United Utilities Regulatory News (UU.)

United Utilities Group PLC

23 November 2022

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2022

Investment strategy and Systems Thinking delivering for customers…

· Investment in sophisticated real time planning and integrated network has enhanced our water supply resilience

· Additional investment announced in May driving 21% reduction in water quality contacts

· Dynamic Network Management investment helping to deliver lowest ever levels of sewer flooding

· On track to deliver leakage target; helped by early investment, latest innovations and detection techniques

· Sector leading customer support package with c£280m support in AMP7 helping more than 200,000 households

· Strong supporter of the CCW's1 proposal for a national social tariff to help customers right across the country

· Investing in the North West's future, with our biggest ever intake of graduates and apprentices

…and the environment

· Awarded highest 4-star environmental rating in the EA's annual assessment for the fifth time in seven years

· Progressing with Better Rivers programme; 29% reduction in spills2 last year and further improvement this year

· Supporting the Government's ambitious environmental targets with investment plans enabling an early start

· Environmental programmes for AMP8 and beyond expected to drive significant increases in sector investment

Operational and financial resilience

· Strong capital programme delivery with 98% of AMP7 base programme let and 65% already delivered

· Power commodity prices locked-in on 96% of FY23 forecast consumption; at an average rate of £85/MWh

· Effective cost management helping to mitigate inflation impact; RCV and totex allowance indexed to inflation

· Cash collection remains strong with household bad debt stable at 1.8% in the first half of the year

· Lower consumption drives improved PCC performance, and £19m impact on revenue will be recovered in FY25

· On track to deliver £30m ODI reward for FY23; targeting c£200m for AMP7, almost five times our AMP6 reward

· Earnings mainly impacted by higher inflation on index-linked debt; underlying EPS3 of -1.8p, down from 28.4p

· Inflation supporting AMP7 nominal RCV growth of 27.5%4 and FY23 RoRE in excess of 7.9% earned in FY22

· Strong balance sheet; sector-leading credit rating and improved gearing5 at 60% benefitting from RCV inflation

· Pension position resilient to recent market challenges, with headroom for further de-risking

· Dividend in line with AMP7 policy, supported by strong operational and financial performance

Key financials

1 Consumer Council for Water

2 As reported against a 2020 baseline

3 Underlying measures are defined in the 'underlying profit' tables

4 Includes returns to be received as revenues in AMP8 and inflation assumptions based on a consensus from a selection of banks and HM Treasury

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

Steve Mogford, Chief Executive Officer, said:

"We continue to focus on the areas that matter most to our stakeholders, delivering sustainable operational improvements for customers and the environment, demonstrating financial resilience and improving regulatory performance, all while providing sector-leading affordability support.

"The North West is home to many of the most deprived communities across the country, and many people are deeply worried about the rising cost of living, which is why we work hard to help customers who are struggling to pay their bills. £280 million of affordability support is being provided to more than 200,000 households between 2020 and 2025, reflecting both customer social tariffs and company contributions. We believe that affordability support should not be a postcode lottery, which is why we are a strong supporter of the Consumer Council for Water's proposal for a national social tariff to help households with their water bills.

"During what has been a difficult macro environment we have shown both operational and financial resilience. While we have not been immune to the impact of inflation, we are well placed compared to many as a result of our tight cost management, effective hedging strategy, and regulatory mechanisms providing further mitigation to rising costs.

"Our responsible, long term approach to investing and deployment of Systems Thinking is delivering sustainable improvements and creating long-term value for our stakeholders. We are improving water quality, have achieved our lowest ever level of sewer flooding, and are on track to meet our leakage reduction target. The Environment Agency has recognised our efforts again by awarding us the highest 4-star ranking for our performance in its latest assessment - the fifth time we have received this status in the last seven years. Storm overflows are a huge area of focus for us, and for the sector, and our Better Rivers, Better North West programme sets out a clear plan of action to reduce their use and improve the environment. It's a big task but we are already making progress having reduced reported spills by 29% last year and making further progress this year.

"There is more that we would like to be able to do. The Environment Agency recently identified new statutory requirements that companies will be required to deliver in the next regulatory period, AMP8, and beyond. While we are strong supporters of this ambitious programme of environmental improvements, the rate of change must consider affordability and deliverability, and we are working with regulators to determine the pace of investment. Our resilient financial position, supported by our Systems Thinking approach, sees us well placed to deliver more for all our stakeholders for the long term."

