Half Yearly Financial Report

United Utilities Group PLC 24 November 2010 HALF YEARLY FINANCIAL REPORT for the SIX MONTHS ended 30 SEPTEMBER 2010 Â£m Six months ended (continuing operations) 30 September 2010 30 September 2009 (restated)* Revenue 762.4 786.6 Operating profit 311.5 339.9 Profit before taxation** 122.2 189.9 Profit after taxation 133.1 186.2 Basic earnings per share**** 19.5 27.3 (pence) Interim dividend per ordinary 10.0 11.17 share (pence) Underlying operating profit*** 327.7 345.4 Underlying profit before 196.2 258.2 taxation*** Underlying profit after 139.3 185.1 taxation*** Underlying earnings per share**** 20.4 27.2 (pence) * The vast majority of the group's non-regulated activities are treated as discontinued and the group has now adopted IFRIC 18 hence the first half of 2009/10 has been restated ** Profit before taxation of Â£122m reflects the recent price review and is impacted by Â£16m of one-off items, Â£55m of fair value movements and Â£3m of net pension interest expense ***Underlying profit measures have been provided to give a more representative view of business performance and exclude one-off items and fair value movements on debt and derivative instruments. These profit measures are defined in the underlying profit measure tables. ****One-off factors affecting earnings per share and underlying earnings per share calculations are explained in the earnings per share section. * Results slightly ahead of management expectations * Underlying operating profit of Â£328 million: reflects new regulatory settlement * Completed cÂ£600 million non-regulated disposal programme: strategic focus on regulated business * Customer satisfaction at highest recorded level: continued strong focus on operational performance * Good start to new regulatory period: capital investment of Â£307 million in the first half * West East Link: close to completing one of the largest capital projects of its kind in UK water sector * Confident of delivering outperformance over 2010-15 period * Interim dividend of 10 pence per share, in line with policy Philip Green, Chief Executive, said: "We have made a good start to the new regulatory period and I am pleased to report results slightly ahead of our expectations. The board has declared an interim dividend for 2010/11 of 10 pence per share with the intention of paying a total dividend of 30 pence per share for the year, consistent with our policy. "Over the last four years, United Utilities has reshaped its portfolio and is now a focused regulated UK water and wastewater company. Earlier this month, we completed our non-regulated disposal programme, providing the opportunity to focus further on improving the performance of our core business. "With the programme of actions we are implementing, we are confident of delivering outperformance over the 2010-15 period with financing outperformance already secured. We have continued to make high levels of investment in our water and wastewater assets, with capital expenditure of over Â£300 million in the half year, providing further benefits for customers, shareholders and the environment. "We are close to completing our West East Link water pipeline, a project costing over Â£120 million, which connects Merseyside and Greater Manchester. This is one of the largest projects of its kind undertaken and will improve further the water supply and demand balance in our region. "United Utilities has a robust capital structure and the business should benefit from predictable regulated revenue streams over the next five years. The group's well defined dividend policy, with a growth target of two per cent per annum above inflation through to 2015, provides clarity for shareholders." For further information on the day, please contact: Gaynor Kenyon - Communications Director +44 (0) 7753 622282 Darren Jameson - Head of Investor Relations +44 (0) 7733 127707 James Bradley/Tom Murray - Tulchan Communications +44 (0) 20 7353 4200 A presentation to investors and analysts starts at 9.00 am on Wednesday 24 November 2010, at the Auditorium, Deutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB. The presentation can be accessed via a live listen in conference call facility by dialling: +44 (0) 20 7162 0025. A recording of the call will be available for seven days following 24 November 2010 on +44 (0) 20 7031 4064, access code 880195. This results announcement and the associated presentation will be available on the day at: http://www.unitedutilities.com CHIEF EXECUTIVE'S REVIEW Financial performance The group has delivered financial results slightly ahead of its expectations for the six months ended 30 September 2010, following the recent regulatory price review. Revenue from continuing operations fell by Â£24 million to Â£762 million, reflecting a real price decrease in our regulated business. Underlying operating profit decreased by 5% to Â£328 million. Underlying profit before taxation decreased by 24% to Â£196 million, which reflected an increase in the underlying net finance expense, largely due to the impact of rising RPI inflation on the group's index-linked debt. We have made a positive start to the new regulatory period and investment in our assets has continued at high levels, helping the business meet strict environmental standards and deliver an improved service for our customers. Capital expenditure in our regulated water and wastewater business amounted to Â£307 million during the half year, including infrastructure renewals expenditure. This level of spend is consistent with our planned investment profile for the initial phase of the 2010-15 period and we have made good early progress in the delivery of outputs. United Utilities has a robust capital structure and the completion of the non-regulated disposal programme, alongside recent levels of inflation, has had a beneficial impact on gearing. The group benefits from headroom to cover its projected financing needs through to the summer of 2012 and this provides us with good flexibility in terms of when and how we raise further debt finance. Disposal programme complete Earlier this month, we completed our non-regulated disposal programme. Over the last four years, United Utilities has reshaped its portfolio from a group with a wide-ranging set of activities and interests, such as telecommunications, business process outsourcing, gas and electricity distribution, metering and international utility operations into a regulated UK water and wastewater business. Operational performance Improving operational performance is a top priority for the group and we have revised our key operational and service measures for the new regulatory period to enhance further the visibility of our performance. We are continuing with our KPIs in the areas of customer satisfaction, relative efficiency and leakage and have introduced new measures to cover serviceability, environmental performance and corporate responsibility. Customer satisfaction has continued to increase and is now at its highest recorded level. Although we are pleased with the progress we have made, we do recognise that we need to reduce further the number of customer complaints we receive and are focused on delivering further improvements. Ofwat is currently introducing a new service incentive mechanism (SIM), which is replacing the existing overall performance assessment (OPA) measurement and will be focused on the customer experience. When this is fully implemented we intend to include SIM as one of our key performance measures, although we believe the measure requires further refinement and we are working with the industry and Ofwat in developing the methodology. Throughout the previous regulatory period we sustained our relative efficiency bandings as assessed by Ofwat. However, we recognise that there is more to do and we aim to reach the upper quartile on relative efficiency by 2013/14, ahead of the next price review. We are on track to meet our regulatory leakage target for the fifth consecutive year and aim to meet or outperform this target each year. We have improved our position in the area of wastewater non-infrastructure in Ofwat's 2009/10 serviceability assessment from a "marginal" rating to a "stable" rating and, as a result, all four asset classes are now "stable". Our aim is to retain a "stable" rating for all four asset classes, which is aligned with Ofwat's target. In respect of environmental performance, we are introducing an Environment Agency measure that incorporates a broad range of areas including pollution. We have halved the number of serious pollution incidents over the last few years and this should help our performance in this area, as we aim for an upper quartile position on this measure by 2013/14. The group has a strong focus on corporate responsibility and is the only UK water company to have a "World Class" rating, as measured by the Dow Jones Sustainability Index. Our target is to retain this status each year. Efficiency initiatives Last year we undertook a comprehensive review of the business, challenging working practices across the group. Our very detailed and early planning enabled us to develop extensive efficiency plans and we are now busy implementing our plans to improve performance and efficiency. We are streamlining our processes as we aim to become a leaner, more efficient company and our new supplier contracts will deliver significant savings and help improve operational and capital efficiency. In March 2010, we placed our pension provision on a much more sustainable footing, which also has the benefit of reducing our future service cost. We have secured significant financing outperformance for the 2010-15 period. United Utilities has just over Â£2 billion of index-linked debt at an average cost of 1.8% real, compared with Ofwat's cost of debt assumption of 3.6% real. The group has also fixed the cost of the majority of its remaining debt at an average nominal rate of around 5.0%. Together with the group's index-linked debt, this produces approximately Â£300 million of financing outperformance over the 2010-15 period, based on an RPI inflation rate of 2.5% per annum. Overall, we are confident of delivering outperformance in respect of the new regulatory contract. Dividend As announced in January, the board intends to pay a total dividend of 30 pence per share for the 2010/11 financial year. This includes an interim dividend of 10 pence per share. Thereafter, the intention is to continue with our policy of targeting dividend growth of RPI+2% per annum through to 2015. Outlook United Utilities has a robust capital structure and should benefit from predictable regulated revenue streams over the next five years. We are implementing a range of detailed efficiency and performance improvement initiatives and are confident of delivering outperformance, with financing outperformance already secured. Our detailed capital investment planning has facilitated a smooth transition into the new regulatory period and we have made good early progress. We expect capital expenditure to continue at high levels in the second half of 2010/11 and beyond, benefiting customers and the environment. For shareholders, our well defined dividend policy provides clarity through to 2015. SEGMENTAL PERFORMANCE REGULATED ACTIVITIES Financial highlights * Regulated revenue lower by 3% at Â£748 