 31 March 2020 499.8 2.9 336.7 2,122.7 2,962.1
Profit after tax - - - 453.4 453.4
Other comprehensive income/(expense)
Remeasurement gains on defined benefit pension schemes (note 11) - - - (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 taken directly to equity (note 7) - - 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
ventures
Total comprehensive income - - (0.4) 361.6 361.2
Dividends (note 9) - - - (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, merger
reserve, cost of hedging reserve, and cash flow hedging reserve. Further
detail of movements in these reserves is included in note 16.
Consolidated statement of cash flows
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m £m £m
Operating activities
Cash generated from operations (note 14) 535.5 495.6 1,037.2
Interest paid (73.1) (68.7) (136.7)
Interest received and similar income 14.9 2.9 7.4
Tax paid (6.7) (31.1) (75.4)
Tax received - - 26.9
Net cash generated from operating activities 470.6 398.7 859.4
Investing activities
Purchase of property, plant and equipment (278.7) (315.4) (610.4)
Purchase of intangible assets (9.8) - (33.6)
Grants and contributions received 0.6 2.9 5.0
Loans to joint ventures - (29.5) (2.0)
Dividends received from joint ventures - 6.4 6.4
Proceeds from disposal of investments - - 85.3
Net cash used in investing activities (287.9) (335.6) (549.3)
Financing activities
Proceeds from borrowings net of issuance costs 72.7 574.2 909.7
Repayment of borrowings (152.6) (75.1) (703.5)
Dividends paid to equity holders of the company (note 9) (196.6) (193.7) (291.9)
Exercise of share options - purchase of shares (4.2) (2.9) (4.0)
Net cash (used in)/generated from financing activities (280.7) 302.5 (89.7)
Net (decrease)/increase in cash and cash equivalents (98.0) 365.6 220.4
Cash and cash equivalents at beginning of the period((1)) 733.6 513.2 513.2
Cash and cash equivalents at end of the period((1)) 635.6 878.8 733.6
((1) )Cash and cash equivalent is stated net of £20.3 million (30 September
2020: £20.2 million; 31 March 2021: £10.5 million; 1 April 2020: £14.9m) of
book overdrafts, which are included in borrowings in the statement of
financial position. Book overdrafts, which result from normal cash management
practices, represent the value of cheques issued and payments initiated that
had not cleared as at the reporting date.
NOTES
1. Basis of preparation and accounting policies
The condensed consolidated financial statements for the six months ended 30
September 2021 have been prepared in accordance with the Disclosure and
Transparency Rules of the Financial Conduct Authority and International
Accounting Standard 34 'Interim Financial Reporting' (IAS 34) as published by
the International Accounting Standards Board (IASB) and adopted by the UK.
The condensed consolidated financial statements do not include all of the
information and disclosures required for full annual financial statements, do
not comprise statutory accounts within the meaning of section 434 of the
Companies Act 2006, and should be read in conjunction with the group's annual
report and financial statements for the year ended 31 March 2021.
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, did not include a
reference to any matters to which the auditor drew attention by way of
emphasis without qualifying their report, and did not contain a statement
under section 498(2) or (3) of the Companies Act 2006.
The annual financial statements for the year ended 31 March 2021 were prepared
in accordance with international accounting standards in conformity with the
requirements of the Companies Act 2006, and in accordance with International
Financial Reporting Standards (IFRSs) and interpretations (IFRICs) as issued
by the IASB and adopted pursuant to Regulation (EC) No 1606/2002 as it applies
in the European Union (EU) as well as adopted by the UK. There are currently
no material areas of divergence between UK-adopted and EU-adopted IFRS, and
this was also the case as at 31 March 2021.
The accounting policies, presentation and methods of computation used in these
condensed consolidated interim financial statements are the same as those used
in the audited financial statement of United Utilities Group PLC for the year
ended 31 March 2021.
Going concern
The interim condensed consolidated financial statements for the six months
ended 30 September 2021 have been prepared on the going concern basis as the
directors have a reasonable expectation that the group has adequate resources
for a period of at least 12 months from the date of their approval, and that
there are no material uncertainties to disclose.