Enquiries

For further information on the day, please contact:

Presentation webcast and conference call details

We will be hosting a live virtual presentation at 9.00am on Wednesday 23 November 2022, which can be accessed via the following link:

http://www.unitedutilitiestv.live/

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

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

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

OPERATIONAL PERFORMANCE

We have continued to improve operational performance in the first half of this year, focused on delivering our purpose of providing great water and more for the North West. Customers and the environment are benefitting from our operational excellence and investment in the areas that matter most to our stakeholders, and these sustainable performance improvements are earning outcome delivery incentive (ODI) rewards.

We have improved water quality for customers, with a resilient water supply and our lowest ever level of sewer flooding, whilst providing sector-leading affordability support. We are consistently one of the leading companies in the industry on environmental performance, with the highest four star rating from the Environment Agency, and we are making good progress against our river pledges with significant reductions in spills from storm overflows, having already delivered a 29 per cent reduction in reported spills last year (from a 2020 baseline), and with further improvement expected this year.

We, alongside the rest of the country, have been navigating a backdrop of considerable political and economic uncertainty in recent months, but our robust financial risk management approach and tight cost control gives us a strong relative position and we remain confident that we will continue to deliver long-term value for all our stakeholders.

Providing great water for customers

We continue to perform well on Ofwat's measure of customer satisfaction, C-MeX. Our combined score for the first half of the year sees us in the top half for the industry, the highest of the listed companies, and fourth out of all water and wastewater companies. We work hard to resolve any issues that do arise, with only 3 per cent of complaints reaching stage 2, making us an upper quartile industry performer.

It is pleasing that so many customers are happy with the service we are providing, but we continue to strive to do even better. We are making great progress on water quality, which was one of the areas targeted by the additional investment we announced in May. The work we have been doing on mains cleaning to reduce discolouration at customers' taps has helped us achieve a 21 per cent reduction in taste, smell and appearance contacts from customers. This was an area where we incurred an ODI penalty last year but are currently on track for a reward this year.

During September we ran Water Quality First week, an internal event highlighting the crucial roles different teams across the company play in providing great water all the way from source to tap. We received great employee engagement, all helping to highlight the important work we are doing and the improvements we are making in water quality for customers.

We are also working to do more on reducing leakage, building on a track record of having met our leakage target for 16 consecutive years. Recognising this as an area of increased importance to stakeholders in recent years, we committed early start investment before the beginning of AMP7 and we are on track to deliver our target to reduce leakage by 15 per cent by 2025, having reduced leakage by 7 per cent so far this AMP. This has been delivered using the latest innovations and detection techniques, including the use of Pressure Management Valves, installation of over 72,000 sensors across our pipe network, and rapid machine-learning technology that can pinpoint the exact location and size of a leak with a greater than 85 per cent success rate just based on the unique sound it makes.

The country experienced particularly dry weather this summer, and we saw just 63 per cent of the long-term average rainfall expected in the North West during July and August, with some areas in our region receiving less than half of the rainfall we would typically expect.

As a result of ground movement caused by this dry weather, we experienced three atypically large pipe bursts, resulting in an increase in the level of supply interruptions, but our teams worked around the clock to fix the damaged pipes as well as deploying our tanker fleet and setting up bottled water stations to ensure customers continued to receive water during the time in which mains supply was impacted. This has resulted in an £8 million increase in operating costs in the first half of the year, including a £1 million provision for net amounts we may be liable to pay in future periods.

Our water resilience performance through this dry summer was very good. We avoided the need for any restrictions on water use for customers in the North West as a result of our proactive customer engagement activities and the previous investment we have made to develop a sophisticated real time water production planning system together with the ability to move large volumes of water around our integrated network.

Protecting and enhancing the environment

We were awarded the top four star rating in the Environment Agency's most recent annual performance assessment for 2021, making us an Industry Leading Company for the fifth time in the last seven years. This is a great achievement against the backdrop of a continuously evolving and tougher assessment regime.

We had the lowest overall levels of pollution in the sector, having delivered a 33 per cent reduction in pollution incidents since the start of AMP7, and we are on track to improve even further this year. We also have the lowest levels of serious pollution incidents in recent years, with only one incident in the last three years (2019-2021).