million, reflecting impact of price review * Regulated underlying operating profit down to Â£324 million from Â£348 million Revenue from regulated activities was lower by 3% at Â£748 million, principally reflecting the impact of the recent price review, which includes a 4.3% real price decrease for 2010/11, partly offset by slightly higher volumes. Customers are benefiting from lower prices alongside significant investment in United Utilities' water and wastewater infrastructure, which helps meet strict environmental standards and deliver an improved service. It is expected that regulated revenue will be a little lower in the second half of 2010/11 compared with the first half, reflecting seasonality. As expected, underlying operating profit for the half year, at Â£324 million, was 7% lower than the corresponding period last year. This was primarily a result of the regulated price reduction and an expected increase in depreciation and property rates, partly offset by a reduction in employee costs, power costs and lower infrastructure renewals expenditure than in the first half of last year. In line with the planned phasing of the capital investment programme, it is anticipated that infrastructure renewals expenditure and depreciation will be higher in the second half of 2010/11 compared with the first half of the year. Reported operating profit, at Â£316 million, was somewhat lower than the prior period, impacted by one-off costs of Â£8 million which principally reflect business restructuring. As outlined previously, the business has entered into forward contracts for the majority of its power requirements for 2010/11 and 2011/12 and unit power costs are expected to be over 20% lower than in 2009/10. Despite the continuing tough economic environment, the business has maintained its cash collection performance. The bad debt charge for the first half of the year is Â£18 million, compared with Â£28 million in the corresponding period last year. The bad debt position would be broadly flat compared with the corresponding period last year, prior to the impact of the group's revision of its application of revenue recognition. United Utilities has made changes which it believes best reflect the likelihood of cash collection. This revised approach is consistent with IFRS guidelines and reflects better information on which customers are not likely to pay. The effect has been to reduce both revenue and the bad debt charge in the income statement, with a minimal impact on operating profit. Other operating expenses have increased by approximately Â£17 million, reflecting increased legal provisions, higher support costs and several small non-recurring items. Capital investment in the half year, including Â£48 million of infrastructure renewals expenditure, was Â£307 million. This level of spend is in line with the planned capital investment profile for the first half of 2010/11, with an increase expected in the second half of the year. Operational performance Operational performance is a top priority and United Utilities Water (UUW) is targeting an upper quartile position among UK water companies on key operational measures by 2013/14, ahead of the next price review. The business has revised its key operational and service measures for the new regulatory period to enhance further the visibility of its performance. * Overall customer satisfaction - Significant progress has been achieved. Customer satisfaction, in response to enquiries, has improved from less than 50% in 2005 to consistently over 80%, with a score of 82% for 2009/10. Overall customer satisfaction is now at its highest recorded level and further improvement has been achieved, with a satisfaction rating of 83% for the 12 months to 30 September 2010. Although UUW has made good progress, the business recognises that it needs to reduce further the number of customer complaints and remains focused on achieving further improvements as it aims for a target of 85%. Ofwat is introducing a new service incentive mechanism (SIM), which replaces the overall performance assessment (OPA) measure. The regulator and the industry are currently working together on its introduction and when fully implemented UUW intends to include SIM as one of its key performance measures. * Relative efficiency - UUW sustained its relative efficiency bandings as assessed by Ofwat throughout the previous regulatory period. This is reflected in Ofwat's most recent (2008/09) assessment of UUW as band B for the water service and band C for the wastewater service. The business expects to sustain these bandings in Ofwat's 2009/10 assessment, which is due to be published shortly, and is aiming for an upper quartile position by 2013/14. * Leakage - UUW met its economic level of leakage rolling target for the fourth consecutive year in 2009/10, despite extreme winter weather conditions, reflecting strong management focus and the commitment of the workforce. The business is on course to meet its 2010/11 regulatory leakage target and aims to continue to meet or outperform the regulatory leakage targets set by Ofwat. * Serviceability - Long-term stewardship of assets is critical and UUW has improved its position in the area of wastewater non-infrastructure in Ofwat's 2009/10 serviceability assessment (Ofwat defines serviceability as the capability of a system of assets to deliver a reference level of service to customers and to the environment now and in the future). All four asset classes (water infrastructure, water non-infrastructure, wastewater infrastructure and wastewater non-infrastructure) are now rated "stable". The aim is to retain a "stable" rating for all four asset classes, which is aligned with Ofwat's target. * Environmental performance - UUW has halved the number of major pollution incidents over the last few years and has reduced the number of properties on the sewer flooding register. In respect of environmental performance, a composite measure is being introduced which is computed by the Environment Agency and incorporates a broad range of areas including pollution. UUW was ranked 10th out of 10 water and sewerage companies for 2008/09, but improved to 6th position for 2009/10. Performance to date in 2010/11 has been encouraging and the business aims to reach the upper quartile by 2013/14. * Corporate responsibility - United Utilities has a strong focus on corporate responsibility and is the only UK water company to have a "World Class" rating as measured by the Dow Jones Sustainability Index. The company aims to retain this "World Class" rating each year. United Utilities has for many years included corporate responsibility (CR) factors as a strategic consideration in its decision making and this contributed to the company achieving the highest platinum plus ranking in Business in the Community's (BITC) CR index and being recognised as BITC's Company of the Year for 2009/10, as well as being rated "World Class" in the Dow Jones Sustainability Index. United Utilities' CR policy sets out its commitment to environmental, social and economic improvements and this is communicated in a way that enables all employees to recognise how their roles and responsibilities contribute to maintaining and improving sustainability performance. The company is now close to completion of a significant capital project, referred to as the West East Link, designed to improve further the water supply and demand balance in its region. Progress has been good and the project, costing over Â£120 million, is due to be completed on schedule in the spring of 2011. The project is a 55 kilometre water pipeline connecting Merseyside and Greater Manchester and over 50 kilometres have now been installed. It will use gravity to transport water from Greater Manchester to Merseyside, with the option to pump water in the other direction, thus providing more resource flexibility. It will increase further the integration of UUW's network, which is important given the potential supply and demand issues that are likely to arise through climate and demographic change. A key benefit is that it will facilitate the maintenance of critical assets and will replace the need to use temporary mains pipes during maintenance and cleaning activities. Efficiency initiatives Last year, United Utilities undertook a comprehensive review of the business, challenging working practices across the group. The very detailed and early planning enabled the business to develop extensive efficiency plans and these plans are now being implemented to improve performance and enhance efficiency and effectiveness. As indicated previously, United Utilities has already secured financing outperformance through its existing debt portfolio of approximately Â£300 million over the 2010-15 period based on an RPI inflation rate of 2.5% per annum. Overall, the business is confident of delivering outperformance in respect of the new regulatory contract. Operating efficiency During 2009/10, United Utilities reduced the number of people working in or supporting the regulated business by approximately 350 (includes United Utilities and agency staff), equivalent to around 7% of that workforce. This has provided an immediate contribution to the achievement of the efficiency targets. Customer service continues to be a key area of focus, as the company aims to reduce significantly its cost to serve, whilst continuing to improve the customer experience. Customer service performance will contribute to the regulator's new SIM assessment and the associated costs form part of Ofwat's relative efficiency analysis. UUW has reduced its annual cost to serve from around Â£23 per customer to approximately Â£18 per customer over the last three years and is implementing plans to deliver further reductions, all while customer satisfaction has improved markedly. The company has amended staff incentive mechanisms with the aim of improving the customer experience thereby reducing unnecessary customer contacts. Performance measurement is now based on first time resolution, rather than average call handling time. Customer service agents have been provided with increased training to help improve management of customer contacts and are proactively keeping customers informed of progress to reduce the need for repeat contacts and help increase satisfaction. New service level arrangements have been introduced to reduce work queues and backlogs have already been substantially eradicated. UUW has achieved an 84% reduction in customer complaints assessed by the Consumer Council for Water (CCW), in the first half of the year compared with the same period last year, through focused performance improvements and is working hard to deliver further improvements. United Utilities' customer online self-serve system is being enhanced to make it more comprehensive and user friendly, with the aim of reducing by a third the need for customers to contact the company's call centre. UUW is focused on improving its debt collection rates and is planning to use more local authority collection agreements. The company is also enhancing systems to improve its customer segmentation analysis and to obtain better data on customers who have moved address, coupled with a more proactive debt follow up strategy. United Utilities is reviewing and streamlining its processes as it aims to become a leaner, more efficient