United Utilities delivers robust set of underlying financial and operational results

United Utilities Group plc (LON:UU) has announced half year results for the six-month period to 30 September 2023.

Louise Beardmore, Chief Executive Officer, said:

“We are announcing a robust set of underlying financial and operational results today, in what has been a busy six months, including submission of our ambitious business plan for 2025-30.

We continue to focus on delivering for our customers, communities and the environment – and creating a stronger, greener and healthier North West. We are providing affordability support to over 350,000 customers – more than ever before – and we are on track to achieve our best ever year on customer outcome delivery incentives. We are doing more to protect and enhance the North West’s waterways and natural habitats and we’re on course to attain the highest 4-star rating from the Environment Agency for 2023.

Last month, we set out an ambitious £13.7 billion plan for 2025-30, a plan that will transform the delivery of services for customers and the environment in the North West and at the same time supporting 30,000 jobs, 7,000 of which will be new. Our strong balance sheet and liquidity puts us in a great position to deliver it, and we aren’t waiting – we have made an early start on overflows, representing £1.2 billion of our proposed programme, and allowing us to press ahead with work to reduce storm overflow spills and deliver the step change we all want to see.”

Key financials – six months ended 30 September

	Reported			Underlying1
£m	2023	2022	% change	2023	2022	% change
Revenue	982.0	919.3	+6.8%	982.0	919.3	+6.8%
Operating profit	240.6	258.5	-6.9%	271.1	258.5	+4.9%
Profit/(loss) before tax	160.0	426.3	-62.5%	90.3	(7.9)	n/a
Profit/(loss) after tax	116.8	353.0	-66.9%	90.3	(12.2)	n/a
EPS (pence)	17.1	51.8	-67.0%	13.2	-1.8	n/a

	2023	2022	% change
Interim DPS (pence)	16.59	15.17	+9.4%
Net regulatory capex (£m)	371.8	334.5	+11.2%
RCV2 (£m)	14,406	13,458	+7.0%
Net debt (£m)	8,541	7,829	+9.1%
RCV gearing3 (%)	59%	58%	+1.7%

Operational highlights

·    Forecasting to double our ODI reward this year, in line with guidance at over £50m

·    On track to achieve 4 star status for 2023 in the EA’s Environmental Performance Assessment

·    Going further and faster on tackling overflows, following regulatory approvals to accelerate delivery of infrastructure investment

·    Progressing well with leakage programme, forecasting to achieve our best ever performance

·    Ranked 1st WaSC⁴ and 4th utility company out of 30 in the UK Customer Satisfaction Index⁵

·    Supporting more customers, with over 370,000 households on Priority Services register and over 350,000 customers supported through affordability schemes so far this AMP

·    Progressing plans for pioneering carbon-capture facility, supporting net zero plans and making an important contribution to the UK’s carbon-capture potential

·    High quality PR24 business plan submission for 2025-30, with strong customer support and ambitious targets to create a stronger, greener and healthier North West

Financial highlights

·    Underlying operating profit of £271m, reported operating profit of £241m

·    Underlying EPS of 13.2p, up from -1.8p, reported EPS of 17.1p

·    Low level of gearing at 59% and solid credit ratings providing future financial flexibility

·    Pension scheme buy-in transaction, covering around 2/3rds of liabilities and representing a significant milestone in our de-risking journey

·    AMP7 funding in place, liquidity extending into 2026

·    Recommended interim dividend of 16.59p, in line with policy

Reiterate financial framework guidance for current AMP7 regulatory period

·    Continue to target AMP7 net ODI reward of around £200m

·    Forecast average real RoRE⁶ of 6-8%

·    RCV growth of 4-5% nominal compound annual growth rate

·    Targeting dividend growth in line with CPIH

·    Maintain gearing within target range of 55-65%

Half Year Results presentation webcast

We will be hosting a webcast presentation for investors and analysts starting at 9.00am on Thursday 16 November 2023, which can be accessed using the following details:

https://us06web.zoom.us/j/81196837873?pwd=cF5Haal0ajFnYigfwjmMLntbay0gn7.1

Meeting ID: 811 9683 7873, Passcode: 978727

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/

Notes

¹ Underlying measures are defined in the underlying profit tables.

² United Utilities Water Limited’s adjusted RCV (adjusted for actual spend, timing differences and including full expected value of AMP7 ex-post adjustment mechanisms). Prior year figures have been re-presented for comparative purposes.

³ RCV gearing calculated as group net debt including loan receivable from joint venture/United Utilities Water Limited’s adjusted RCV (adjusted for actual spend, timing differences and including full expected value of AMP7 ex-post adjustment mechanisms). Prior period figures have been re-presented for comparative purposes.