River health is an ongoing priority, and our 'Better Rivers, Better North West' programme detailed our pledges and targets for kick-starting a river revival across the region, supported by £230 million base investment across AMP7 that will lead to 184 kilometres of improved waterways. In addition to this £230 million, part of the reinvestment of outperformance we announced in May is being used to accelerate these plans and get a head start on future requirements.

Spills from storm overflows are a big area of focus for the whole industry as part of improving river health. Following keen interest from the public and Government, and publication of the new Environment Act 2021, ambitious targets have been set for a progressive but substantial reduction in spill frequency across the country.

Storm overflows help to minimise the risk of sewer flooding in periods of heavy rainfall by allowing heavily diluted wastewater to be released directly to the environment. The North West receives 28 per cent more average annual rainfall than other regions and the industrial legacy of our region means we have a much higher proportion of combined sewers, with 55 per cent of our network taking both waste and surface water compared with the industry average of 27 per cent. The combined result of these unique characteristics means that more rain is collected more often in our region than any other wastewater system in the country. As a result of these new national requirements and the regional imbalance in the level of rainfall that enters sewers, new targets to reduce spill frequency indicate a substantial investment need over the longer term, with DEFRA comimissioned estimates suggestingthat over 60 per cent of the sector investment necessary to meet their targets needing to be made in the North of the country. We are still early in the process of scoping and costing our environmental programme for AMP8, but as a result of these targets and other drivers coming out of the Environment Act, early indications point to an investment that could be significantly higher than the average level over the last two AMP periods. Given the size of this potential investment, we are in discussions with regulators about balancing the pace of investment in light of affordability and deliverability considerations, and the investment needed to meet these new environmental requirements is likely to run over successive AMP periods.

We were an early adopter of spill monitoring and have one of the largest installed bases in the sector, with 100 per cent coverage to be achieved by 2023. Our Better Rivers programme is delivering improvements that support our target of at least a 33 per cent reduction in spills by 2025, from a 2020 baseline. We have already made great headway, delivering a 29 per cent reduction last year, and our progress so far this year suggests that we will exceed this target. We are conscious that performance can be significantly influenced by weather and while we are extremely pleased with the progress delivered so far, we recognise that there is more we could do, both individually and as a sector. The Government has asked us to go faster, and we have responded by identifying additional investment that could be spent in AMP7 but would be fully recovered in AMP8.

As well as heavy rainfall exceeding sewer capacity, sewer blockages can result in an eventual spill. This is one of the areas helped by our £100 million investment in Dynamic Network Management (DNM), a state-of-the-art digital solution that uses a network of sensors and artificial intelligence that provides a real-time picture of what's happening in our sewers, allowing prediction and proactive detection of deviations from expected levels of performance in our wastewater network. These alerts mean preventative activities can be taken by our operational teams to avoid sewer blockages from forming. DNM is now in operation and our investment is already achieving success, contributing to our best ever sewer flooding performance as well as helping us to reduce spills from storm overflows.

Providing sector-leading affordability support

The North West is home to many of the most deprived neighbourhoods in England, and supporting customers that are struggling with their bills has long been one of our top priorities. With many households across our region seriously impacted by recent cost of living increases, this is now even more important.

We are helping over 200,000 customers, more than ever before, through our extensive range of affordability schemes. We monitor customer payment behaviour to proactively identify customers who may be struggling to pay and use targeted early intervention communications to increase awareness of available support and flexible payment plans, as well as water efficiency advice. We have revamped our affordability webpages to simplify key messaging and improve accessibility of support and we use a range of methods, including social media and our data share arrangement with the DWP, to ensure we can get help to a wide range of people who need it. We were the first water company to utilise Open Banking technology, which gives customers the ability to share their account details so we can expedite the process of verifying their eligibility for our support schemes, meaning a process that could take two weeks can be done in just minutes.

We actively engage with customers to offer advice and awareness to help deliver reductions in water demand, particularly around dry weather periods like we saw this summer, and per capita consumption has reduced by around 11 per cent so far this year. This helps customers to keep their bills down (both water bills for metered customers, and energy bills where they are using less heated water), whilst also improving regional water resource resilience and ODI performance. We are making significant progress in eliminating voids, finding properties that are using water but not being billed, which helps to keep average customer bills lower as well as earning ODI rewards.