company. The group is focused on operating with fewer, simpler and more consistent processes. For example, UUW is halving the number of steps from metering to cash collection. The group is rationalising its IT infrastructure, providing greater automation and visibility of workflow. Managers now have ownership of all steps in a process to help enhance performance. Individuals also have greater visibility and understanding of how their performance influences the efficiency of the entire process. To support this, the group has taken the decision to bring back in-house its IT services to give the business greater control of its IT assets and applications. The group has in place a focused programme to improve the efficiency of its assets. This includes using remote operational site management and optimisation of chemical and power usage and developing combined heat and power assets, which recycle energy generated from wastewater treatment processes. The company's wastewater treatment optimisation programme is targeting approximately Â£9 million of annual savings by 2013 and the analysis phase has to date identified savings ahead of target. Operational improvements at treatment works have already been identified and are being implemented, reducing reactive work orders, providing benefits to asset lives and helping improve serviceability. Capital delivery United Utilities has a robust commercial capital delivery framework in place for the 2010-15 period. Contractor partners have been appointed and the company has signed new supplier contracts, which will deliver significant savings and help improve efficiency. Incentive mechanisms are closely linked to the UUW business plan and pain/gain incentives are assessed on a project basis, rather than a cumulative basis, providing more clarity on performance. A partial fee retention mechanism is also in place to help drive on-time project delivery. In addition, UUW has flexibility in respect of the level of competitive tendering it may use in the award of future work during the five year regulatory period. United Utilities undertook detailed advanced planning which ensured a smooth transition into the 2010-15 period and leveraged recent economic conditions to deliver procurement efficiency benefits. Early progress has been good. For example, in respect of the company's mains cleaning programme, innovative techniques and improved unit rates have delivered schemes below the initial target costs and outputs have been delivered ahead of schedule. In addition, UUW has reorganised its capital delivery function for the new regulatory period which is expected to deliver efficiencies over the five years. Financial United Utilities has just over Â£2 billion of long dated, index-linked debt at an average cost of 1.8% real. This compares with Ofwat's cost of debt assumption of 3.6% real and secures financing outperformance for the next five years. In line with its policy, the group has also fixed the interest rates on a significant proportion of the remainder of its existing debt portfolio, for the 2010-15 regulatory period, at an average nominal rate of around 5.0% (inclusive of credit spread). This provides more clarity on UUW's ability to outperform the final determination. Taken together with the group's index-linked debt, this equates to approximately Â£300 million of financing outperformance over the five years, based on an RPI inflation rate of 2.5% per annum. United Utilities has a robust debt profile and has less than Â£250 million of its cÂ£5 billion term debt portfolio to re-finance during the 2010-15 period. In addition, the group would expect to raise new finance to help fund the substantial capital investment programmes and would expect UUW's regulatory capital value to grow to reflect the investment. The changes made to the defined benefit pension schemes in the second half of 2009/10 have reduced significantly the company's pension deficit, reduced the future service cost and reduced future funding and future deficit risk, thereby placing the company's pension provision on a much more sustainable footing. NON-REGULATED ACTIVITIES United Utilities completed its cÂ£600 million non-regulated disposal programme in November 2010. The vast majority of the non-regulated activities are treated as discontinued in the 2010/11 half yearly financial statements. The residual elements of the previously reported non-regulated activities operating segment, which have not been classified as discontinued operations, no longer form a reportable segment as defined by International Financial Reporting Standards and have therefore been included within "All other segments". These principally include UUW's non-appointed activities and the group's holding in AS Tallinna Vesi (Tallinn Water) which it has decided to retain. As outlined previously, United Utilities intends to retain the proceeds from these disposals within the group. Since the majority of the sale transactions completed after 30 September 2010, including the group's holding in Meter Fit, its Australian business and its principal UK and European non-regulated water interests, the proceeds are not fully reflected in the group's net debt position at the half year end but will be included in the net debt position reported in the financial statements as at 31 March 2011. In the half year, the non-regulated activities that are now treated as discontinued produced profit after taxation of Â£20 million. ALL OTHER SEGMENTS All other segments has delivered a small underlying operating profit during the half year of Â£4 million, which compares with an underlying operating loss of Â£3 million in the corresponding period last year. This segment includes UUW's non-appointed activities, United Utilities Property Services (UUPS) and the contribution from the group's 35.3% holding in Tallinn Water, partly offset by certain central costs. Despite the continuing difficult conditions in the UK property market, UUPS has generated a small profit contribution. The reported operating loss for the segment was Â£4 million. This reflects one-off costs of approximately Â£8 million, principally in relation to restructuring within the group's support services function, elements of which are reported in central costs. FINANCIAL PERFORMANCE Investment income and finance expense Finance expense of Â£191 million was Â£36 million higher than the prior period, principally reflecting a higher charge in respect of the group's index-linked debt following an increase in RPI inflation. This expense included Â£53 million of net fair value losses on debt and derivative instruments, compared with Â£64 million of net fair value losses in the first half of 2009/10. The impact of credit spreads on debt accounted for at fair value through profit or loss and the fair value associated with the group's fixed interest rate hedge can result in significant volatility. These factors have contributed to the net fair value movement on the prior period. In order to provide a hedge of the interest cost implicit in the regulatory period, the group fixes interest rates for the duration of each five-year review period for a substantial proportion of its debt using interest rate swaps. IAS 39 limits the use of hedge accounting for these commercial hedges, thereby increasing the potential volatility of the income statement. However, this volatility in fair values has no cash flow impact. A reduction in net pension interest expense in the first half of 2010/11, compared with the corresponding period last year, has partially offset the increase in finance expense in the period. Investment income was Â£1 million, compared with Â£5 million in the prior period. This reduction principally relates to a Â£4 million interest receipt in the prior year from HMRC, in respect of historical taxation payments. Excluding this interest receipt, investment income has been flat on the comparative period last year. The underlying net finance expense for continuing operations of Â£132 million was Â£44 million higher than the first half of 2009/10. This reflects an increase in the group's average annualised underlying interest rate from around 3.7% to 5.6%. The group has just over Â£2 billion of index-linked debt and the increase in the finance expense primarily reflects a return to an inflationary environment. However, the group has benefited from fixing the majority of its remaining debt for the 2010-15 period, with a net effective nominal interest rate of approximately 5%, around 0.8% lower than the first half of last year. During the six months ended 30 September 2010, indexation of the principal of index-linked debt amounted to a net charge in the income statement of Â£50 million compared with a credit of Â£8 million in the comparative prior period due to the effects of RPI deflation in the prior year on the index-linked debt with an eight month lag. The indexation charge of Â£50 million is not a cash payment and is more than matched by an inflationary uplift to the regulatory capital value. Profit before taxation Underlying profit before taxation was Â£196 million, 24% lower than the first half of the prior year, principally reflecting the revenue impact from the regulatory price review, an increase in the underlying net finance expense and a higher depreciation charge as a result of growth in the commissioned asset base. This underlying measure adjusts for the impact of one-off items, principally from restructuring within the business, and fair value movements in respect of debt and derivative instruments. Reported profit before taxation from continuing operations decreased by 36% to Â£122 million principally as a result of larger one-off restructuring costs, a higher depreciation charge and an increase in finance expense. Taxation The group made a cash taxation payment during the first half of the year of Â£27 million. In the corresponding period last year, the group received a cash taxation inflow of Â£51 million, following agreement with HMRC of prior years' taxation returns. This item significantly reduced the cash taxation paid in 2009/10. The current taxation charge relating to continuing activities was Â£30 million at the half year and the current taxation effective rate was 25%, compared with 10% in the equivalent prior year period. The prior year current taxation charge included a Â£34 million credit in relation to the agreement with HMRC of prior years' taxation returns, without which the effective taxation rate would have been 28%. The group has recognised a net deferred taxation credit of Â£41 million in the first half of 2010/11. This includes a Â£47 million credit to reflect the changes enacted on 27 July 2010 to reduce the mainstream rate of corporation taxation from 28% to 27% from 1 April 2011. This compares to a deferred taxation credit relating to continuing operations of Â£15 million in the first half of last year, which included a Â£16 million credit in relation to the agreement with HMRC of prior years' taxation returns. An overall taxation credit of Â£11 million relating to continuing operations has been recognised for the six months ended 30 September 2010. Excluding the impact of the reduction in the corporation taxation rate, the total taxation charge relating to continuing operations would be Â£36 million or 30% compared with a Â£54 million charge or 28% in the