In assessing the appropriateness of the going concern basis of accounting, the
directors have reviewed the resources available to the group in the form of
cash and committed bank facilities, as well as considering the group's capital
adequacy, along with a baseline plan that incorporates the expected economic
impacts brought about by the COVID-19 pandemic. 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 interim condensed consolidated
financial statements, and that the severe but reasonable downside scenarios
indicate that the group will be able to operate within the amounts and terms
(including relevant covenants) of existing facilities. The interim condensed
consolidated financial statements have therefore been prepared on a going
concern basis.
Update on critical accounting judgements and key sources of estimation
uncertainty associated with COVID-19
Since 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, and
its interim condensed consolidated financial statements for the six months
ended 30 September 2020. 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 10.
These judgements and estimates have been kept under review during the six
months to 30 September 2021 in order to ensure that they reflect the most
up-to-date information available as the situation has developed. An update on
these is as follows:
Accounting estimate - unbilled revenue in respect of measured customers: The
amount of revenue recognised for customers who have a water meter (measured
customers) 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 eased during the period, 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 for a number of reasons, including international
travel restrictions, businesses transitioning to hybrid working arrangements
that facilitate increased levels of working from home, and other businesses
moving employees to permanent home working. As a result, patterns of future
usage in the longer term remain unclear.
However, over the course of the previous financial year, and as the current
financial year has progressed, 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 six month period to 30 September 2021, 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 £7.5
million higher than the total in-period revenue estimated in the CMOS system
as part of the normal settlement process (£16.1 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, with this uncertainty continuing
throughout the year to 31 March 2021 and to date.
Cash collection over the six months to 30 September 2021 has been stronger
than anticipated, and is higher than the current year collection rate at the
same point in the prior year, although the economic situation remains
uncertain at the interim reporting date. This is particularly the case as
government support schemes such as furlough unwind, which could result in
increased unemployment and therefore further impact the ability of some
customers to pay. A range of collection scenarios have been considered taking
account of current year cash collection rates as well as collection of prior
year and legacy debt. This supports a bad debt charge of 1.8 per cent of
household revenue at the interim reporting date.
This compares with a charge equivalent to 2.2 per cent of household revenue
recognised for the year ended 31 March 2021 based on the average recovery of
household trade receivables evidenced in that year and the year ended 31 March
2020. This was considered an appropriate indicator of expected future
collection that encompassed a range of scenarios that have been experienced,
including before the onset of the COVID-19 pandemic, periods of lockdown, and
periods of recovery.
2. Segmental reporting
The board of directors of United Utilities Group PLC (the board) is provided
with information on a single segment basis for the purposes of assessing
performance and allocating resources. The group's performance is measured
against financial and operational key performance indicators, underlying
operating profit, operating profit, assets and liabilities, regulatory capital
expenditure, and regulatory capital value gearing at a consolidated level. In
light of this, the group has a single segment for financial reporting purposes
and therefore no further detailed segmental information is provided in this
note.
3. Revenue
30 September 30 September 31 March
2021 2020 2021
£m
£m
£m
Wholesale water charges 393.6 375.5 751.0
Wholesale wastewater charges 477.0 461.8 941.5
Household retail charges 35.0 35.9 64.1
Other 26.7 21.2 51.4
932.3 894.4 1,808.0
The £37.9 million increase in revenue for the six months ended 30 September
2021 compared with the same period in the prior year is largely attributable
to the impact of the COVID-19 pandemic and measures to control the spread of
the virus in each period. Customer tariffs for the 2020/21 financial year were
set in December 2019 before the impact of the pandemic was known, whereas
tariffs for the 2021/22 financial year were set in December 2020 and therefore
factored in the forecast COVID-19 impacts on both household and non-household
customers based on the best available data at that point in time. Actual
consumption during the period has been above amounts forecasted when tariffs
were set, with the impact of this being offset by known regulatory revenue
reductions.
With lockdown restrictions easing during the six months to 30 September 2021,
this in turn has resulted in an increase in non-household wholesale charge
revenue compared with the same period in the prior year of £67.8 million,
which has been partially offset by a reduction in household revenue of £29.4
million.
Given the nature of the group's operations, revenues are not typically
materially impacted by seasonality or cyclicality, and therefore revenue
recognised for the first half of the financial year would typically be similar
to that recognised in the second half, though these trends can be impacted by
changing patterns of consumption such as what has been experienced during the
COVID-19 pandemic.