As a result of the cost of living challenges households are currently facing, there is a higher level of uncertainty around the potential impact on cash collection. However, it is encouraging to see that our proactive engagement, innovative solutions and tailored assistance has meant that we have more customers on direct debits and payment plans than ever before. Cash collection so far this year has been particularly strong, remaining on target despite the challenging current economic environment. This all supports our lowest ever level of bad debt, at 1.8 per cent of regulated revenue.

We are strong supporters of the national social tariff proposal put forward by the Consumer Council for Water. This measure would level up affordability support so it is not a postcode lottery and provide much needed help to struggling families across the country during these challenging times.

Supporting and developing our people

We have delivered over 10,000 days of training over the first half of this year, with around 45 per cent being delivered remotely or via e-learning, ensuring a cost efficient and effective delivery built on adaptations made during the pandemic. In addition to remote learning, we continue to deliver best-in-class practical training at our technical training centre, supplemented by our 'on the road' programme at key satellite sites in the north of our region to minimise travel time.

As a large employer in the North West with over 6,000 employees, we are committed to recruiting from all areas of our communities and have been shortlisted for both the Social Mobility and Inclusive Culture initiatives in the Inclusive Company Awards 2022. We are committed to developing younger generations across the region, having welcomed 90 new apprentices and graduates in September. Our pipeline of future operational leaders is strengthened through our Aspiring Manager talent development programme, in partnership with Manchester Metropolitan University, which has been completed by over 20 employees graduating with degrees in Business Management this summer and is preparing to welcome the next intake. 92 per cent of previous graduates on this programme have secured promotions or role changes.

We continue to make progress on our diversity and inclusion strategy, having sponsored the first ever North West Diversity and Inclusion Summit in April and piloted our 'Stepping Up' programme to support development of ethnic minority colleagues, as well as continuing to support the 10,000 Black Interns programme. We held our inaugural Employee Network AGM and Inclusion Awards, celebrating colleagues' contributions to championing inclusion in the workplace and our local communities. We continue to receive external recognition for our efforts, ranking for the third consecutive year in the top one per cent of over 850 companies across Europe in the Financial Times' Statista Diversity Survey.

We launched a new electric car salary sacrifice scheme in May, enabling our employees to access benefits that help them play a part in mitigating climate change. This has received significant interest with over 120 orders already placed.

Delivering our AMP7 regulatory contract and preparing for AMP8

We are one of the top performing companies on customer ODI rewards, on track for our largest annual reward of £30 million this year, and continuing to target a net reward of £200 million for AMP7. This is supported by strong performance in areas such as minimising pollution incidents, water service resilience, lifting customers out of water poverty, and eliminating voids, as well as the investment we have made to improve performance in areas such as sewer flooding and discolouration of water, where our performance has been weaker.

We are not immune to widespread macro challenges resulting from high levels of inflation, but we are relativley well placed. We have 98 per cent of our base capital programme for AMP7 on contract, with 65 per cent already delivered at this halfway point in the five-year period, and we have power commodity prices locked-in on 96 per cent of our forecast consumption for this financial year at an average price of £85/MWh compared to the market cap of £211/MWh. Meanwhile we continue to seek efficiencies and exploit technology and innovation to help us deliver our total expenditure (totex) efficiently.

We are building an ambitious plan for the 2025-30 period, AMP8, and we are confident that our strong and resilient corporate and financial structure, supported by our Systems Thinking approach and a culture that seeks to continually improve, innovate and invest for sustainable long term performance, sees us well placed to continue to deliver for all our stakeholders in this regulatory period and beyond.

Over the last 8 weeks we have released a series of short videos showcasing a few of the ways we are using innovation and technology to develop sustainable ESG solutions for some of the modern challenges water companies face with an increasing population, urbanisation of the landscape, and a changing climate. We wil continue to apply this forward-thinking approach in our plans for AMP8 and beyond, helping us deliver further improvements in performance and resilience. The videos can be viewed at: https://www.unitedutilities.com/corporate/responsibility/esg-playlist/

FINANCIAL PERFORMANCE

Revenue for the six months to 30 September 2022 decreased by 1 per cent, mainly driven by lower consumption than predicted which more than offsets the allowed regulatory revenue increase but will be recovered in FY25. Household cash collection has remained robust and bad debt is stable at 1.8 per cent of regulated revenue, supported by our sector-leading affordability support schemes and use of innovative tools and techniques. As set out in our trading update of 27 September 2022, the current difficult macro-environment has impacted financial performance in the first half of the year. Operating profit was down £74 million, driven by the decrease in revenue and a combination of inflationary increases on input costs, increased investment in infrastructure renewals expenditure (IRE) and the impact of incidents resulting from dry weather over the summer.