first half of last year, after excluding the impact of the one-off prior year taxation credits. Profit after taxation Reported profit after taxation was Â£133 million compared with Â£186 million in the first half of the prior year. Underlying profit after taxation was Â£139 million. This is based on the underlying profit before taxation figure less an underlying taxation charge of Â£57 million, which includes an adjustment for the deferred taxation credit in relation to the change in the mainstream rate of corporation taxation. Earnings per share Basic earnings per share relating to continuing operations reduced from 27.3 pence to 19.5 pence, principally reflecting the reduction in profit before taxation in the current period. Underlying earnings per share reduced from 27.2 pence to 20.4 pence. This underlying measure is derived from underlying profit before taxation less underlying taxation. This includes the adjustment for the deferred taxation credit in the first half of 2010/11 associated with the aforementioned reduction in the corporation taxation rate and the impact of the one-off taxation credit in the first half of last year. Dividend per share The board has declared an interim dividend of 10.0 pence per ordinary share in respect of the six months ended 30 September 2010. This is consistent with the group's intention to pay a total dividend for the 2010/11 financial year of 30.0 pence per ordinary share, which was announced in January. Thereafter, United Utilities intends to continue with its dividend policy of targeting a real growth rate of RPI+2% per annum through to 2015. The interim dividend is expected to be paid on 2 February 2011 to shareholders on the register at the close of business on 17 December 2010. The ex-dividend date is 15 December 2010. Cash flow Net cash generated from continuing operating activities for the six months ended 30 September 2010 was Â£331 million, compared with Â£460 million in the corresponding period last year. This reflects the impact of the regulatory price review and a taxation payment of Â£27 million in the first half of the current year compared with a taxation receipt of Â£51 million in the first half of last year. The group's net capital expenditure on continuing operations was Â£247 million, principally in the regulated water and wastewater investment programmes. This excludes infrastructure renewals expenditure which is treated as an operating cost under International Financial Reporting Standards. Net debt including derivatives in respect of continuing operations at 30 September 2010 was Â£4,864 million, compared with Â£4,906 million at 31 March 2010. Expenditure on the regulatory capital investment programmes and payments of dividends and interest have been offset by operating cash flows and the net debt reduction of Â£208 million following the announced non-regulated disposals and the associated activities being treated as discontinued. The cash proceeds from the non-regulated disposals completed after 30 September 2010 have subsequently reduced further the group's net debt position. Debt financing and interest rate management Gearing (measured as group net debt divided by UUW's regulatory capital value) decreased to 62% at 30 September 2010, compared with 64% at 31 March 2010. This reflects growth in the regulatory capital value coupled with a reduction in group net debt following the agreed disposal of non-regulated activities. Since the majority of the non-regulated disposal transactions completed after the 30 September 2010, the associated cash proceeds received have subsequently reduced gearing further to approximately 60%. At the half year end, United Utilities Water PLC had long-term credit ratings of A3/BBB+ and United Utilities PLC had long-term credit ratings of Baa1/BBB- from Moody's Investors Service and Standard & Poor's Ratings Services respectively. The split rating reflects differing methodologies used by the credit rating agencies. Cash and short-term deposits at 30 September 2010 amounted to Â£136 million. During the 2009/10 financial year, the group's financing headroom position was enhanced through the issuance of an additional Â£100 million, 5.75% bond maturing in March 2022; an additional Â£50 million, 6.125% bond maturing in December 2015; and a new Â£70 million, 2.40%+RPI index-linked bond maturing in July 2039. No further bonds were issued in the first half of 2010/11, although the group renewed Â£50 million of existing bilateral bank facilities in the period. United Utilities has headroom to cover its projected financing needs through to the summer of 2012. The group has access to the international debt capital markets through its â‚¬7 billion medium-term note programme which provides for the periodic issuance by United Utilities PLC and United Utilities Water PLC of debt instruments on terms and conditions determined at the time the instruments are issued. The programme does not represent a funding commitment, with funding dependent on the successful issue of the debt securities. Long-term borrowings are structured or hedged to match assets and earnings, which are largely in sterling, indexed to UK retail price inflation and subject to regulatory price reviews every five years. Very long-term sterling inflation index-linked debt is the group's preferred form of funding as this provides a natural hedge to assets and earnings. At 30 September 2010, approximately 44% of the group's net debt was in index-linked form, representing around 27% of UUW's regulatory capital value, with an average real interest rate of 1.8%. The long-term nature of this funding also provides a good match to the group's long-life infrastructure assets and is a key contributor to the group's average term debt maturity profile which is in excess of 25 years. Where nominal debt is raised in a currency other than sterling and/or with a fixed interest rate, to manage exposure to long-term interest rates, the debt is generally swapped to create a floating rate sterling liability for the term of the liability. To manage exposure to medium-term interest rates, the group fixes interest costs for a substantial proportion of the group's debt for the duration of each price control period at around the time of that price control determination. The group does not undertake any speculative trading activity. Liquidity Short-term liquidity requirements are met from the group's normal operating cash flow and its short-term bank deposits. The group has a â‚¬2 billion euro-commercial paper programme and further liquidity is provided by committed but undrawn credit facilities. In line with the board's treasury policy, United Utilities aims to maintain a healthy headroom position. Available headroom at 30 September 2010 was Â£735 million based on cash, short-term deposits and medium-term committed bank facilities, net of short-term debt. This headroom is sufficient to cover the group's projected financing needs through to the summer of 2012. United Utilities believes that it operates a prudent approach to managing banking counterparty risk. Counterparty risk, in relation to both cash deposits and derivatives, is controlled through the use of counterparty credit limits. United Utilities' cash is held in the form of short-term (generally no longer than three months) money market deposits with either prime commercial banks or with triple A rated money market funds. United Utilities operates a bilateral, rather than a syndicated, approach to its core relationship banking facilities. This approach spreads maturities more evenly over a longer time period, thereby reducing refinancing risk and providing the benefit of several renewal points rather than a large single refinancing requirement. Pensions The group has sought to adopt a more sustainable approach to the delivery of pension provision and in the second half of 2009/10 amended the terms of its defined benefit pension schemes. The measures taken include a cap on the increase in pensionable earnings, an increase in the normal retirement age, an increase in employee contribution rates, an adjustment to the accrual rates and a re-balancing of the pensions investment strategy. This reduces both the future service cost and the future funding risk to the company, thereby enabling the company to retain defined benefit pension schemes for existing members. The changes to the scheme rules were supported by the company's trade unions. The reduction in service cost in the first half of 2010/11 was approximately Â£5 million, although the lower risk investment strategy has reduced investment income and resulted in a lower net benefit at the profit before taxation level. These amendments also resulted in a reduction of Â£92 million to the group's pension deficit, which was reported in the financial statements as at 31 March 2010. Overall, the group's net pension deficit at the half year end has increased by Â£29 million, compared with the position at 31 March 2010, reflecting changes in market conditions and the routine actuarial assessment of movements in assets and liabilities. As at 30 September 2010, the group's net pension obligations stood at Â£301 million, a lower level than would have been the case had the group not made the above changes to its pension schemes. United Utilities has also reduced its future pension obligations as a result of the sale of non-regulated activities. Further detail is provided in note 8 ("Retirement benefit obligations") of these condensed consolidated financial statements. The group will continue to evaluate its pensions investment strategy to de-risk further its pension provision. Going concern The directors have reviewed the financial resources available to the group and have concluded that the group is a going concern. This conclusion is based upon, amongst other matters, a review of the group's financial projections together with a review of the cash and committed borrowing facilities available to the group. Underlying profit In considering the underlying results for the period, the directors have excluded fair value movements on debt and derivative instruments and one-off items. Reported operating profit and profit before taxation from continuing operations are reconciled to underlying operating profit, underlying profit before taxation and underlying profit after taxation (non-GAAP measures) as follows: Continuing operations Regulated All other Group activities segments Operating profit/(loss) for the six months ended Â£m Â£m Â£m 30 September 2010 Operating profit/(loss) per published results 315.5 (4.0) 311.5 One-off items* 8.1 8.1 16.2 ------ ------ ------ Underlying operating profit 323.6 4.1 327.7 ------ ------ ------ Continuing operations Regulated All other Group activities segments Operating profit/(loss) for the six months ended Â£m Â£m Â£m 30 September 2009 (restated) Operating profit/(loss) per published results 344.9 (5.0) 339.9 One-off items* 3.5 2.0 5.5 ------ ------ ------ Underlying operating profit/(loss) 348.4 (3.0) 345.4 ------ ------ ------ Continuing operations Restated Six months Six months Underlying net finance expense ended 30 ended 30 September September 2010 2009 Â£m Â£m Finance expense (190.5) (154.8) Investment income 1.2 4.8 ------ ------ Net finance expense (189.3) (150.0) Net fair value losses on debt and derivative 53.2 instruments 63.9 Add back