4. Other operating costs
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m
£m £m
Hired and contracted services 50.1 45.9 96.3
Property rates 46.5 45.2 89.4
Materials 40.7 39.5 82.2
Power 38.2 38.5 83.6
Regulatory fees 14.5 14.5 28.0
Accrued innovation costs 3.1 - 6.2
Loss on disposal of property, plant and equipment 3.0 2.2 10.7
Insurance 3.0 2.6 5.2
Cost of properties disposed 0.1 0.1 2.6
Other expenses 18.1 12.5 27.7
217.3 201.0 431.9
Other operating costs have increased compared with the same period in the
prior year for a number of reasons, including inflationary increases on the
group's core cost base, the accrual of costs relating to the Innovation in
Water Challenge scheme operated by Ofwat for AMP7, which were not accrued in
the same period in the prior year, as well as increased costs associated with
the group's response to a number of incidents affecting customers. Additional
costs have also been incurred during the period to improve performance for
customers and the environment and therefore deliver a better outcome on our
customer outcome delivery incentives.
During the six months to 30 September 2021 the group incurred around £2.5
million of operating costs that were directly attributable to its response to
the ongoing effects of the COVID-19 pandemic, compared with £2.9 million for
the six months to 30 September 2020. As such costs are now being incurred as
part of the group's normal business activities, they have not been treated as
adjusting items in arriving at the group's underlying profit measures included
within the alternative performance measures set out above for either the six
month periods ended 30 September 2021 and 30 September 2020, or the year ended
31 March 2021.
This is also the case for the £1.7 million of operating costs and £1.5
million of infrastructure renewals expenditure incurred in the six months to
30 September 2020 in response to a period of dry weather experienced over the
spring and summer of that year that coincided with the first nationwide
lockdown associated with the pandemic; costs incurred in response to dry
weather in the six months to 30 September 2021 were minimal.
5. Investment income
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m
£m £m
Interest receivable 1.9 3.4 7.5
Net pension interest income (note 11) 7.3 8.7 17.5
9.2 12.1 25.0
6. Finance expense
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m
£m £m
Interest 147.6 104.9 181.7
payable
Net fair value (gains)/losses on debt and derivative instruments (20.1) 27.1 (74.5)
127.5 132.0 107.2
Interest payable is stated net of £21.4 million (30 September 2020: £17.0
million; 31 March 2021: £30.4 million) borrowing costs capitalised in the
cost of qualifying assets within property, plant and equipment and intangible
assets during the period. Interest payable includes a £92.8 million (30
September 2020: £39.9 million; 31 March 2021: £52.6 million) non-cash
inflation expense in relation to the group's index-linked debt.
Net fair value gains on debt and derivative instruments includes £14.6
million income (30 September 2020: £11.4 million income; 31 March 2021:
£21.5 million income) due to net interest on derivatives and debt held under
fair value option, and £10.3 million expense (30 September 2020: £1.4
million expense; 31 March 2021: £1.3 million expense) due to non-cash
inflation uplift on the group's index-linked derivatives.
7. Tax
The total effective tax rate, after adjusting for the one-off deferred tax
charge to restate the brought forward deferred tax liability at the new 25 per
cent future headline rate of tax, was 22 per cent for the current period,
compared with 19 per cent in the previous half year; the increase being due to
the current year deferred tax also being measured at the new future headline
tax rate of 25 per cent. The split of the total tax charge between current and
deferred tax was due to ongoing timing differences in relation to tax
deductions on capital investment and unrealised gains and losses on treasury
derivatives.
For the current period, the current tax is significantly lower due to the
impact of the capital allowances "super deductions", announced in the March
2021 Chancellors Budget and effecting our eligible plant and machinery
additions in 2022 and 2023.
The tax adjustments taken to equity primarily relate to remeasurement
movements on the group's defined benefit pension schemes.
8. Earnings per share
Basic and diluted earnings per share are calculated by dividing (loss)/profit
after tax by the weighted average number of shares in issue during the period.
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m
£m £m
(Loss)/profit after tax attributable to equity holders of the company -
continuing operations
(216.2) 162.0 453.4
Weighted average number of shares in issue in millions
Basic 681.9 681.9 681.9
Diluted 683.6 683.5 683.5
Earnings per share in pence
Basic (31.7) 23.8 66.5
Diluted (31.6) 23.7 66.3
9. Dividends
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m
£m £m
Dividends relating to the period comprise:
Interim dividend 98.9 98.3 98.3
Final dividend - - 196.6
( ) 98.9 98.3 294.9
Dividends deducted from shareholders' equity comprise:
Interim dividend - - 98.3
Final dividend 196.6 193.7 193.6
( ) 196.6 193.7 291.9
The interim dividends for the six months ended 30 September 2021 and 30
September 2020, and the final dividend for the year ended 31 March 2021, have
not been included as liabilities in the respective condensed consolidated
financial statements at 30 September 2021 and 30 September 2020, and the
consolidated financial statements at 31 March 2021, because they were approved
after the reporting date.