While inflation has impacted both our reported and underlying financial performance, we continue to focus on tight cost management, and this, alongside effective power hedging, is helping to lessen the impact of inflation on our cost base. Furthermore, our regulatory mechanism provides mitigation through inflationary uplifts to our totex allowance and the Regulatory Capital Value (RCV). The regulatory performance of the business remains robust and we are on track to deliver an improved return on regulatory equity (RoRE) this year.

We continue to have one of the strongest balance sheets in the sector, with RCV gearing comfortably within our target range and an industry-leading, fully funded pension position which has been resilient to the recent market challenges. Both of these support a sector-leading stable A3 credit rating with Moody's.

Revenue

Revenue was down £13 million, at £919 million, largely reflecting lower consumption more than offsetting the allowed regulatory revenue increase.

In the first half of 2022/23 we have had a £30 million increase in the revenue cap, largely incorporating a 4.6 per cent CPIH-linked increase partly offset by a 1.3 per cent real reduction in allowed wholesale revenues.

Non-household revenue has decreased by £38 million compared with the first half of last year and household consumption has decreased by £18 million, both largely in reflection of changes in consumption, which was atypically high in the first half of last year.

For both domestic and business customers we had predicted a slower return to the lower, pre-pandemic consumption levels than we are actually seeing. In part, this has been driven by our active engagement and awareness campaigns to help deliver reductions in water demand. This has resulted in a £19 million under-recovery against allowed revenues for the first half of the year. Under the revenue control, this consumption impact is recoverable in two years' time.

Operating profit

Operating profit at £259 million was £74 million lower than the first half of last year, largely reflecting the decrease in revenue and the combination of inflationary increases in our core costs, alongside the impact of one-off incidents resulting from dry weather over the summer.

As expected, inflationary pressures have impacted input costs resulting in a £36 million increase. The largest increases have been to power and chemical costs while we have experienced smaller inflationary increases to labour and other contract costs.

The £9 million of additional infrastructure renewals expenditure driving ODI performance is targeted at improving performance against specific customer ODIs. This is primarily spend associated with investments in Dynamic Network Management and improving water quality.

The drier summer months led to ground movement and resulted in three atypically large pipe bursts in our water network, resulting in a £8 million cost to repair our network, support customers and pay appropriate compensation.

The IFRS Interpretations Committee decision during the prior year in respect of configuration costs associated with Software as a Service means that costs of £3m in the first half of the year are treated as operating costs whereas previously they were accounted for as fixed asset additions.

Our bad debt position has remained strong, stable at our lowest ever level of household bad debt of 1.8 per cent of regulated revenue.

Profit before tax

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

Underlying loss before tax was £8 million, £205 million lower than the underlying profit before tax in the first half of last year. This reflects the £74 million decrease in underlying operating profit and an increase in underlying net finance expense of £132 million, slightly offset by a reduction in share of losses of joint ventures of £2 million, from a £1.8 million share of losses in the first half of last year to a small £0.2 million share of profits. Underlying profit before tax reflects consistently applied presentational adjustments as set out in the 'underlying profit' tables.

Reported profit before tax increased by £214 million to £426 million reflecting a £255 million decrease in reported net finance expense (including fair value movements), from a £119 million net finance expense in the first half of last year to a £136 million net finance income, £2 million reduction in share of losses of joint ventures and a £31 million profit on disposal of our subsidiary United Utilities Renewable Energy Limited, partly offset by the £74 million decrease in reported operating profit.

The allowed inflationary increase in the current financial year is based on CPIH in November of the previous financial year. This means that rising inflation is reflected in core costs and the cost of index-linked debt sooner than it is reflected in increased revenue. We therefore are reporting a reduction in earnings in the current year with the uplift to revenue based on current inflation expected to follow in revenues in 2023/24.

· Net finance expense/income

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

The underlying net finance expense of £267 million was £132 million higher than the first half of last year, mainly due to the non-cash impact of significantly higher inflation on our index-linked debt.