⁴ Water and Sewerage Company

⁵ UKCSI is an Institute for Customer Service measure

⁶ Return on regulated equity

OPERATIONAL REVIEW

Submitting our most ambitious plan

Last month, we submitted a high quality and ambitious business plan to our regulator, Ofwat, for 2025-30, through which we are proposing the largest investment in the region’s water and wastewater infrastructure in over 100 years. Highlights from our United Utilities Water plan include:

·    £13.7 billion total expenditure across 2025-30, with 93% of enhancement spend driven by statutory requirements, resulting in 8.7% nominal RCV growth per annum, equating to over 50% growth across the five-year period;

·    Improving water and wastewater services, increasing resilience, protecting and enhancing the environment, and reducing greenhouse gas emissions;

·    Proposing to double our support package to £525 million, with financial support for one in six customers, reducing the risk of hardship from the necessary bill increases;

·    Financing the investment in a responsible and sustainable way, with financial flexibility to finance the plan with average gearing of 65% over the AMP, based on Ofwat’s September 2022 ‘early view’ WACC assumption, and without assuming new equity;

·    Strong levels of customer support at 74%, following a regional approach and engaging with 95,000 people across our five great counties; and

·    Real opportunities for the North West regional economy, with a chance to drive inward investment and our plan supporting 30,000 jobs.

Supporting customers, employees and communities for a stronger North West

We recognise that affordability is a hugely important issue for customers, particularly against a backdrop of rising household costs and economic uncertainty. We are seeing sustained demand for financial support from customers and have helped over 350,000 customers with financial support so far during AMP7. We continue to work with the Department for Work and Pensions (DWP) to identify hard to reach customers eligible for our support schemes and proactively apply lower bill tariffs. We continue to develop our multi-award winning Priority Services offering, which helps vulnerable customers in our region. We now have over 370,000 customers on our Priority Services register and are on track to meet our full year target, and have lifted around 100,000 customers out of water poverty so far this AMP. Our team was rated number one WaSC, and fourth utility company overall, for customer service in the latest independent UK Customer Satisfaction Index (UKCSI).

We have welcomed more than 80 new graduates and apprentices in our September intake, including our first digital cohort, and this year we have announced additional graduate opportunities in our newly formed rainwater management team, supporting our commitments to river health. We were also recently awarded the Water Industry Skills Employer of the Year, in recognition of our technical competence and assessment programmes, key health and safety practical training, and award-winning internally-delivered apprenticeship pathways.

The Lake District is a special place in our region, with Lake Windermere at the heart of the National Park. Over the summer we opened our first ever shop on the Windermere High Street, welcoming anyone who wants to drop by. For questions or advice on anything from overflows to water bills, career opportunities to property development, we are on hand for the people of our region.

We have been accredited with the Fair Tax Mark for five years in a row, maintain upper quartile performance across a range of trusted ESG ratings, including MSCI and Sustainalytics, and we have once again been categorised as having the highest financial resilience status in Ofwat’s latest Monitoring Financial Resilience assessment.

Protecting and enhancing the environment for a greener North West

Our core business is inextricably linked to the natural environment and we recognise the responsibility and opportunity we have to improve and enhance the environment. We have completed 67% of our AMP7 environmental improvement programme, and we are currently on track to attain the highest 4-star rating in the Environment Agency’s Environmental Performance Assessment (EPA) for 2023.

Our PR24 submission included the UK’s biggest storm overflow spill reduction plan, targeting a 60% reduction in the decade to 2030. We have made a fast start through our ‘Better Rivers’ programme, supported by additional reinvestment of outperformance, and had made good progress as at the end of the 2023 financial year with a 39% reduction in reported spills against the 2020 baseline. As part of the Accelerated Infrastructure Delivery Project earlier this year, Ofwat gave approval for the company to progress with 154 priority projects during 2023-25. This means we are able to progress work on around £200 million worth of projects during 2023-25.

Despite experiencing a number of storm events and severe rainfall, we are on track to deliver a reduction in average spills per overflow again this year. These storms have, however,  impacted our flooding performance. As a result we expect to be in penalty position on our annual internal sewer flooding performance commitment.

In June, we experienced a fractured outlet pipe at our Fleetwood Wastewater Treatment Works. Given the location and difficulty of the repair, the engineering solution was more complex than usual. To minimise any impact as best we could, our teams worked night and day to optimise the network and constructed a 2 kilometre, 5 lane bypass around the fractured pipe. During this time, flows were diverted to alternative sites and the Environment Agency issued precautionary advice in relation to the bathing water along the Fylde coast. The site is now operating at full capacity while the permanent repair is ongoing.  This has resulted in £30 million of additional operating and infrastructure renewals expenditure in the period, which has been excluded from underlying results as shown in the underlying profit measure tables.

A pioneering carbon-capture facility recently received planning permission to be constructed at our head office in Warrington. Funded by the UK’s Department for Energy Security and Net Zero through their Direct Air Capture and Greenhouse Gas Removal innovation programme, we are excited to host this innovative project, and to play a part in the UK’s plans for Net Zero by 2050. The vision for the site is that nothing will go to waste – once the facility’s carbon-capture capabilities are proven, the heat and power generated by the process will be redirected to heat United Utilities’ on-site buildings as part of our long-term sustainability goals.

Providing a great quality and reliable water service for a healthier North West

Ensuring we provide great quality, wholesome drinking water at all times is a priority for us, and this is at the heart of our Water Quality First programme. As part of the initiative, this summer we completed a rigorous eight-year programme of inspecting and cleaning every storage reservoir before returning them to full capacity. Having achieved this milestone, we have implemented an ongoing cleaning programme, with a rolling schedule to ensure the water we provide is of the best quality at all times.