The interim dividend of 14.50 pence per ordinary share (2020: interim dividend
of 14.41 pence per ordinary share, final dividend of 28.40 pence per ordinary
share) is expected to be paid on 1 February 2022 to shareholders on the
register at the close of business on 17 December 2021. The ex-dividend date
for the interim dividend is 16 December 2021.
10. Interests in joint ventures and other investments
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m
£m £m
( )
Joint ventures at the start of the period - 46.8 46.8
Additions 18.3 - -
Share of (losses)/profits of joint ventures (1.8) 2.5 (9.3)
Less: Share of losses allocated to other components - 0.1
of long-term interest in joint ventures 14.2
Dividends received from joint ventures - (6.4) (6.4)
Currency translation differences - 1.3 (1.6)
Disposal of joint venture - - (43.7)
Joint ventures at the end of the period 16.5 44.3 -
Other investments 0.1 0.1 0.1
Interests in joint ventures and other investments 16.6 44.4 0.1
( )
Following the disposal of its interest in AS Tallinna Vesi (Tallinn Water) in
March 2021, joint ventures mainly comprise the group's 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.
As reported in the group's latest annual report, at 31 March 2021 a fully
drawn £32.5 million revolving credit facility extended to Water Plus by
United Utilities PLC, which was presented within amounts owed by related
parties included within trade and other receivables, was considered to form
part of the group's long-term interest in the Water Plus joint venture as
there was a clear expectation that it would be converted to additional equity
share capital. As such, the group's £14.2 million share of losses recognised
in the income statement for the year then ended (comprising the groups share
of Water Plus losses for the year of £8.9 million and £5.3 million of the
group's previously unrecognised share of losses relating to prior years) was
allocated against this fully drawn facility resulting in a net reported
balance of £18.3 million. As at 30 September 2020 there was not the same
expectation that this facility would be converted into additional equity share
capital, and therefore no unrecognised losses relating to prior years were
recognised against the related party receivable balance at that date.
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
period. Against this, the group has recognised its £1.8 million share of
Water Plus losses for the six month period ended 30 September 2021.
Details of transactions between the group and its joint ventures are disclosed
in note 18.
11. Retirement benefit surplus
The main financial assumptions used by the company's actuary to calculate the
defined benefit surplus of the United Utilities Pension Scheme (UUPS) and the
United Utilities PLC Group of the Electricity Supply Pension Scheme (ESPS)
were as follows:
Six months ended Six months ended Year ended
30 September 30 September 31 March
2021 2020 2021
% p.a. % p.a. % p.a.
Discount rate 2.05 1.60 2.05
Pensions increases 3.50 3.10 3.35
Pensionable salary growth:
ESPS 3.50 3.10 3.35
UUPS 2.60 1.90 2.45
Price inflation - RPI 3.50 3.10 3.35
Price inflation - CPI((1)) 2.90 1.90 2.75
( (1)) The CPI price inflation assumption represents a single weighted
average rate derived from an assumption of 2.60 per cent pre-2030 and 3.40 per
cent post-2030.
The discount rate is consistent with a high quality corporate bond rate with
2.05 per cent being equivalent to gilts + 75bps (30 September 2020: 1.60 per
cent being equivalent to gilts + 95bps; 31 March 2020: 2.05 per cent being
equivalent to gilts + 75bps). In order to align to emerging market practice
and provide a more robust estimate, the population of high quality corporate
bonds used in deriving the discount rate used to estimate the fair value of
defined benefit obligations was expanded during the prior year to include
those rated at least AA by one or more credit rating agencies, whereas
previously the rate was derived based on bonds rated AA by two or more
agencies.