The indexation of principal on index-linked debt, including the impact of inflation swaps, amounted to a net charge in the income statement of £290 million, compared with a net charge of £103 million in the first half of last year, resulting in an increase of £187 million. Offsetting this increase are £42 million higher capitalised borrowing cost and £7 million higher net pension interest income. Interest payable on index-linked debt (including the impact of inflation swaps) of £13 million is £4 million lower than the first half of last year. Interest receivable on short-term bank deposits and loans to JVs is £3 million higher than the first half of last year and interest payable on non-index linked debt and derivatives is £1 million higher than the first half of last year.

The £267 million underlying net finance expense included in the income statement for the year compares with £54 million net cash interest paid included in the statement of cash flows. This £213 million difference is due to non-cash inflation uplifts on index linked debt and derivatives of £290 million, less capitalised borrowing costs of £63 million and net pension interest income of £14 million, both of which are also non-cash items.

Reported net finance income of £136 million was £254 million higher than the £118 million net finance expense in the first half of last year, reflecting the £387m increase in net fair value gains on our debt and derivative instruments excluding interest on derivatives and debt under fair value option, from £16 million in the first half of last year to £403 million in the first half of this year. This is partially offset by the £132 million increase in underlying finance expense.

· Joint ventures

For the six months to 30 September 2022, we recognised a £0.2 million profit in the income statement relating to our joint venture Water Plus, compared with a £1.8 million net share of losses from joint ventures in the first half of last year. Further details can be found in note 11 of these condensed consolidated financial statements.

Profit/(loss) after tax and earnings per share

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

Underlying loss after tax of £12 million was £206 million lower than the first half of last year, and underlying earnings per share decreased from 28.4 pence to (1.8) pence, as the £205 million reduction in underlying profit before tax is increased slightly by a £1 million increase in underlying tax.

The group has a reported profit after tax of £353 million for the first half of this year, compared with a £216 million reported loss after tax in the first half of last year. This £569 million difference reflects the £214 million increase in reported profit before tax, and a £355 million decrease in deferred tax largely due to a one-off charge in the first half of last year to restate the brought forward deferred tax liability at the new 25 per cent future headline rate. Reported basic earnings per share increased from (31.7) pence to 51.8 pence.

· Tax

We continue to be fully committed to paying our fair share of tax and acting in an open and transparent manner in relation to our tax affairs, and are delighted to have been accredited with the Fair Tax Mark again in 2022 for the fourth year running.

In addition to corporation tax, the group makes further contributions to the public finances, typically of around £200 million per annum, in the form of business rates, employer's national insurance contributions, environmental taxes, other regulatory service fees such as water abstraction charges as well as employment taxes on behalf of our 6,000 strong workforce.

We paid corporation tax of £2 million in the period and also received a provisional repayment of corporation tax of £18 million which relates to prior years' UK tax matters. The key reconciling item to the headline rate of corporation tax continues to be allowable tax deductions on capital investment, these being deductions put in place by successive governments to encourage such investment and thus reflecting responsible corporate behaviour in relation to taxation. For the current period, the cash tax paid is low due to the impact of the capital allowances super deductions, announced in the March 2021 Chancellor's Budget and affecting our eligible plant and machinery additions in 2022 and 2023.

The current tax charge was £4 million in the six months to 30 September 2022, compared with £5 million in the previous half year.

For the six months to 30 September 2022, we recognised a deferred tax charge of £69 million, compared with £42 million for the same period last year. The prior year figure excludes the £382 million one-off deferred tax charge reflecting the 25 per cent future headline rate.

The total effective tax rate, was 17 per cent for the six months to 30 September 2022, compared with 22 per cent in the previous half year; the decrease being mainly due to the non-taxable profit on the disposal of United Utilities Renewable Energy Ltd and an increase in capital allowances "super-deductions".

In the period, there were £21 million of tax adjustments taken to equity, primarily relating to remeasurement movements on the group's defined benefit pension schemes and on hedge effectiveness.

Dividend per share

The Board has proposed an interim dividend of 15.17 pence per ordinary share in respect of the six months ended 30 September 2022. This is an increase of 4.6 per cent compared with the interim dividend relating to last year, in line with the group's dividend policy of targeting a growth rate of CPIH inflation each year through to 2025. The 4.6 per cent increase is based on the CPIH element included within allowed regulated revenue for the 2022/23 financial year (i.e. the movement in CPIH between November 2020 and November 2021).