In July this year, the Drinking Water Inspectorate published its Drinking Water 2022 report, in which it commended our efforts in taking positive action to put water quality first, and we won the Drinking Water Initiative of the Year in the 2023 Water Industry Awards. Water Quality First is also having a measurable benefit in customer contacts as we continue to outperform on this performance commitment.

Leakage performance has also been strong so far this year, as we progress at pace with our detailed programme, which is enabling us to fix more leaks. We are forecasting to achieve our best ever leakage performance this year, and an ODI reward on this measure. Water supply levels remain strong as we enter the winter period, helped by higher levels of rainfall over the summer and our integrated supply network, which has built flexibility into our system to balance supply and demand needs.

AMP7 FINANCIAL FRAMEWORK

Our five-year financial framework captures anticipated performance in the five years to 31 March 2025. This period aligns with the AMP7 regulatory period. Our financial framework below is unchanged from 2022/23 full year results.

Investment and regulated asset growth

We expect to deliver a number of capital programmes in AMP7, in addition to our base totex (total expenditure) programme. These include Green Recovery, the Accelerated Infrastructure Delivery Project spend and AMP8 transitional investment. Combined with the impact of inflation, our regulated assets are expected to grow at a compound annual growth rate of 4 to 5 per cent across the five years to March 2025.

Return on regulated equity

The return on regulatory equity (RoRE) metric measures returns (after tax and interest) earned by reference to notional regulated equity. Overall returns comprise a base return on equity plus a contribution from outcome delivery incentives, operating efficiency, financing and tax efficiency and customer service. We currently expect to deliver average returns of between 6 and 8 per cent in AMP7, on a real RPI/CPIH blended basis.

Balance sheet

The board has set a target gearing range for the AMP7 regulatory period of 55 to 65 per cent net debt to regulated capital value. As at 30 September 2023 our gearing is in the lower half of this range at 59 per cent.

Dividend policy

The group maintains a dividend policy to target a growth rate of CPIH inflation each year through to 2025. The annual increase in the dividend is based on the CPIH element included within allowed regulated revenue for the current financial year. This is calculated as using the CPIH annual rate from the November prior (i.e. the 2023/24 dividend is equal to the 2022/23 dividend indexed for the movement in CPIH between November 2021 and November 2022).

OUTLOOK AND GUIDANCE

ODI rewards

We are forecasting to achieve a net customer ODI reward of over £50m in FY23 and targeting a net reward of around £200 million in total over AMP7.

Revenue

Revenue is expected to increase by around £150 million in 2023/24, largely reflecting the November 2022 CPIH inflation of 9.4 per cent, partially offset by a £20 million net impact of over/under-recovery during 2022/23 and 2021/22 (under-recovery in 2022/23, for which we have re-baselined in 2023/24, and an over-recovery in 2021/22).

Underlying operating costs

Operating costs are expected to be around £60 million higher year-on-year. This increase is largely driven by inflation, with the largest inflationary pressures impacting power, labour, and chemicals costs. The remaining increase reflects the 2023/24 operating cost impact of additional investments, including our Better Rivers programme.

Underlying net finance expense

Underlying net finance expense is expected to be at least £150 million lower year-on-year, due to the impact of falling inflation. As at 31 March 2023, we had £4.5 billion of index-linked debt exposure, giving rise to a £45m swing in our annual interest charge for every 1 per cent change in inflation. Our cash interest in 2022/23 was £102 million and we expect this to be slightly higher in 2023/24.

Underlying tax

Our current tax charge is expected to be nil in 2023/24, reflecting expected benefits following the spring budget in relation to “full expensing” and the 50 per cent first year allowances on longer life assets.

Capital expenditure

Capex in 2023/24 is expected to be in the range of £720 million to £800 million. In addition to our AMP7 base programme, this reflects capital expenditure for the year in relation to our additional investment (including Green Recovery and investment supporting our Better Rivers programme), and AMP8 acceleration capital programmes.

FINANCIAL REVIEW

Key financials (£m) – six months ended 30 September

	Reported			Underlying1
	2023	2022	% change	2023	2022	% change
Revenue	982.0	919.3	+6.8%	982.0	919.3	+6.8%
Operating expenses	(421.9)	(361.8)	+16.6%	(401.3)	(361.8)	+10.9%
Infrastructure renewals expenditure	(106.1)	(92.2)	+15.1%	(96.2)	(92.2)	+4.3%
Depreciation and amortisation	(213.4)	(206.8)	+3.2%	(213.4)	(206.8)	+3.2%
Operating profit	240.6	258.5	-6.9%	271.1	258.5	+4.9%
Net finance (expense)/income	(79.5)	136.4	n/a	(179.7)	(266.6)	-32.6%
Share of (losses)/profits of JVs	(1.1)	0.2	n/a	(1.1)	0.2	n/a
Profit on disposal of subsidiary	–	31.2	n/a	–	–	–
Profit/(loss) before tax	160.0	426.3	-62.5%	90.3	(7.9)	n/a
Tax charge	(43.2)	(73.3)	-41.1%	–	(4.3)	n/a
Profit/(loss) after tax	116.8	353.0	-66.9%	90.3	(12.2)	n/a
EPS (pence)	17.1	51.8	-67.0%	13.2	-1.8	n/a

	2023	2022	% change
Interim DPS (pence)	16.59	15.17	+9.4%
Net regulatory capex (£m)	371.8	334.5	+11.2%
RCV2 (£m)	14,406	13,458	+7.0%
Net debt (£m)	8,541	7,829	+9.1%
RCV gearing3 (%)	59%	58%	+1.7%

¹ Underlying measures are defined in the underlying profit tables.  