At 30 September 2021, 31 March 2021 and 30 September 2020, mortality in
retirement is assumed to be in line with the Continuous Mortality
Investigation's (CMI) S2PA year of birth tables, with scaling factor of 106
per cent and 109 per cent for male pensioners and non-pensioners respectively,
and 104 per cent and 105 per cent for female pensioners and non-pensioners
respectively, reflecting actual mortality experience. At both 30 September
2021 and 31 March 2021, mortality in retirement is based on CMI 2020 long-term
improvement factors, with a long-term annual rate of improvement of 1.25 per
cent (30 September 2020: CMI 2019, long-term annual rate of improvement of
1.50 per cent).
The net pension income before tax in the income statement in respect of the
defined benefit schemes is summarised as follows:
Six months ended Six months ended Year ended
30 September 30 September 31 March
2021 2020 2021
£m £m £m
Current service cost 3.7 2.5 4.9
Curtailments/settlements - 0.2 0.6
Administrative expenses 0.8 1.1 3.0
Pension expense charged to operating profit 4.5 3.8 8.5
Net pension interest income credited to investment income (note 5) (7.3) (8.7)
(17.5)
Net pension income charged before tax (2.8) (4.9) (9.0)
The reconciliation of the opening and closing net pension surplus included in
the statement of financial position is as follows:
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m
£m £m
At the start of the period 689.0 754.1 754.1
Income recognised in the income statement 2.8 4.9 9.0
Contributions less unregistered pension promise payments 5.9 4.6 8.6
Remeasurement gains/(losses) gross of tax 123.4 (109.3) (82.7)
At the end of the period 821.1 654.3 689.0
The closing surplus at each reporting date is analysed as follows:
30 September 30 September 31 March
2021 2020 2021
£m £m £m
Present value of defined benefit obligations (3,341.9) (3,550.2) (3,295.7)
Fair value of schemes' assets 4,163.0 4,204.5 3,984.7
Net retirement benefit surplus 821.1 654.3 689.0
The £123.4 million remeasurement gain has principally resulted from increases
in the RPI inflation assumption being more than offset by increases in asset
returns.
As the 2018 valuation basis was consistent with a long-term target for
self-sufficiency, the expectation is that the pension schemes will be fully
funded on a low dependency basis without additional contributions from the
company.
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 2018 for both the group's ESPS and UUPS schemes. The triennial
actuarial valuations as at 31 March 2021 were ongoing as at the 30 September
2021 reporting date, and were not at a sufficiently advanced stage to enable
updated assumption estimates or member data to be incorporated into the
calculation of the overall IAS 19 surplus. It is expected that progress ahead
of the 31 March 2022 reporting date will enable these updates to be
incorporated into the calculation of the IAS 19 surplus at that point.
Defined contribution schemes
During the period, the group made £12.8 million (30 September 2020: £11.4
million; 31 March 2021: £23.4 million) of contributions to defined
contribution schemes which are included in employee benefits expense.
12. Borrowings
New borrowings raised during the six months ended 30 September 2021, 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. These notes have a settlement date of 4 October 2021 and
therefore are not included in the consolidated statement of financial position
as at 30 September 2021.
Borrowings at 30 September 2021 include £60.6 million in relation to lease
liabilities (30 September 2020: £58.0 million; 31 March 2021: £60.0
million), of which £57.2 million (30 September 2020: £55.3 million; 31 March
2021: £56.7 million) was classified as non-current and £3.4 million (30
September 2020: £2.7 million; 31 March 2021: £3.3 million) was classified as
current.
13. Fair values of financial instruments
The fair values of financial instruments are shown in the table below.
31 March 2021
30 September 2021 30 September 2020
Fair Carrying value Fair Carrying value Fair Carrying value
value £m value £m value £m
£m £m £m
Financial assets at fair value through profit or loss
Derivative financial assets - fair value hedge 280.8 280.8 459.3 459.3 275.6 275.6
Derivative financial assets - held for trading 152.4 152.4 200.0 200.0 142.6 142.6
Derivative financial assets - cash flow hedge 48.1 48.1 2.6 2.6 6.5 6.5
Investments 0.1 0.1 0.1 0.1 0.1 0.1
Financial liabilities at fair value through profit or loss
Derivative financial liabilities - fair value hedge (13.7) (13.7) (0.2) (0.2) (12.6) (12.6)
Derivative financial liabilities - held for trading (95.8) (95.8) (187.5) (187.5) (102.1) (102.1)
Derivative financial liabilities - cash flow hedge - - (0.4) (0.4) - -
Financial liabilities designated at fair value through profit or loss (388.0) (388.0) (411.2) (411.2) (373.6) (373.6)
Financial instruments for which fair value does not approximate carrying value
Financial liabilities in fair value hedge relationships (3,002.8) (2,940.1) (2,797.9) (2,763.5) (2,913.6) (2,895.5)
Other financial liabilities at amortised cost (6,697.4) (5,134.7) (7,386.3) (5,771.5) (6,568.1) (5,182.7)
(9,716.3) (8,090.9) (10,121.5) (8,472.3) (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 £2,630.0
million (30 September 2020: £2,524.7 million; 31 March 2021: £2,766.0
million) for financial liabilities in fair value hedge relationships, and
£3,761.6 million (30 September 2020: £1,689.7 million; 31 March 2021:
£2,321.6 million) for other financial liabilities at amortised cost.