The interim dividend is expected to be paid on 1 February 2023 to shareholders on the register at the close of business on 23 December 2022. The ex-dividend date is 22 December 2022. The election date for the Dividend Reinvestment Plan is 11 January 2023.

Cash flow

Net cash generated from continuing operating activities for the six months to 30 September 2022 was £401 million, £70 million lower than £471 million in the first half of last year, but continuing to facilitate ongoing investments and helping to support our dividend policy.

The group's net capital expenditure was £331 million, principally in the regulated water and wastewater investment programmes. This excludes infrastructure renewals expenditure, which is treated as an operating cost.

Pensions

As at 30 September 2022, the group had an IAS 19 net pension surplus of £824 million, compared with a surplus of £1,017 million at 31 March 2022. This £193 million decrease has principally resulted from experience losses recognised in the period due to actual inflation being higher than assumed at 1 April 2022, as well as increases in discount rate assumptions more than offset by increases in net yields reducing the schemes assets by a greater amount that the liabilities. A significant rise in yields occurred following the Government's "mini-budget" announced on 23 September 2022 and had wider implications for many UK pension schemes. As a result of our clear and robust policies, our schemes were able to successfully navigate what was an extremely challenging set of market conditions.

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

Financing

Net debt at 30 September 2022 was £7,829 million, compared with £7,570 million at 31 March 2022. This comprises gross borrowings with a carrying value of £8,264 million, net derivative liabilities hedging specific debt instruments of £30 million and indexation in inflation swaps of £67m, net of cash and short-term deposits of £532 million.

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

Gearing, measured as group net debt divided by UUW's shadow (adjusted for actual spend and timing difference) regulatory capital value of £13.1 billion, was 60 per cent at 30 September 2022. This is slightly lower than gearing of 61 per cent as at 31 March 2022, and remains comfortably within our target range of 55 to 65 per cent.

· Cost of debt

As at 30 September 2022, the group had approximately £3.3 billion of RPI-linked instruments and £0.4 billion of CPI or CPIH-linked instruments held as debt. In recent years, in response to Ofwat's decision to transition away from RPI inflation linkage, the group has entered into a number of transactions swapping RPI-linked cash flows to CPI-linked cash flows or swapping floating rate cash flows to CPI-linked cash flows. As a result, including these swaps, the group has RPI-linked debt exposure of £3.3 billion at an average real rate of 1.3 per cent, and £1.2 billion of CPI or CPIH-linked debt exposure at an average real rate of -0.6 per cent.

A significantly higher inflation charge compared with the same period last year contributed to the group's average effective interest rate of 9.0 per cent being higher than the rate of 4.5 per cent for the six months to 30 September 2021. The average underlying interest rate represents the underlying net finance expense adjusted for capitalised borrowing costs and net pension interest income, divided by average notional debt. More information on this can be found in the average effective interest rate reconciliation table

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

· Credit ratings

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

· Debt financing

The group has access to the international debt capital markets through its £10 billion medium-term note (MTN) programme. The MTN programme is updated at least annually and this year's update is expected to be completed shortly. The MTN programme does not represent a funding commitment, with funding dependent on the successful issue of the notes.

In total over 2020-25, the group had a term funding requirement of around £2.7 billion to cover refinancing and incremental debt, supporting our five-year investment programme. Coming into this AMP the group was already pre-funded for the first two years, and so far in AMP7, we have raised around £1.7 billion, taking advantage of attractive rates available and extending our liquidity position out to February 2025. Through combined financing and liquidity, the group has sufficient funding through to almost the end of AMP7. 

In the six months to 30 September 2022 we raised £385 million of term funding. £235m was raised through two bilateral loans with Export Development Canada (EDC) both with 8-year maturities. AAA-rated EDC is a financial Crown Corporation and Canada's Export Credit Agency that looks to promote trade with Canadian firms worldwide. This followed collaboration with EDC in relation to some of the innovation activities that we have undertaken. A further £150m bilateral loan with a 10 year maturity was entered into with one of the group's relationship banks.

Since March 2022, we have renewed £50 million of revolving credit facilities for a further 5-year term and entered into £50 million of new revolving credit facilities for a 5-year term.