² United Utilities Water Limited’s adjusted RCV (adjusted for actual spend, timing differences and including full expected value of AMP7 ex-post adjustment mechanisms). Prior period figures have been re-presented for comparative purposes.

³ RCV gearing calculated as group net debt including loan receivable from joint venture/United Utilities Water Limited’s adjusted RCV (adjusted for actual spend, timing differences and including full expected value of AMP7 ex-post adjustment mechanisms). Prior period figures have been re-presented for comparative purposes.

We have delivered robust underlying financial performance for the half year. Revenue increased 7 per cent, mainly driven by the inflation increase allowed as part of our revenue cap. Inflationary pressures have once again increased our operating costs, however we continue to work hard to contain the inflation impact on overall costs within the totex inflation allowance allowed for in our regulatory model. The combined effect of the higher revenue, partly offset by inflation increases to costs resulted in underlying operating profit increasing 5 per cent to £271 million. Reported operating profit was £30 million lower at £241 million reflecting an adjusting item in respect of costs associated with a fractured outlet pipe at our Fleetwood Wastewater Treatment Works.

Non-cash interest expense on our index-linked debt declined, resulting in an underlying profit of £90 million and an underlying earnings per share of 13.2 pence. Reported profit after tax was higher at £117 million, with reported earnings per share of 17.1 pence per share. Adjusted items between underlying and reported are set out in the underlying profit tables.

Our balance sheet continues to be one of the strongest in the sector. During the half year we completed a pension scheme buy-in transaction with Legal & General, covering 2/3rds of scheme liabilities and representing a significant milestone in our de-risking journey. We have fully pre-funded our AMP7 investment requirements, and this, alongside our low level of gearing at 59% and solid credit ratings provide us with future flexibility as we approach AMP8.

Revenue

	£m
Six months to 30 September 2022	919.3
Regulatory revenue impact	52.7
Other impacts	10.0
Six months to 30 September 2023	982.0

Revenue was up £63 million, at £982 million, largely reflecting the inflation increase allowed as part of our revenue cap.

In the first half of 2023/24, we had a £53 million increase in the revenue cap due to regulatory adjustments, largely driven by a 9.4 per cent CPIH-linked increase partly offset by 1.4 per cent real reduction in allowed wholesale revenues as set out in our PR19 Final Determination.

Other revenue impacts largely reflect increases in consumption.

Operating profit

	£m
Underlying – Six months to 30 September 2022	258.5
Revenue increase	62.7
Inflationary increases on operating costs	(35.7)
Depreciation increase	(6.6)
Costs driving ODI performance	(4.9)
Other	(2.9)
Underlying operating profit -Six months to 30 September 2023	271.1
Adjusted items*	(30.5)
Reported – Six months to 30 September 2023	240.6

* Adjusted items are set out in the underlying profit tables

Underlying operating profit at £271 million was £13 million higher than the first half of last year, largely reflecting the increase in revenue, offset by inflationary pressures on our core costs.

Inflationary pressures continue to impact our operating costs and resulted in a £36 million increase for the first half of the year. The largest increases continue to be to power, labour and chemical costs, where we incurred an additional £13 million, £10 million and £6 million respectively.

As our asset base continues to grow, depreciation charge for the half year increased by £7 million.

The £5 million of additional expenditure driving improvements to ODI performance is primarily in relation to investment in Dynamic Network Management to drive improvements in management of our sewer network.

Reported operating profit decreased by £18 million on the same period last year, reflecting the £13 million increase in underlying operating profit offset by £30 million of costs associated with responding to a fractured outlet pipe at our Fleetwood Wastewater Treatment Works. The scale of the activity involved in remediating this failure, and the associated cost was not representative of normal business activity, and as such the costs were excluded in arriving at underlying operating profit.

Our industry-leading affordability schemes, combined with effective credit collection practices and utilisation of technology have meant that current year cash collection has been strong. Our bad debt position remains stable at 1.8 per cent of statutory revenue. 

Profit/(loss) before tax

	£m
Underlying – Six months to 30 September 2022	(8.0)
Underlying operating profit increase	12.6
Underlying net finance expense decrease	87.0
Share of JVs losses increase	(1.3)
Underlying profit before tax – Six months to 30 September 2023	90.3
Adjusted items *	69.7
Reported – Six months to 30 September 2023	160.0

* Adjusted items are set out in the underlying profit tables.

Underlying profit before tax of £90 million compared to a £8 million underlying loss before tax in the first half of last year. The £98 million difference reflects the £13 million increase in underlying operating profit and a £87 million decrease in underlying net finance expense, partly offset by a small increase in the share of losses of joint ventures of £1 million (from a £0.2 million share of profits in the prior half year to a £1.1 million share of losses in the current half year). Underlying profit before tax reflects presentational adjustments as outlined in the underlying profit tables below.