interest on swaps and debt under fair 2.0 value option (11.7) Adjustment for net pension interest expense 2.6 10.6 ------ ------ Underlying net finance expense (131.5) (87.2) ------ ------ Continuing operations Restated Six months Six months Profit before taxation ended 30 ended 30 September September 2010 2009 Â£m Â£m Profit before taxation per published results 122.2 189.9 One-off items* 16.2 5.5 Net fair value losses on debt and derivative 53.2 instruments 63.9 Add back interest on swaps and debt under fair 2.0 value option (11.7) Adjustment for net pension interest expense 2.6 10.6 ------ ------ Underlying profit before taxation 196.2 258.2 ------ ------ Continuing operations Restated Six months Six months Profit after taxation ended 30 ended 30 September September 2010 2009 Â£m Â£m Underlying profit before taxation 196.2 258.2 Reported taxation 10.9 (3.7) Deferred taxation credit (47.1) - Agreement of prior years' UK taxation returns - (50.3) Taxation relating to underlying profit before (20.7) (19.1) taxation adjustments ------ ------ Underlying profit after taxation 139.3 185.1 ------ ------ *principally relates to restructuring and other reorganisation costs within the business PRINCIPAL RISKS AND UNCERTAINTIES The group faces a variety of risks and uncertainties, both foreseeable and unforeseeable, which if they materialise, could adversely affect its reputation, profitability or financial position, its share price or the pricing and liquidity of its debt securities. The group maintains an internal control framework that assesses, throughout the year, the nature and magnitude of internal and external risks to the achievement of business goals. The board assesses the group's appetite for and tolerance of risk and clear risk tolerance boundaries are set. Managers are required to employ both proactive and reactive mitigation measures in a prioritised manner to reduce exposures and ensure ongoing resilience should a risk materialise. The executive management team regularly reviews significant risks. The audit committee regularly reviews the framework's effectiveness and the group's compliance with it. The group's anticipated principal risks and uncertainties over the second half of the financial year and beyond remain as stated in its 2010 Annual Report and Financial Statements, although the risks in the group's non-regulated business have largely been removed since the vast majority of these activities have now been sold. The principal risks and uncertainties are set out in full on pages 19-24 of the 2010 Annual Report and Financial Statements, namely (a) capital investment programmes; (b) service incentive mechanism and serviceability assessment; (c) the adoption of private sewers; (d) economic environment, inflation and capital market conditions; (e) pension scheme obligations; (f) failure to comply with applicable law or regulations; (g) increased competition in the water and wastewater industry; (h) events, service interruptions, systems failures, water shortages or contamination of water supplies; (i) risks in the group's non-regulated business; and (j) material litigation. There has been no change to the nature of related party transactions in the first six months of the financial year which has materially affected the financial position or performance of United Utilities. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This half yearly 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 half yearly financial report and the company undertakes no obligation to update these forward-looking statements. Nothing in this half yearly financial report should be construed as a profit forecast. Certain regulatory performance data contained in this half yearly financial report is subject to regulatory audit. Consolidated income statement Restated* Restated* Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Continuing operations Revenue 762.4 786.6 1,573.1 ------ ------ ------ Employee benefits expense: - excluding pension schemes curtailment gains arising on (67.9) (77.7) (156.3) amendment of pension obligations and restructuring costs - pension schemes curtailment gains arising on amendment of pension obligations (note 8) - - 87.3 - restructuring costs (3.4) (5.5) (25.8) ------ ------ ------ Total employee benefits expense (71.3) (83.2) (94.8) ------ ------ ------ Other reorganisation costs (12.8) - - Other operating costs (177.8) (181.7) (321.8) Other income 0.7 2.4 5.1 Depreciation and amortisation expense (141.7) (125.8) (280.1) Infrastructure renewals expenditure (48.0) (58.4) (113.7) ------ ------ ------ Total operating expenses (450.9) (446.7) (805.3) ------ ------ ------ Operating profit 311.5 339.9 767.8 Investment income (note 2) 1.2 4.8 6.2 Finance expense (note 3) (190.5) (154.8) (365.3) ------ ------ ------ Investment income and finance expense (189.3) (150.0) (359.1) ------ ------ ------ Profit before taxation 122.2 189.9 408.7 Current taxation charge (30.2) (18.4) (19.5) Deferred taxation (charge)/credit (6.0) 14.7 (42.2) Deferred taxation credit - change in 47.1 - - taxation rate ------ ------ ------ Taxation (note 4) 10.9 (3.7) (61.7) ------ ------ ------ Profit after taxation from continuing 133.1 186.2 347.0 operations Discontinued operations Profit after taxation from discontinued 20.3 11.9 56.5 operations (note 5) ------ ------ ------ Profit after taxation 153.4 198.1 403.5 ------ ------ ------ Earnings per share from continuing and discontinued operations (note 6) Basic 22.5p 29.1p 59.2p Diluted 22.5p 29.0p 59.2p Earnings per share from continuing operations (note 6) Basic 19.5p 27.3p 50.9p Diluted 19.5p 27.3p 50.9p Underlying basic earnings per share from continuing operations (note 6) 20.4p 27.2p 50.9p Dividend per ordinary share (note 7) 10.00p 11.17p 34.30p * The comparatives have been restated to reflect the requirements of IFRS 5 `Non-current Assets Held for Sale and Discontinued Operations' and the adoption of IFRIC 18 `Transfers of Assets from Customers'. Consolidated statement of comprehensive income Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Profit after taxation 153.4 198.1 403.5 Other comprehensive income Actuarial losses on defined benefit pension (70.7) (131.0) (125.4) schemes Deferred tax on actuarial losses on defined benefit pension schemes 19.1 36.7 35.1 Revaluation of investments 1.1 6.7 3.4 Reclassification from other reserves arising on sale of financial asset investment - - (36.6) Net fair value (losses)/gains on cashflow (0.2) 1.0 0.9 hedges Deferred tax on net fair value 0.1 (0.3) (0.5) losses/(gains) on cashflow hedges Foreign exchange adjustments (3.1) 5.9 6.4 ------ ------ ------ Total comprehensive income 99.7 117.1 286.8 ------ ------ ------ There is no tax impact on the items of other comprehensive income except where stated in the table above. Consolidated statement of financial position Restated* Restated* 30 September 30 September 31 March 2010 2009 2010 Â£m Â£m Â£m ASSETS Non-current assets Property, plant and equipment 8,113.0 7,990.4 8,159.6 Goodwill - 2.5 2.5 Other intangible assets 97.9 209.1 208.6 Investments 2.1 143.3 7.7 Trade and other receivables - 52.6 56.5 Derivative financial instruments 565.1 303.7 378.5 ------ ------ ------ 8,778.1 8,701.6 8,813.4 ------ ------ ------ Current assets Inventories 50.3 80.2 74.8 Trade and other receivables 333.4 510.9 451.0 Cash and short-term deposits 135.6 331.6 301.5 Derivative financial instruments 2.2 186.1 18.3 Assets classified as held for sale 524.1 - - ------ ------ ------ 1,045.6 1,108.8 845.6 ------ ------ ------ Total assets 9,823.7 9,810.4 9,659.0 ------ ------ ------ LIABILITIES Non-current liabilities Trade and other payables (203.5) (157.8) (182.9) Borrowings (5,323.5) (5,260.0) (5,307.9) Retirement benefit obligations (note 8) (300.6) (358.6) (271.3) Deferred tax liabilities (1,303.2) (1,293.0) (1,355.4) Provisions (8.6) (10.2) (8.3) Derivative financial instruments (151.5) (43.7) (102.3) ------ ------ ------ (7,290.9) (7,123.3) (7,228.1) ------ ------ ------ Current liabilities Trade and other payables (470.2) (704.1) (594.4) Borrowings (89.9) (314.6) (168.3) Current income tax liabilities (93.8) (137.9) (89.0) Provisions (30.0) (26.2) (45.5) Derivative financial instruments (2.4) (91.0) (25.8) Liabilities classified as held for sale (397.0) - - ------ ------ ------ (1,083.3) (1,273.8) (923.0) ------ ------ ------ Total liabilities (8,374.2) (8,397.1) (8,151.1) ------ ------ ------ Total net assets 1,449.5 1,413.3 1,507.9 ------ ------ ------ EQUITY Capital and reserves attributable to equity holders of the company Share capital 499.8 499.8 499.8 Share premium account 1.1 0.9 0.9 Retained earnings 436.2 358.4 492.7 Other non-distributable reserves 512.4 554.2 514.5 ------ ------ ------ Shareholders' equity 1,449.5 1,413.3 1,507.9 ------ ------ ------ * The comparatives for the period ended 30 September 2009 and year ended 31 March 2010 have been restated to reflect the adoption of IFRIC 18 `Transfers of Assets from Customers'. The comparatives for the period ended 30 September 2009 have also been restated to reflect the adoption of the amendments to IAS 1 arising from the `Improvements to IFRS (2008)' project. Consolidated statement of changes in equity Six months ended 30 September 2010 Share Cumulative Share premium Retained Treasury exchange Merger Other Revaluation capital account earnings shares* reserve* reserve* reserves* reserve* Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m At 1 April 2010 499.8 0.9 492.7 (0.1) 22.3 329.7 3.8 158.8 1,507.9 Profit after taxation - - 153.4 - - - - - 153.4 Other comprehensive income Actuarial losses on defined benefit pension schemes - - (70.7) - - - - - (70.7) Deferred tax on actuarial losses on defined benefit pension schemes - - 19.1 - - - - - 19.1 Revaluation of investments - - - - - - 1.1 - 1.1 Net fair value losses on cashflow hedges - - - - - - (0.2) - (0.2) Deferred tax on net fair value losses on cashflow hedges - - - - - - 0.1 - 0.1 Foreign exchange adjustments - - - - (3.1) - - - (3.1) ------ ------ ------ ------ ------ ------ ------ ------ ------ Total comprehensive income/(expense) for the period - - 101.8 - (3.1) - 1.0 - 99.7 ------ ------ ------ ------ ------ ------ ------ ------ ------ Transactions with owners Dividends (note 7) - - (157.6) - - - - - (157.6) New share capital issued - 0.2 - - - - - - 0.2 Equity-settled share-based payments - - (0.7) - - - - - (0.7) ------ ------ ------ ------ ------ ------ ------ ------ ------ At 30 September 2010 499.8 1.1 436.2 (0.1) 19.2 329.7 4.8 158.8 1,449.5 ------ ------ ------ ------ ------ ------ ------ ------ ------ Six months ended 30 September 2009 Share Cumulative Share premium Retained Treasury exchange Merger Other Revaluation capital account earnings shares* reserve* reserve* reserves* reserve* Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m At 1 April 2009 499.8 0.7 420.2 (0.3) 15.9 313.0 36.6 158.8 1,444.7 Profit after taxation - - 198.1 - - - - - 198.1 Other comprehensive income Actuarial losses on defined benefit pension schemes - - (131.0) - - - - - (131.0) Deferred tax on actuarial losses on defined benefit pension schemes - - 36.7 - - - - - 36.7 Revaluation of investments - - - - - - 6.7 - 6.7 Net fair value gains on cashflow hedges - - - - - - 1.0 - 1.0 Deferred tax on net fair value gains on cashflow hedges - - - - - - (0.3) - (0.3) Foreign exchange adjustments - - - - 5.9 - - - 5.