The £1,304.0 million increase in 'level 1' fair value liability measurements
compared with the position at 31 March 2021 (30 September 2020: £2,033.0
million increase compared with 31 March 2020; 31 March 2021: £2,906.2 million
increase compared with 31 March 2020) is largely due to an increase in the
number of observable quoted bond prices in active markets at 30 September
2021. 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 2021.
The principal reason for the increase in the difference between the fair value
and carrying value of the group's borrowings at 30 September 2021 compared
with the position at 31 March 2021 is a decrease in credit spreads during the
period.
14. Cash generated from operations
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m
£m £m
Operating profit 332.8 318.5 602.1
Adjustments for:
Depreciation of property, plant and equipment 186.8 182.2 379.8
Amortisation of intangible assets 20.7 20.6 42.5
Loss on disposal of property, plant and equipment 3.0 2.2 10.7
Amortisation of deferred grants and contributions (7.7) (7.1) (15.0)
Equity-settled share-based payments charge 2.6 1.4 3.6
Changes in working capital:
Increase in inventories (0.6) (2.4) (1.7)
(Increase)/decrease in trade and other receivables (14.2) 0.6 18.1
Increase/(decrease) in trade and other payables 11.5 (16.3) 2.5
Increase/(decrease) in provisions 2.0 (3.3) (5.3)
Pension contributions paid less pension expense charged to operating profit (1.4) (0.8) (0.1)
Cash generated from operations 535.5 495.6 1,037.2
15. Net debt
Movements in net debt during the period were as follows:
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m
£m £m
At the start of the period 7,305.8 7,227.5 7,227.5
Net capital expenditure 288.0 312.5 639.0
Dividends (note 9) 196.6 193.7 291.9
Interest 58.2 65.8 129.3
Inflation expense on index-linked debt (note 6) 92.8 39.9 52.6
Fair value movements including foreign exchange (17.6) (4.6) 34.5
Tax 6.7 31.1 48.5
Extension of loans to joint ventures - 29.5 2.0
Proceeds from disposal of investment - - (85.3)
Non-cash movements in lease liabilities 1.6 1.1 4.1
Other 4.2 1.3 5.3
Dividends from joint ventures - (6.4) (6.4)
Cash generated from operations (note 14) (535.5) (495.6) (1,037.2)
At the end of the period 7,400.8 7,395.8 7,305.8
Movements in net debt during the period are impacted by net cash generated
from financing activities as disclosed in the consolidated statement of cash
flows.
Net debt at the end of each period comprised:
30 September 30 September 31 March
2021 2020 2021
£m £m £m
Borrowings 8,462.8 8,946.2 8,451.8
Derivative financial instruments (liabilities) 109.5 188.1 114.7
Derivative financial instruments (assets) (481.3) (661.9) (424.7)
Cash and short-term deposits (655.9) (899.0) (744.1)
Net debt - as agreed to statement of financial position 7,435.1 7,573.4 7,397.7
Adjustments to exclude the fair value impact of:
Interest rate derivatives fixing future nominal interest rates (49.9) (152.6) (84.6)
Inflation derivatives fixing future real interest rates (32.5) (27.2) (13.8)
Electricity derivatives fixing future electricity costs 48.1 2.2 6.5
Net debt - as adjusted to align to the group's definition 7,400.8 7,395.8 7,305.8
The group defines net debt as the sum of borrowings and derivative financial
instruments, net of cash and short term deposits, and adjusted to exclude the
impact of derivatives that are not hedging specific debt instruments. In
presenting net debt in this way, the group aims to give a fair reflection of
the net debt amount the group is contractually obliged to repay, consistent
with the approach taken by credit rating agencies, and the regulatory
economics of the group's arrangements. As the impact of derivatives that are
not hedging specific debt instruments is excluded from the group's definition
of net debt, fair value movements associated with these derivatives are not
included in above reconciliation from the opening to closing net debt
position.