Reported profit before tax decreased by £266 million to £160 million reflecting an £18 million decrease in reported operating profit and a £216 million increase in reported net finance expense (from a £136 million reported net finance income to a £80 million reported net finance expense), a £31 million profit on disposal of our subsidiary United Utilities Renewable Energy Limited recognised in the previous first half, and a small increase in the share of losses of joint ventures of £1 million, as noted above.

·    Net finance expense

The underlying net finance expense of £180 million was £87 million lower than the same period last year mainly due to significantly lower inflation resulting in a £106 million decrease in the non-cash indexation on our debt and derivative portfolio, partly offset by a reduction in capitalised interest of £7 million, and rising interest rates resulting in higher net interest payable of £12 million.

Cash interest of £60 million was £6 million higher than the first half of last year. Cash interest excludes non-cash items mainly comprising the indexation on our debt and derivative portfolio, capitalised interest and net pension interest income.

Reported net finance expense of £80 million was £216 million higher than the first half of last year, reflecting a £303 million reduction in net fair value gains on debt and derivatives (excluding interest on debt and derivatives under fair value option) from £403 million last year to £100 million this year, partly offset by the £87 million decrease in underlying net finance expense.

·    Joint ventures

The group incurred a share of the losses of Water Plus for the six months ended 30 September 2023 of £1.1 million all of which has been recognised in the income statement. This compares to a share of the profits of Water Plus of £0.2 million for the six months ended 30 September 2022, with the difference largely as a result of the impact of higher interest rates.

Profit/(loss) after tax and earnings per share

	PAT£m	Earnings per sharePence/share
Underlying – Six months to 30 September 2022	(12.2)	(1.8)
Underlying profit before tax increase	98.2
Reduction in underlying tax charge	4.3
Underlying profit after tax – Six months to 30 September 2023	90.3	13.2
Adjusted items *	26.5
Reported – Six months to 30 September 2023	116.8	17.1

* Adjusted items are set out in the underlying profit tables.

The underlying profit after tax of £90 million was £102 million higher than the £12 million underlying loss in the first half of last year, reflecting the £98 million increase in underlying profit before tax and a £4 million reduction in underlying tax charge, resulting in a nil tax charge for the half year.

Reported profit after tax was higher at £117 million and reported earnings per share at 17.1 pence per share with the adjusted items between underlying and reported set out in the underlying profit tables.

·    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 2023 for the fifth year running.

In addition to corporation tax, the group makes further contributions to the public finances, typically of around £230 million per annum, in the form of business rates, employer’s national insurance contributions, environmental taxes, other regulatory service fees such as water abstraction charges as well as employment taxes on behalf of our 6,000 strong workforce.

For the current period, no  cash tax was paid due to the impact of the capital allowances first year allowances, announced in the March 2023 Chancellor’s Budget. 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.

The current tax charge was nil in the six months to 30 September 2023, compared with £4 million in the previous half year.

For the six months to 30 September 2023, we recognised a deferred tax charge of £43 million, compared with £69 million for the same period last year.

The total effective tax rate, was 27 per cent for the six months to 30 September 2023, compared with 17 per cent in the previous half year; the increase being mainly due to the non-taxable profit on the disposal of United Utilities Renewable Energy Ltd and capital allowance “super deductions” in the prior year and an increase in the corporation tax rate to 25 per cent in the current year.

In the period, there were £127 million of tax adjustments taken to equity, primarily relating to remeasurement movements on the group’s defined benefit pension schemes and on hedge effectiveness.

Dividend per share

The Board has proposed an interim dividend of 16.59 pence per ordinary share in respect of the six months ended 30 September 2023. This is an increase of 9.4 per cent compared with the interim dividend last year, in line with the group’s dividend policy of targeting a growth rate of CPIH inflation each year through to 2025. The 9.4 per cent increase is based on the CPIH element included within allowed regulated revenue for the 2023/24 financial year (i.e. the movement in CPIH between November 2021 and November 2022).

The interim dividend is expected to be paid on 1 February 2024 to shareholders on the register at the close of business on 22 December 2023. The ex-dividend date for the interim dividend is 21 December 2023. The election date for the Dividend Reinvestment Plan is 11 January 2024.

Cash flow

Net cash generated from operating activities for the six months to 30 September 2023 was £381 million, £20 million lower than £401 million in the same period last year, principally as a result of  net tax receipts in the prior half year. The net cash generated from continuing operating activities supports the dividends paid of £207 million and partially funds some of the group’s net capital expenditure of £360 million, with the balance being funded by net borrowings and cash and cash equivalents.

Pensions

As at 30 September 2023, the group had an IAS 19 net pension surplus of £269 million, compared with a surplus of £601 million at 31 March 2023. This £332 million decrease principally reflects the impact of the purchase of bulk annuities as part of a buy-in transaction completed in July with Legal & General leading to around a £220 million reduction in the surplus. The remaining reduction relates to an increase in the value of the schemes’ liabilities due to actual inflation being higher than assumed at 31 March 2023.  Further detail on pensions is provided in note 10 (‘Retirement benefit surplus’) of these condensed consolidated financial statements.