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total comprehensive income for the period - - 103.8 - 5.9 - 7.4 - 117.1 ------ ------ ------ ------ ------ ------ ------ ------ ------ Transactions with owners Dividends (note 7) - - (150.1) - - - - - (150.1) New share capital issued - 0.2 - - - - - - 0.2 Shares disposed of from employee share trust - - (0.2) 0.2 - - - - - Capital reorganisation** - - (16.7) - - 16.7 - - - Equity-settled share-based payments - - 1.4 - - - - - 1.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ At 30 September 2009 499.8 0.9 358.4 (0.1) 21.8 329.7 44.0 158.8 1,413.3 ------ ------ ------ ------ ------ ------ ------ ------ ------ Year ended 31 March 2010 Share Cumulative Share premium Retained Treasury exchange Merger Other Revaluation capital account earnings shares* reserve* reserve* reserves* reserve* Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m At 1 April 2009 499.8 0.7 420.2 (0.3) 15.9 313.0 36.6 158.8 1,444.7 Profit after taxation - - 403.5 - - - - - 403.5 Other comprehensive income Actuarial losses on defined benefit pension schemes - - (125.4) - - - - - (125.4) Deferred tax on actuarial losses on defined benefit pension schemes - - 35.1 - - - - - 35.1 Revaluation of investments - - - - - - 3.4 - 3.4 Reclassification from other reserves arising on sale of financial asset investment - - - - - - (36.6) - (36.6) Net fair value gains on cashflow hedges - - - - - - 0.9 - 0.9 Deferred tax on net fair value gains on cashflow hedges - - - - - - (0.5) - (0.5) Foreign exchange adjustments - - - - 6.4 - - - 6.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total comprehensive income/(expense) for the year - - 313.2 - 6.4 - (32.8) - 286.8 ------ ------ ------ ------ ------ ------ ------ ------ ------ Transactions with owners - Dividends (note 7) - - (226.2) - - - - - (226.2) New share capital issued - 0.2 - - - - - - 0.2 Shares disposed of from employee share trust - - (0.2) 0.2 - - - - - Capital reorganisation** - - (16.7) - - 16.7 - - - Equity-settled share-based payments - - 2.4 - - - - - 2.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ At 31 March 2010 499.8 0.9 492.7 (0.1) 22.3 329.7 3.8 158.8 1,507.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ * Other non-distributable reserves ** The increase in the merger reserve during the year ended 31 March 2010 is due to the redemption of the remaining Â£16.7 million of B shares in April 2009. Consolidated statement of cashflows Restated Restated Six months Six months Year ended ended ended 30 31 March 30 September September 2010 2010 2009 Â£m Â£m Â£m Operating activities Cash generated from continuing operations 419.9 484.7 945.5 Interest paid (63.9) (79.8) (201.0) Interest received and similar income 1.2 4.1 6.5 Tax paid (26.7) - (51.2) Tax received - 50.5 50.5 ------ ------ ------ Net cash generated from operating activities (continuing operations) 330.5 459.5 750.3 ------ ------ ------ Net cash (used in)/generated from operating activities (discontinued operations) (11.9) 5.1 51.7 ------ ------ ------ Investing activities Proceeds from disposal of discontinued 34.4 - - operations Transaction costs, deferred consideration (17.3) - - and cash disposed ------ ------ ------ Proceeds from disposal of discontinued operations net of deferred consideration, 17.1 - - cash disposed and transaction costs Purchase of property, plant and equipment (239.0) (264.9) (500.4) Purchase of other intangible assets (8.4) (12.2) (33.9) Proceeds from sale of property, plant and - 1.8 3.9 equipment Purchase of investments - - (0.8) ------ ------ ------ Net cash used in investing activities (230.3) (275.3) (531.2) (continuing operations) ------ ------ ------ Net cash (used in)/generated from investing activities (discontinued operations) (11.8) (25.1) 78.5 ------ ------ ------ Financing activities Proceeds from issue of ordinary shares 0.2 0.2 0.2 Proceeds from borrowings 29.3 234.5 265.0 Repayment of borrowings (59.4) (167.2) (337.9) Dividends paid to equity holders of the (157.6) (150.1) (226.2) company Return to shareholders on capital - (16.7) (16.7) reorganisation ------ ------ ------ Net cash used in financing activities (187.5) (99.3) (315.6) (continuing operations) ------ ------ ------ Net cash (used in)/generated from financing activities (discontinued operations) (1.2) 1.0 (2.6) ------ ------ ------ Effects of exchange rate changes (0.7) 10.2 13.5 (discontinued operations) ------ ------ ------ Net (decrease)/increase in cash and cash equivalents (continuing operations) (87.3) 84.9 (96.5) ------ ------ ------ Net (decrease)/increase in cash and cash equivalents (discontinued operations) (25.6) (8.8) 141.1 ------ ------ ------ Cash and cash equivalents at beginning of 253.7 209.1 209.1 the period ------ ------ ------ Cash and cash equivalents at end of the 140.8 285.2 253.7 period ------ ------ ------ Cash generated from continuing operations Restated Restated Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Profit before taxation (continuing 122.2 189.9 408.7 operations) Adjustment for investment income and finance 189.3 150.0 359.1 expense ------ ------ ------ Operating profit (continuing operations) 311.5 339.9 767.8 Adjustments for: Depreciation of property, plant and 126.5 114.2 254.1 equipment Amortisation of other intangible assets 15.2 11.6 26.0 Loss/(profit) on disposal of property, plant 0.6 (1.0) 3.0 and equipment Equity-settled share-based payments (0.7) 1.0 1.7 (credit)/charge Other non-cash movements - pension schemes curtailment gains arising on amendment of - - (87.3) pension obligations Changes in working capital: Increase in inventories (0.6) (1.4) (1.6) (Increase)/decrease in trade and other (52.4) (34.9) 12.1 receivables Increase/(decrease) in provisions and 19.8 55.3 (30.3) payables ------ ------ ------ Cash generated from continuing operations 419.9 484.7 945.5 ------ ------ ------ Segmental reporting The group now has one operating division for management purposes, being regulated activities. This forms the basis on which the operating segment information, presented in accordance with IFRS 8 `Operating Segments', is reported. The United Utilities Group PLC board of directors (the `board') has implemented a strategy to divest the vast majority of its non-regulated businesses and in accordance with IFRS 5 `Non-current Assets Held for Sale and Discontinued Operations', the results of the relevant disposal groups have been reclassified from the previously reported non-regulated activities operating segment to discontinued operations in the consolidated income statement and the comparative information has been restated accordingly (note 5). The segmental information presented has been restated to reflect the changes in the group. The elements of the previously reported non-regulated activities operating segment which have not been classified as discontinued operations no longer form a separately reportable segment as required by IFRS 8 and are therefore included within `all other segments'. Segmental information in respect of discontinued operations is included in note 5. The regulated activities segment is as previously reported and includes the regulated results of United Utilities Water PLC. The `all other segments' category includes the results of United Utilities Property Services Limited (formerly United Utilities Property Solutions Limited), United Utilities Group PLC, the remaining non-regulated businesses not classified as discontinued and other group holding companies. The disclosure correlates with the information provided to the board for the purposes of assessing performance and allocating resources. The board reviews revenue, underlying operating profit and operating profit by segment, but assets and liabilities are reviewed at a consolidated level. Investment income and finance expense, and taxation are managed on a group basis and are not allocated to operating segments. Regulated All other Group Continuing operations activities segments Â£m Â£m Â£m Six months ended 30 September 2010 Total revenue 747.7 24.7 772.4 Inter-segment revenue (0.2) (9.8) (10.0) ------ ------ ------ External revenue 747.5 14.9 762.4 ------ ------ ------ Underlying segmental operating profit 323.6 4.1 327.7 Restructuring costs (0.8) (2.6) (3.4) Other reorganisation costs (7.3) (5.5) (12.8) ------ ------ ------ Segmental operating profit/(loss) 315.5 (4.0) 311.5 ------ ------ Investment income 1.2 Finance expense (190.5) ------ Profit before taxation 122.2 ------ Regulated All other Group Continuing operations activities segments Restated Â£m Â£m Â£m Six months ended 30 September 2009 Total revenue 768.3 20.8 789.1 Inter-segment revenue (0.3) (2.2) (2.5) ------ ------ ------ External revenue 768.0 18.6 786.6 ------ ------ ------ Underlying segmental operating profit/(loss) 348.4 (3.0) 345.4 Restructuring costs (3.5) (2.0) (5.5) ------ ------ ------ Segmental operating profit/(loss) 344.9 (5.0) 339.9 ------ ------ Investment income 4.8 Finance expense (154.8) ------ Profit before taxation 189.9 ------ Regulated All other Group Continuing operations activities segments Restated Â£m Â£m Â£m Year ended 31 March 2010 Total revenue 1,538.2 40.8 1,579.0 Inter-segment revenue (0.8) (5.1) (5.9) ------ ------ ------ External revenue 1,537.4 35.7 1,573.1 ------ ------ ------ Underlying segmental operating profit 700.8 5.5 706.3 Restructuring costs (15.8) (10.0) (25.8) Pension schemes curtailment gains arising on amendment of pension obligations 76.7 10.6 87.3 ------ ------ ------ Segmental operating profit 761.7 6.1 767.8 ------ ------ Investment income 6.2 Finance expense (365.3) ------ Profit before taxation 408.7 ------ NOTES 1. Basis of preparation and accounting policies The condensed consolidated half yearly financial statements for the six months ended 30 September 2010 which are unaudited, have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and International Accounting Standard 34 `Interim Financial Reporting' (IAS 34). The accounting policies, presentation and methods of computation are consistent with those set out in the audited consolidated financial statements of United Utilities Group PLC for the year ended 31 March 2010, which are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU), except for the adoption of the standards and interpretations referred to below. The adoption of the following standards and interpretations, at 1 April 2010, has not had a material impact on the group's financial statements: IFRIC 18 `Transfers of Assets from Customers' The interpretation applies to all agreements in which an entity receives from a customer an item of property, plant and equipment (PPE) (or cash to construct or acquire an item of PPE) that the entity must then use, either to connect the customer to a network, or to provide the customer with ongoing access to a supply of goods or services, or to do both. Its application is retrospective and has been applied to transfers of assets from customers received on or after 1 July 2009. Hence, restatement of the information presented for the period ended 30 September 2009 and the year ended 31 March 2010 is required. The impact in the half year ended 30 September 2010 in respect of transfers of assets from customers which were not previously accounted for is to record PPE of Â£20.5 million (September 2009: Â£15.0 million, March 2010: Â£36.8 million) with a credit of the same amount to deferred revenue within current and non-current trade and other payables combined. The assets will be depreciated over their useful life and the deferred revenue released over the same period. Certain transfers of assets from customers were previously recognised immediately within revenue and operating expenses and have therefore been reclassified to deferred revenue and PPE thereby reducing both revenue and operating expenses, as they would otherwise have been reported, by Â£0.9 million in the half year ended September 2010 (September 2009: Â£0.9 million, March 2010: Â£2.5 million). As a result of the adoption of this interpretation, the group has presented a restated consolidated income statement and consolidated statement of financial position for the period ended 30 September 2009 and the year ended 31 March 2010. IFRS 3 `Business Combinations' This revised standard, issued in January 2008, is effective for periods commencing on or after 1 July 2009 and was endorsed by the EU on 12 June 2009. This will have a material impact on the group's financial statements only if it enters into any relevant transactions in the future. `Improvements to IFRSs (2008)' The group adopted the amendments to IAS 1 arising from the `Improvements to IFRS (2008)' project in the financial statements for the year ended 31 March 2010 and has therefore restated the statement of financial position for the comparative period ended 30 September 2009 to categorise the `held for trading' derivatives between current and non-current, based upon the contractual maturity date or, where applicable, the contractual early termination date. The comparatives for the consolidated income statement and consolidated statement of cash flows for the period ended 30 September 2009 and year ended 31 March 2010, have been restated to reflect the disclosure of the results of the non-regulated businesses that meet the definition of disposal groups in accordance with IFRS 5 `Non-current Assets Held for Sale and Discontinued Operations' as at 30 September 2010 and the results of the businesses disposed of in the period, as discontinued operations (note 5). The group has updated the valuation of its defined benefit pension schemes in the half yearly financial statements due to the continued volatility in financial markets. The condensed consolidated half yearly 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 2010. The comparative figures for the year ended 31 March 2010 do not comprise the group's statutory accounts for that financial year. Those accounts have been reported upon by the group's auditors and delivered to the registrar of companies. The report of the auditors was unqualified and did not include a reference to any matters to which the auditors 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. Going concern The directors have reviewed the financial resources available to the group and have concluded that the group is a going concern. This conclusion is based upon, amongst other matters, a review of the group's financial projections together with a review of the cash and committed borrowing facilities available to the group. 2. Investment income Restated Restated Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Continuing operations Interest receivable 1.2 4.8 6.2 ------ ------ ------ 3. Finance expense Restated Restated Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Continuing operations Interest payable (134.7) (80.3) (207.2) Fair value losses on debt and derivative (53.2) (63.9) (136.5) instruments ------ ------ ------ (187.9) (144.2) (343.7) Expected return on pension schemes' assets 51.6 41.6 83.8 Interest cost on pension schemes' (54.2) (52.2) (105.4) obligations ------ ------ ------ Net pension interest expense (note 8) (2.6) (10.6) (21.6) ------ ------ ------ (190.5) (154.8) (365.3) ------ ------ ------ The group has a policy of fixing interest costs for a substantial proportion of the group's net debt for the duration of each five-year regulatory pricing period and hedging currency exposures for the term of each relevant debt instrument. The group hedges its position through the use of interest rate and cross currency swap contracts where applicable. The economic underlying net finance expense for the continuing group of Â£131.5 million (30 September 2009 restated: Â£87.2 million, 31 March 2010 restated: Â£223.2 million) is derived by excluding from financing expense fair value losses on debt and derivative instruments, adding back the interest payable element of fair value with respect to swaps and fair value option debt, including investment income and excluding the net pension interest expense in relation to the group's defined benefit pension schemes. Restated Restated Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Continuing operations Finance expense (190.5) (154.8) (365.3) Fair value losses on debt and derivative 53.2 63.9 136.5 instruments Add back interest on swaps and debt under 2.0 (11.7) (22.2) fair value option Investment income 1.2 4.8 6.2 Adjustment for net pension interest 2.6 10.6 21.6 expense ------ ------ ------ Underlying net finance expense (131.5) (87.2) (223.2) ------ ------ ------ 4. Taxation Restated Restated Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 Continuing operations 2010 2009 Â£m Â£m Â£m Current taxation UK corporation tax 28.3 51.4 65.7 Foreign tax 1.9 1.2 0.9 Prior year adjustments - (34.2) (47.1) ------ ------ ------ 30.2 18.4 19.5 ------ ------ ------ Deferred taxation Current period 6.0 1.4 48.8 Prior year adjustments - (16.1) (6.6) ------ ------ ------ 6.0 (14.7) 42.2 Change in taxation rate (47.1) - - ------ ------ ------ (41.1) (14.7) 42.2 ------ ------ ------ ------ ------ ------ Total taxation (credit)/charge for the (10.9) 3.7 61.7 period ------ ------ ------ The prior year adjustments relate to agreement of prior years' UK tax returns. The deferred taxation credit for the six months ended 30 September 2010 includes a credit of Â£47.1 million to reflect the changes enacted on 27 July 2010 to reduce the mainstream rate of corporation tax from 28% to 27% from 1 April 2011. 5. Discontinued operations and disposal of investments Discontinued operations and assets and liabilities held for sale In line with the group's strategy of focusing on its core regulated activities, the board had previously approved a strategy to divest its non-regulated businesses. As at 30 September 2010, sales for the vast majority of these non-regulated businesses had either been completed, agreed or were being actively marketed. Subsequent to the half year end, the group announced that the non-regulated disposal programme had been completed. Therefore, the businesses that had not reached sale completion as at 30 September 2010 meet the definition of disposal groups in accordance with IFRS 5 `Non-current Assets Held for Sale and Discontinued Operations' and are therefore classified as held for sale in the consolidated statement of financial position and as discontinued operations in the consolidated income statement and consolidated statement of cash flows. In accordance with IFRS 5, the assets and liabilities of the disposal groups have been reviewed to determine whether an adjustment is required to carry them at fair value, less estimated costs to sell. This review has not resulted in a reduction in the carrying value of the assets and liabilities of the disposal groups in the consolidated statement of financial position at 30 September 2010. In the period, the group completed the disposals of its electricity operations and maintenance business in the North West of England and its gas and electricity metering installation contract with British Gas Trading. Combined proceeds from the two transactions totalled Â£34.4 million. The results of the discontinued operations in the six months to 30 September 2010, and comparative periods, which have been disclosed separately in the consolidated income statement, as required by IFRS 5, are as follows: Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Revenue 311.1 422.7 863.5 Employee benefits expense: - excluding pension schemes curtailment gains arising on (74.3) (104.2) (206.1) amendment of pension obligations and restructuring costs - pension schemes curtailment gains arising on amendment of - - 5.0 pension obligations - restructuring credits/(costs) 1.5 (1.9) (4.9) ------ ------ ------ Total employee benefits expense (72.8) (106.1) (206.0) Other reorganisation credits 7.0 - - Other operating costs (198.4) (282.5) (582.7) Depreciation and amortisation expense (6.3) (11.9) (24.7) ------ ------ ------ Operating profit 40.6 22.2 50.1 Investment income and finance expense (6.6) (2.8) (10.4) Profit on disposal of investments - - 36.6 Evaluation and disposal costs relating to (5.0) (3.2) (10.8) discontinued operations ------ ------ ------ Profit before taxation 29.0 16.2 65.5 Current taxation charge (9.7) (1.5) (2.5) Deferred taxation credit/(charge) 0.7 (2.8) (6.5) ------ ------ ------ Taxation (9.0) (4.3) (9.0) ------ ------ ------ Profit after taxation 20.0 11.9 56.5 ------ ------ Profit on disposal of discontinued 0.3 operations after taxation ------ Total profit after taxation from 20.3 discontinued operations ------ The total assets and liabilities disposed in the period and the profit on disposal were as follows: Â£m Property, plant and equipment 15.2 Other intangible assets 3.8 Inventories 8.2 Trade and other receivables 46.4 Cash and short-term deposits 14.7 Trade and other payables (58.0) Deferred taxation 1.4 ------ Net assets disposed of 31.7 Transaction and other costs of disposal 2.4 Profit on disposal of discontinued operations after taxation 0.3 ------ Total proceeds 34.4 ------ Disposal of investments As reported in the consolidated financial statements of United Utilities Group PLC for the year ended 31 March 2010, during the prior year the group disposed of its 11.7 per cent economic interest in Manila Water Company (MWC) and of its 15.0 per cent economic interest in Northern Gas Networks Holdings Limited (NGN). MWC NGN Total Â£m Â£m Â£m Year ended 31 March 2010 Proceeds 46.3 85.8 132.1 Carrying value of investment (46.3) (85.8) (132.1) Reclassification from other reserves arising on sale of 36.6 - 36.6 financial asset investment ------ ------ ------ Profit on disposal of investments 36.6 - 36.6 ------ ------ ------ 6. Earnings per share Basic and diluted earnings per share are calculated by dividing profit after taxation by the following weighted average number of shares in issue: Basic Diluted million million Six months ended 30 September 2010 681.5 682.0 Six months ended 30 September 2009 681.5 682.0 Year ended 31 March 2010 681.5 682.0 The difference between the weighted average number of shares used in the basic and diluted earnings per share calculations arises due to the group's operation of share-based payment compensation arrangements. The difference represents those ordinary shares deemed to have been issued for no consideration on the conversion of all potential dilutive ordinary shares in accordance with IAS 33 `Earnings per Share'. The basic, diluted and underlying earnings per share for the current and prior periods are as follows: Six months Six months ended Year ended ended 30 September 31 March 30 