16. Other reserves
Six months ended 30 September 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 2021 - 1,033.3 (703.6) 0.4 6.2 336.3
Changes in fair value recognised in other comprehensive income - - - 1.8 44.2 46.0
Amounts reclassified from other comprehensive income to profit or loss - - - - (1.3) (1.3)
Tax on items taken directly to equity (note 7) - - - (0.5) (10.7) (11.2)
At 30 September 2021 - 1,033.3 (703.6) 1.7 38.4 369.8
Six months ended 30 September 2020
Cumulative exchange reserve Capital redemption reserve Merger reserve Cash flow hedge reserve Total
£m £m £m Cost of hedging reserve £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 - - - (7.5) 4.9 (2.6)
Tax on items taken directly to equity (note 7) - - - 1.4 (0.9) 0.5
Foreign exchange adjustments 1.3 - - - - 1.3
At 30 September 2020 (1.1) 1,033.3 (703.6) 4.6 2.7 335.9
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 taken directly to equity (note 7) - - - 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 cost of hedging reflects accumulated fair value movements on
cross-currency swaps resulting from changes in the foreign currency basis
spread, which represents a liquidity charge inherent in foreign exchange
contracts for exchanging currencies and is excluded from the designation of
cross-currency swaps as hedging instruments.
On adoption of IFRS 9, the group designated a number of swaps hedging
non-financial risks in cash flow hedge relationships in order to give a more
representative view of operating costs. The cash flow hedge reserve reflects
fair value movements relating to the effective part of swaps hedging
non-financial risks that have been designated in cash flow hedge relationships
in order to give a more representative view of operating costs.
17. Commitments and contingent liabilities
At 30 September 2021 there were commitments for future capital expenditure
contracted but not provided for of £319.1 million (30 September 2020:
£377.3 million; 31 March 2021: £336.7 million).
Since 2016, the group has received indications from a number of groups of
property search companies (PSCs) that they intend to claim compensation for
amounts paid in respect of CON29DW water and drainage search reports, which
they allege should have been provided to them either free of charge or for a
nominal fee in accordance with the Environmental Information Regulations. In
April 2020 a group of over 100 PSCs, comprising companies within the groups
that had previously issued notice of intended claims, served proceedings on
all of the water and sewerage undertakers in England and Wales, including
United Utilities Water Limited, for an unspecified amount of compensation.
This is an industry-wide issue with the litigation still in its early stages.
The water and sewerage undertakers are working to agree with the claimants a
list of material issues and fact patterns, although the litigation's likely
direction and the quantum of any compensation being claimed remains uncertain
at this stage.
However, based on the information currently available the likelihood of the
claim's success is considered to be low, and any potential outflow is not
expected to be material.
The group has credit support guarantees as well as general performance
commitments and potential liabilities under contract that may give rise to
financial outflow. The group has determined that the possibility of any
outflow arising in respect of these potential liabilities is remote and, as
such, there are no contingent liabilities to be disclosed (30 September 2020
and 31 March 2021: none).
18. Related party transactions
The related party trading transactions with the group's joint ventures and
other interests during the period, and amounts outstanding at the period end
date, were as follows:
Six months ended Six months ended Year ended
31 March
30 September 30 September
2021
2021 2020
£m
£m £m
Sales of services 183.1 172.5 362.9
Charitable contributions advanced to related parties 0.1 - -
Interest income and fees recognised on loans to related parties 1.5 1.2
3.7
Amounts owed by related parties 96.8 154.3 113.8
Amounts owed to related parties 1.9 4.6 2.4
Sales of services to related parties mainly represent non-household wholesale
charges to Water Plus that were billed and accrued during the period. These
transactions were on market credit terms in respect of non-household wholesale
charges, which are governed by the wholesale charging rules issued by Ofwat.