Financing

Net debt	£m
At 31 March 2023	8,200.8
Cash generated from operations	(440.7)
Net capital expenditure	359.0
Dividends	206.9
Indexation	160.0
Interest	59.8
Fair value movements	8.4
Exchange rate movements on bonds and term borrowings	(16.6)
Other	3.0
At 30 September 2023	8,540.6

Net debt at 30 September 2023 was £8,541 million, compared with £8,201 million at 31 March 2023. This comprises gross borrowings with a carrying value of £9,149 million, net derivative liabilities hedging specific debt instruments of £112 million and total indexation on inflation swaps of £108 million and is net of cash and bank deposits of £829 million.

Gearing, measured as group net debt including a £74 million loan receivable from joint venture divided by UUW’s adjusted RCV (adjusted for actual spend, timing differences and including full expected value of AMP7 ex-post adjustment mechanisms) of £14.4 billion, was 59 per cent at 30 September 2023, slightly higher than the 58 per cent at 31 March 2023, and remains within our target range of 55 to 65 per cent.

·    Cost of debt

As at 30 September 2023, the group had approximately £3.5 billion of RPI-linked instruments and £0.5 billion of CPI or CPIH-linked instruments held as debt. Including swaps, the group has RPI-linked debt exposure of £3.4 billion at an average real rate of 1.4 per cent, and £1.3 billion of CPI or CPIH-linked debt exposure at an average real rate of -0.6 per cent.

A significantly lower RPI inflation charge compared with the same period last year contributed to the group’s average effective interest rate of 6.0 per cent being lower than the rate of 9.0 per cent last half year. More information on this can be found in the underlying profit tables below.

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 2.6 to 2.8 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 senior unsecured debt obligations are rated Baa1 with Moody’s, A- with Fitch and BBB- with S&P, all on stable outlook.

·    Debt financing

The group has access to the international debt capital markets through its £10 billion medium-term note (MTN) programme. The group has fully pre-funded its AMP7 investment requirements, and has begun funding its AMP8 (2025-30) investment programme.

In the half year to September 2023, we raised £750 million of term funding. A 15.5 year £300 million sustainable public bond in April, a 9 year £100 million bilateral loan with a relationship bank in April, and a 13 year £350 million sustainable public bond in June. We renewed £100 million of relationship bank revolving credit facilities with an initial 5-year term.

·    Interest rate management

Long-term sterling inflation index-linked debt provides a natural hedge to assets and earnings under the regulatory model. At 30 September 2023, approximately 40 per cent of the group’s net debt was in RPI-linked form, representing around 24 per cent of UUW’s regulatory capital value, with an average real interest rate of 1.4 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 17 years.

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

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

·    Liquidity

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

At 30 September 2023, we had liquidity out into 2026, comprising cash and bank 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 ongoing capital investment programme.

Underlying profit

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

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

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

Adjusted item	Rationale
Adjustments not expected to recur
Fleetwood outfall pipe fracture	In June 2023 the group suffered a large-scale outfall pipe fracture at a major wastewater treatment works at Fleetwood. The scale of the activity involved in remediating this failure, and the associated cost (which was incurred across both operating expenditure and infrastructure renewals expenditure) was not representative of normal business activity and therefore the costs are excluded in arriving at underlying operating profit.
Profit on disposal of subsidiary	This relates to the disposal of the group’s subsidiary United Utilities Renewable Energy Limited, 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 interest on derivatives and debt under fair value option	Fair value movements on debt and derivative instruments can be both very 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 / (loss) 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 ended30 September 2023	6 months ended30 September 2022	Year ended31 March 2023
	£m	£m	£m
Operating profit per published results	240.6	258.5	440.8
Fleetwood outfall pipe fracture	30.5	–	–
Underlying operating profit	271.1	258.5	440.8
Net finance expense
	£m	£m	£m
Finance (expense)/income	(119.9)	117.3	(262.7)
Investment income	40.4	19.1	47.0
Net finance expense per published results	(79.5)	136.4	(215.7)
Adjustments:
Fair value gains on debt and derivative instruments, excluding interest on derivatives and debt under fair value option	(100.2)	(403.0)	(259.4)
Underlying net finance expense	(179.7)	(266.6)	(475.1)
	£m	£m	£m
Share of (losses)/profits of joint ventures	(1.1)	0.2	–
Profit on disposal of business	–	31.2	31.2
Adjustments:
Profit on disposal of subsidiary	–	(31.2)	(31.2)
Underlying profit on disposal of subsidiary	–	–	–
Profit before tax per published results	160.0	426.3	256.3
Adjustments:
In respect of operating profit	30.5	–	–
In respect of net finance expense	(100.2)	(403.0)	(259.4)
In respect of profit on disposal of subsidiary	–	(31.2)	(31.2)
Underlying profit/(loss) before tax	90.3	(7.9)	(34.3)
Profit after tax per published results	116.8	353.0	204.9
Adjustments:
In respect of profit before tax	(69.7)	(434.2)	(290.6)
Deferred tax adjustment	43.2	69.0	76.6
Tax in respect of adjustments to underlying profit before tax	–	–	0.4
Underlying profit/(loss) after tax	90.3	(12.2)	(8.7)
Earnings per share
	£m	£m	£m
Profit after tax per published results (a)	116.8	353.0	204.9
Underlying profit / (loss)  after tax (b)	90.3	(12.2)	(8.7)
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)	17.1	51.8	30.0
Underlying earnings per share, in pence (b/c)	13.2	(1.8)	(1.3)
Dividend per share, in pence	16.59p	15.17p	45.51p