September 2009 2010 2010 From continuing and discontinued operations Basic 22.5p 29.1p 59.2p Diluted 22.5p 29.0p 59.2p From continuing operations Basic 19.5p 27.3p 50.9p Diluted 19.5p 27.3p 50.9p Underlying basic 20.4p 27.2p 50.9p From continuing operations Six months Six months Year ended ended ended 30 September 30 September 31 March 2010 2009 2010 Â£m Â£m Â£m Profit after taxation - continuing and 153.4 198.1 403.5 discontinued operations Adjustment for profit after taxation (20.3) (11.9) (56.5) from discontinued operations ------ ------ ------ Profit after taxation - continuing 133.1 186.2 347.0 operations ------ ------ ------ Statutory profit after taxation from continuing operations is reconciled to underlying profit after taxation from continuing operations as follows: Six months Six months ended Year ended ended 30 September 31 March 30 September 2009 2010 2010 Â£m Â£m Â£m Continuing operations Profit after taxation 133.1 186.2 347.0 Restructuring and other reorganisation 16.2 5.5 25.8 costs Pension schemes curtailment gains arising on amendment of pension - - (87.3) obligations (note 8) Net fair value losses on debt and 53.2 63.9 136.5 derivative instruments Interest on swaps and debt under fair 2.0 (11.7) (22.2) value option Net pension interest expense 2.6 10.6 21.6 Deferred taxation credit - change in (47.1) - - taxation rate Agreement of prior years' UK taxation - (50.3) (53.7) returns Taxation relating to underlying profit before taxation adjustments (20.7) (19.1) (20.8) ------ ------ ------ Underlying profit after taxation 139.3 185.1 346.9 ------ ------ ------ 7. Dividends Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Dividends relating to the period comprise: Interim dividend 68.2 76.1 76.1 Final dividend - - 157.6 ------ ------ ------ 68.2 76.1 233.7 ------ ------ ------ Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Dividends deducted from shareholders' equity comprise: Interim dividend - - 76.1 Final dividend 157.6 150.1 150.1 ------ ------ ------ 157.6 150.1 226.2 ------ ------ ------ The proposed interim dividends for the six months ended 30 September 2010 and 30 September 2009 and the final dividend for the year ended 31 March 2010 have not been included as liabilities in the condensed consolidated half yearly financial statements at 30 September 2010, 30 September 2009 or the consolidated financial statements at 31 March 2010 respectively. The interim dividend of 10.00 pence per ordinary share (2010: interim dividend of 11.17 pence per ordinary share; final dividend of 23.13 pence per ordinary share) is expected to be paid on 2 February 2011 to shareholders on the register at close of business on 17 December 2010. The ex-dividend date for the interim dividend is 15 December 2010. 8. Retirement benefit obligations The main financial assumptions used by the actuary were as follows: Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 %pa %pa %pa Discount rate - United Utilities Pension Scheme (UUPS), United Utilities Group PLC section of the Electricity Supply Pension Scheme (ESPS) and Northern Gas Networks 5.20 5.60 5.70 Pension Scheme (NGNPS) Expected return on assets - UUPS 6.20 6.60 6.20 Expected return on assets - ESPS 6.30 6.20 6.30 Expected return on assets - NGNPS 6.10 5.90 6.10 Pensionable salary growth - UUPS 3.10 4.15 3.30 Pensionable salary growth - ESPS 3.10 4.20 3.30 Pensionable salary growth - NGNPS 4.10 4.20 4.30 Pension increases 3.10 3.20 3.30 Price inflation 3.10 3.20 3.30 The net pension (expense)/income (charged)/credited before taxation for continuing operations in the income statement in respect of the defined benefit schemes is summarised as follows: Restated Restated Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Continuing operations Current service cost (6.1) (8.6) (16.5) Curtailments/settlements - arising on reorganisation* (4.9) (1.2) (9.3) - arising on amendment of pension - - 87.3 obligations Past service cost (1.0) (1.4) (2.8) ------ ------ ------ Pension (expense)/income (charged)/credited to operating profit (12.0) (11.2) 58.7 ------ ------ ------ Expected return on schemes' assets 51.6 41.6 83.8 Interest cost on schemes' obligations (54.2) (52.2) (105.4) ------ ------ ------ Pension expense charged to investment income and finance expense (note 3) (2.6) (10.6) (21.6) ------ ------ ------ Net pension (expense)/income (charged)/credited to profit before (14.6) (21.8) 37.1 taxation ------ ------ ------ * Curtailments arising on reorganisation of Â£4.9 million (September 2009: Â£1.2 million; March 2010: Â£9.3 million) are included within net restructuring costs of Â£3.4 million (September 2009: Â£5.5 million; March 2010: Â£25.8 million) within total employee benefits expense. The net pension expense charged before taxation for discontinued operations in the income statement in respect of defined benefit pension schemes is summarised as follows: Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Discontinued operations Current service cost (3.5) (4.9) (9.5) Curtailments/settlements - arising on reorganisation 3.0 (6.2) (7.9) - arising on amendment of pension - - 5.0 obligations ------ ------ ------ Pension expense charged to operating (0.5) (11.1) (12.4) profit ------ ------ ------ Expected return on schemes' assets 6.9 5.0 10.3 Interest cost on schemes' obligations (6.6) (5.9) (11.9) ------ ------ ------ Pension income/(expense) credited/(charged) to investment income 0.3 (0.9) (1.6) and finance expense Curtailment/settlement arising on disposal and charged to profit on disposal of (0.9) - - discontinued operations ------ ------ ------ Net pension expense charged to profit (1.1) (12.0) (14.0) before taxation ------ ------ ------ Employee related pension costs have been charged to operating profit within discontinued operations where the employing entity has been included as a discontinued operation. Pension interest income/(expense) has been included within investment income and finance expense where the underlying pension obligation has either been disposed of during the period or is included within liabilities held for sale at 30 September 2010. Curtailments/settlements arising on the transfer of employees' pension obligations with businesses disposed of in the current period are included within the profit on disposal of discontinued operations. The reconciliation of the opening and closing net pension obligation included in the statement of financial position is as follows: Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m At the start of the period (271.3) (213.1) (213.1) Expense recognised in the income statement - continuing operations (14.6) (21.8) 37.1 - discontinued operations (1.1) (12.0) (14.0) Contributions paid 47.9 19.3 44.1 Actuarial losses gross of taxation (70.7) (131.0) (125.4) Reclassified to liabilities held for sale 9.2 - - ------ ------ ------ At the end of the period (300.6) (358.6) (271.3) ------ ------ ------ The closing obligation at each reporting date is analysed as follows: Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Present value of defined benefit (1,917.5) (2,210.9) (2,182.2) obligations Fair value of schemes' assets 1,616.9 1,852.3 1,910.9 ------ ------ ------ Net retirement benefit obligations (300.6) (358.6) (271.3) ------ ------ ------ The net retirement benefit obligation of Â£9.2 million included in liabilities held for sale consists of a present value of defined benefit obligations of Â£252.2 million net of fair value of schemes' assets of Â£243.0 million. 9. Related party transactions Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. The following trading transactions were carried out with the group's joint ventures: Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Group Sales of services 38.5 48.3 92.9 Purchases of goods and services 8.1 1.6 4.8 ------ ------ ------ Amounts owed by and to the group's joint ventures are as follows: Six months Six months Year ended ended ended 31 March 30 September 30 September 2010 2010 2009 Â£m Â£m Â£m Group Amounts owed by related parties 16.8 13.1 19.2 Amounts owed to related parties 3.8 (0.1) 0.9 ------ ------ ------ Sales of services to related parties were on the group's normal trading terms. The amounts outstanding are unsecured and will be settled in accordance with normal credit terms. The group has issued guarantees of Â£180.2 million (30 September 2009: Â£157.2 million, 31 March 2010: Â£126.8 million) to its joint ventures. A Â£0.7 million provision has been made for doubtful receivables in respect of the amounts owed by related parties (30 September 2009: Â£0.1 million, 31 March 2010: Â£0.4 million). A Â£0.4 million expense has been recognised for bad and doubtful receivables in respect of the amounts owed by related parties (30 September 2009: Â£0.1 million, 31 March 2010: Â£0.3 million). 10. Contingent liabilities The group has entered into performance guarantees as at 30 September 2010, where a financial limit has been specified of Â£279.4 million (30 September 2009: Â£193.5 million, 31 March 2010: Â£201.2 million), of this amount, Â£186.9 million relates to discontinued operations. 11. Events after the reporting period The group announced on 10 November 2010 that it had completed its non-regulated disposal programme. The various sales have achieved a total enterprise value of approximately Â£600 million. The group has taken the decision to retain its 35.3% holding in AS Tallinna Vesi (Tallinn Water). 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 Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. 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; and - 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 during the first six months of the current financial year and their impact on the condensed set of financial statements; and a description of principal risks and uncertainties for the remaining six months of the year; and * DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so. The directors of United Utilities Group PLC at the date of this announcement are listed below: Dr John McAdam Philip Green Russ Houlden Dr Catherine Bell CB Paul Heiden David Jones CBE Nick Salmon By order of the Board ............................. ............................ Philip Green Russ Houlden 23 November 2010 23 November 2010 Chief Executive Officer Chief Financial Officer INDEPENDENT REVIEW REPORT TO UNITED UTILITIES GROUP PLC 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 2010 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 cashflows and related notes 1 to 11. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the company 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. Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review 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 formed. 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 Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union. 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. 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 United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) 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. Conclusion 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 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. Deloitte LLP Chartered Accountants and Statutory Auditors Manchester, United Kingdom 23 November 2010

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