At 30 September 2021 amounts owed by joint ventures, as recorded within trade
and other receivables in the statement of financial position, were £96.8
million (30 September 2020: £154.3 million; 31 March 2021: £113.8 million),
comprising £28.2 million (30 September 2020: £29.8 million; 31 March 2021:
£27.1 million) of trade balances, which are unsecured and will be settled in
accordance with normal credit terms, and £68.6 million (30 September 2020:
£124.5 million; 31 March 2021: £86.7 million) relating to loans.
Included within these loans receivable were the following amounts owed by
Water Plus:
· £66.4 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 interest rate of the Bank of England base rate plus a
credit margin. This balance comprises £67.5 million outstanding net of a
£1.1 million allowance for expected credit losses; and
· £0.8 million receivable being the £10.5 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 £0.2
million allowance for expected credit losses, and £9.5 million of the group's
cumulative recognised share of joint venture losses as the loan is deemed to
be part of the group's long-term investment (see note 10). No losses were
recognised against this loan during the six months to 30 September 2021 as all
of the group's share of Water Plus losses for the period were recognised
against the equity investment in the joint venture following the conversion of
a £32.5 million revolving credit facility to equity share capital in April
2021. This is a zero coupon shareholder loan with a total amount outstanding
at 30 September 2021 of £12.5 million, comprising the £10.5 million
receivable measured at fair value, and £2.0 million recorded as an equity
contribution to Water Plus recognised within interests in joint ventures.
A further £1.4 million of non-current receivables was owed by other related
parties at 30 September 2021.
During the period, United Utilities PLC provided guarantees in support of
Water Plus in respect of certain amounts owed to wholesalers. The aggregate
limit of these guarantees was £54.1 million, of which £32.1 million related
to guarantees to United Utilities Water Limited.
At 30 September 2021, amounts owed to related parties were £1.9 million (30
September 2020: £4.6 million; 31 March 2021: £2.4 million). Included within
this amount is £1.1 million due to Water Plus for the surrender of consortium
relief tax losses. The amounts outstanding are unsecured and will be settled
in accordance with normal credit terms.
19. Events after the reporting period
Apart from the issuance of £100 million fixed rate notes traded on 27
September 2021 with a settlement date of 4 October 2021, as set out in note
12, there were no material events after the reporting date that required
recognition or disclosure in the condensed consolidated financial statements
for the period ended 30 September 2021. This issuance did not settle until
after the reporting period, and therefore it has not been included in the
condensed consolidated financial statements as it represents a non-adjusting
event.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA.
Responsibilities Statement
We confirm that to the best of our knowledge:
· the condensed set of financial statements has been prepared in
accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU;
· the interim management report includes a fair review of the
information required by:
· DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first six months
of the financial year and their impact on the condensed set of financial
statements; and a description of the principal risks and uncertainties for the
remaining six months of the year; and
· DTR 4.2.8R of the Disclosure and Transparency Rules, being related
party transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial
position or performance of the entity during that period; and any changes in
the related party transactions described in the last annual report that could
do so.
The directors of United Utilities Group PLC at the date of this announcement
are listed below:
Sir David Higgins
Steve Mogford
Phil Aspin
Mark Clare
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
23 November 2021 23 November 2021
Chief Executive Officer Chief Financial Officer
INDEPENDENT REVIEW REPORT TO UNITED UTILITIES GROUP PLC
Conclusion
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
September 2021 which comprises the consolidated income statement, the
consolidated statement of comprehensive income, the consolidated statement of
financial position, the consolidated statement of changes in equity, the
consolidated statement of cash flows and the related explanatory notes.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 September 2021 is not prepared,
in all material respects, in accordance with IAS 34 Interim Financial
Reporting as adopted for use in the UK and the Disclosure Guidance and
Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the
UK FCA").
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410 Review of Interim Financial Information
Performed by the Independent Auditor of the Entity issued by the Auditing
Practices Board for use in the UK. A review of interim financial information
consists of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review procedures.
We read the other information contained in the half-yearly financial report
and consider whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of financial
statements.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an
audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 1, the latest annual financial statements of the group
were prepared in accordance with International Financial Reporting Standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European
Union and in accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and the next annual financial
statements will be prepared in accordance with UK-adopted international
accounting standards. The directors are responsible for preparing the
condensed set of financial statements included in the half-yearly financial
report in accordance with IAS 34 as adopted for use in the UK.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.
Ian Griffiths
for and on behalf of KPMG LLP
Chartered Accountants
1 St Peter's Square
Manchester
M2 3AE
23 November 2021
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