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

	6 months ended	6 months ended	Year ended
Average effective interest rate	30 September 2023	30 September 2022	31 March 2023
	£m	£m	£m
Underlying net finance expense	(179.7)	(266.6)	(475.1)
Adjustments:
Net pension interest income	(14.2)	(14.4)	(28.7)
Adjustment for capitalised borrowing costs	(55.8)	(62.9)	(127.5)
Net finance expense for effective interest rate	(249.7)	(343.9)	(631.3)
Average notional net debt1	(8,351)	(7,679)	(7,849)
Average effective interest rate	6.0%	9.0%	8.0%
Effective interest rate on index-linked debt	8.0%	13.7%	12.4%
Effective interest rate on other debt	3.4%	2.5%	2.2%

¹ Notional net debt is calculated as the principal amount of debt to be repaid, net of cash and bank deposits, taking: the face value issued of any nominal sterling debt, the inflation accreted principal on the group’s index linked debt, and the sterling principal amount of the cross currency swaps relating to the group’s foreign currency debt.

PRINCIPAL RISKS AND UNCERTAINTIES

Our approach to risk management

Our approach to risk management, including how we identify and assess risk, the oversight and governance process, and focus on continual improvement remains unchanged from that detailed in our Annual Report for the year ended 31 March 2023.

Risk profile

The business risk profile is based on the value chain of the company, with the ten inherent risk areas (primary and supportive) where value can be gained, preserved or lost relative to the performance, future prospects or reputation of the company. Underpinning these inherent risk areas, the profile consists of approximately 100 event-based risks, each of which is allocated based on the context of the event, enabling the company to consider interdependency and correlation of common themes and control effectiveness. Although the profile remains relatively static in terms of its headline inherent risk factors, risk assessment remains dynamic by reflecting new and emerging circumstances, as outlined below:

The sector continues to be under significant scrutiny, linked largely to issues arising from political and public concern over water quality and storm overflows, and the significant environmental investment needs for the next AMP and beyond. Aligned with these concerns, changes to legislation and the interpretation thereof leads to uncertainty over existing business models notably in bioresources.

Our risk assessment process considers both financial and reputational implications of the changing business environment and the increased uncertainty that this brings over both the short and long term. The half year review of the risk profile highlighted storm overflows, Bioresources and AMP8 preparedness as three concurrent themes of uncertainty, with macro-economic and geopolitical tensions compounding these sector issues.  These factors have been considered in the reassessment of the company’s most significant event-based risks.  

The company’s most significant event-based risks

The most significant event-based risks represent the ten highest-ranked risks by exposure (likelihood of occurrence of the event multiplied by the most likely financial impact) and those risks which have been assessed as having a significantly high impact, but low likelihood. Depending on the circumstances, financial impacts will include loss of revenue, additional or extra cost, fines, regulatory penalties and compensation. Reputational impact relative to our multiple stakeholders is also assessed, reported and considered as part of the mitigation.

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

1. Price Review 2024 outcome

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

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

Assurance: Extensive customer research and several external providers were commissioned for technical optioneering. Second line assurance is provided through a dedicated price review team and a PR24 programme board. There was a blend of internal audit and external assurance focused on the quality of the submission.

2. Failure of the Haweswater Aqueduct

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

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

Assurance: Technical and geological advice and modelling have been sought throughout the programme development, with second line assurance including engineering technical governance. Independent assurance is provided by internal audits and external assurance over the HARP procurement process.

3. Recycling of biosolids to agriculture

Risk exposure: Represents various impact scenarios including operational failures, increased restrictions or total ban of recycling biosolids to agriculture. The risk considers the Environment Agency’s interpretation of the Farming Rules for Water regulations and the increasing threat to recycling of biosolids to land.

Control/mitigation: Treatment, sampling and testing regimes ensure that biosolids meets acceptable standards for application. We work closely with farmers, landowners and contractors to ensure compliance with regulations such as Farming Rules for Water and our standard operating procedures are met.

Assurance: Bioresources production planning team undertakes first line assurance against UK Biosolids Assurance Scheme (BAS) accreditation, and other codes of practice such as the safe sludge matrix which certifies our recycling activities. Second and third line assurance is also undertaken by the assurance and internal audit teams respectively.

4. Wastewater network failure

Risk exposure: Blockages, operational issues or inadequate hydraulic capacity relative to population growth, extreme weather, asset health, and legal/regulatory change, resulting in unpermitted storm overflow activations, sewer flooding and environmental damage.

Control/mitigation: Preventative maintenance and inspection regimes, customer campaigns, sewer rehabilitation programme and Better Rivers programme.

Assurance: Second line assurance provided by wholesale assurance, engineering technical governance and flood review panel. Subject to regular internal audits and external assurance of regulatory reporting.

5. Failure to treat sludge

Risk exposure: Relates to the impact of changing demographics, asset health and legislative / regulatory change (such as the Industrial Emissions Directive (IED) now applying to biological treatment of sewage sludge) on our ability to sustainably treat sludge.

Control/mitigation: We look to maximise our treatment capacity by adopting a Throughput, Reliability, Availability and Maintainability (T-RAM) approach for our facilities. We also undertake a digester and tank clean programme, regular testing and analysis of sludge, and balance capacity and demand through the bioresources production planning team.

Assurance: Bioresources production planning team undertakes first line assurance relative to codes of practice such as the safe sludge matrix which certifies our treatment. Second and third line assurance is also undertaken by the assurance and internal audit teams respectively.

6. Cyber

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

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

Assurance: Security measures reflect multiple sources of threat intelligence. The security steering group provides second line assurance, with independent assurance provided by cyclical internal audits and various technical audits by external specialist. 

7. Failure to meet the totex efficiency challenge

Risk exposure: Totex efficiencies designed for AMP7 are challenged through a combination of factors including supply chain issues, inflationary pressures, and additional investment to deliver performance improvements.

Control/mitigation: Strategic Portfolio Board (SPB) planning and risk-based investment prioritisation and the company business planning process all contribute to efficient delivery of services and the capital programme. In addition, there are number of executive led initiatives to realise efficiency opportunities.

Assurance: First line assurance is undertaken through executive led meetings, with the strategic portfolio board, and monthly executive performance review meetings providing second line governance and assurance. Third line assurance is undertaken through cyclical internal audits.

8. Water sufficiency event

Risk exposure: Water sufficiency is one of the most sensitive risks to climate change, with the increased frequency of hot and dry weather being evidence of changing circumstances. Extended periods of low rainfall and exceptionally hot weather, with accompanying increased customer demand, impacts our water resources which can result in the need to implement water use restrictions.

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

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

9. Credit Rating

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

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

Assurance: Second line assurance provided by financial control and monthly executive performance review meetings, with oversight provided by the treasury committee. The treasury function is subject to regular internal audits.

10. Failure of Technology Systems

Risk exposure: Represents various impact scenarios as a result of the pace of technological change across a complex technology estate, which is increasingly more essential for enabling key business processes as the company becomes more reliant on connected technology.

Control/mitigation: Architectural design to assure service availability, defined criticality of services, continuous monitoring,  and risk assessment together with  maintenance and replacement strategies / roadmaps against target state architecture.

Assurance: First line assurance is carried out by the Technology Services team with independent assurance provided by cyclical internal audits and various technical audits by external specialists. 

A. Dam failure

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

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

Assurance: Various sources of second line assurance, including supervising engineers, dam safety group, assurance team and regular board reviews. Independent assurance is provided by panel engineers and internal audit.

B. Financial Outperformance

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

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

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

C. Disease pandemic

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

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

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

D. Terrorism

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

Control/mitigation: A risk-based protection of assets in line with the Security and Emergency Measures Direction (SEMD) and close liaison with the Protective Security Authority (NPSA), regional counter terrorist units, local agencies and emergency services.

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

E. Process Safety

Risk exposure: United Utilities’ activities include processes which are inherently hazardous including the storage of toxic and explosive gases across multiple sites, including two which fall under Control of Major Accident Hazard (COMAH) regulations.

Control/mitigation: Multi layers of protection are in place including: design standards; maintenance and operating regimes; permit to work / work authorisation procedures; emergency planning and training.

Assurance: Second line assurance is undertaken by both the assurance and health & safety teams, with third line assurance being undertaken through periodic internal audits. The Health & Safety Executive also carry out regulatory 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. While our directors remain of the opinion that the likelihood of a material adverse impact on the group’s financial position is remote, based on the facts currently known to us and the provisions in our statement of financial position, the following three cases are worthy of note:

·    In relation to the Manchester Ship Canal Company matter reported in previous years, a hearing was held in the Court of Appeal in 2022 and the main additional points raised by MSCC were dismissed, although MSCC were granted leave to appeal to the Supreme Court. The final appeal was heard in early March 2023 and the Court’s decision is awaited. This may provide further clarity in relation to the rights and remedies afforded to the parties and others in relation to discharges by water companies into the canal and other watercourses;

·    As reported in previous years, in February 2009, United Utilities International Limited (UUIL) was served with notice of a multiparty ‘class action’ in Argentina related to the issuance and payment default of a US$230 million bond by Inversora Eléctrica de Buenos Aires S.A. (IEBA), an Argentine project company set up to purchase one of the Argentine electricity distribution networks which was privatised in 1997. UUIL had a 45 per cent shareholding in IEBA which it sold in 2005. The claim is for a non-quantified amount of unspecified damages and purports to be pursued on behalf of unidentified consumer bondholders in IEBA. Starting in May 2023, the Argentine Court scheduled various hearings to receive the testimony of fact witnesses and experts. UUIL has filed its response and preliminary motions to dismiss the claim, vigorously resist the proceedings given the robust defences that UUIL has been advised that it has on procedural and substantive grounds; and

·    A Letter Before Action was received by UUW in February 2023 in respect of potential collective proceedings before the Competition Appeal Tribunal. We are informed that the Proposed Class Representative (PCR) is intending to bring a claim on behalf of a class comprising consumers of UUW (on an opt-out basis) who have allegedly been overcharged for sewerage services as a result of an alleged abuse of a dominant position. We have been informed that the PCR also intends to bring the claim against United Utilities Group PLC, as the ultimate parent company of UUW. Proceedings have not yet been issued.