· Interest rate management

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

Long-term sterling inflation index-linked debt provides a natural hedge to assets and earnings. At 30 September 2022, approximately 42 per cent of the group's net debt was in RPI-linked form, representing around 25 per cent of UUW's regulatory capital value, with an average real interest rate of 1.3 per cent. A further 16 per cent of the group's net debt was in CPI or CPIH-linked form, representing around nine per cent of UUW's RCV, with an average real rate of -0.6 per cent. The long-term nature of this funding also provides a good match to the company's long-life infrastructure assets and is a key contributor to the group's average term debt maturity profile, which is around 18 years.

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

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

· Liquidity

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

At 30 September 2022, the group had liquidity out to February 2025, comprising cash and short-term deposits, plus committed undrawn revolving credit facilities. This gives us flexibility in terms of when and how further debt finance is raised to help refinance maturing debt and support the delivery of our regulatory capital investment programme.

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

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

OUTLOOK

Our investment strategy and Systems Thinking approach is delivering value through sustainable operational excellence, driving improvements to what matters most to our stakeholders. While the current challenging macro environment is impacting financial performance, the economic performance of our business remains robust, supported by our strong balance sheet, effective hedging policies and tight cost control. We continue to target a cumulative net outperformance of around £200 million against our customer ODIs for AMP7, almost five times the reward earned in AMP6.

2022/23 FULL YEAR GUIDANCE

Revenue is expected to be around 1 per cent lower than 2021/22, largely reflecting the November 2021 CPIH inflation of 4.6 per cent, offset by the regulatory revenue reduction of 1.3 per cent and under-recovery in the current year due to lower than expected consumption. A £34 million expected impact from lower consumption will be recovered through increased revenue in FY25.

Underlying operating costs are expected to be around £130 million higher year-on-year. Approximately £80 million reflects inflationary pressures on operating costs, principally power, chemicals, labour and other contract costs. Around £30 million reflects increases in scope and includes the FY23 element of incremental infrastructure renewals expenditure in relation to the additional investment we previously announced. The remaining £20 million reflects atypical cost increases including dry weather costs incurred in the first half.

Underlying finance expense is expected to be around £165 million higher year-on-year based on our latest, market based inflation forecast. As at 31 March 2022, we had £4.3 billion of index-linked debt exposure, therefore every 1 per cent increase in inflation equates to an around £43 million higher interest charge. Our cash interest in 2021/22 was £118 million and we expect this to be broadly the same in 2022/23, with the overall increase in underlying net finance expense largely relating to the non-cash indexation of our index-linked debt.

Underlying tax is expected to be between a £5 million and £10 million charge for the year, as we continue to optimise the use of capital allowance 'super deductions' and efficiently manage the group's tax position.

Capital expenditure (capex) in 2022/23 is expected to be in the range of £660 million to £715 million, including the 2022/23 element of incremental capital expenditure in relation to the £765 million additional investment.

We are on track to deliver a net customer ODI reward of around £30 million, consistent with our investment plans and AMP7 target of around £200 million reward. With higher expected financing performance this year alongside our improving ODI performance, RoRE is expected to be higher than the 7.9% reported in FY22.

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

Underlying profit

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

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

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

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

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

PRINCIPAL RISKS AND UNCERTAINTIES

Our approach to risk management

Our approach to risk management, including how we identify and assess risk, the oversight and governance process, and focus on continual improvement remains unchanged from that detailed in our Annual Report for the year ended 31 March 2022.

Risk profile

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

The common themes are under continuous review, however at present they are:

· Causal factor themes: Extreme weather/climate change; Demographic change; Legislative and regulatory change; Economic conditions; Asset health; and Culture.

· Consequence themes: Customers; Environment; Investors; and Employees.

The company's most significant event-based risks

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

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

1. Price Review 2024 outcome

Risk exposure: This risk focuses on the ability to secure an adequately funded business plan that allows delivery for customers, communities, and the environment that is sustainable and resilient for the long term relative to the unique characteristics of the region we serve, in light of multiple influencing factors - notably changing demographics, climate change and asset health.

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

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

2. Failure of the Haweswater Aqueduct

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

Control/mitigation: A capital project to replace the tunnel sections of the aqueduct has already commenced with the completion in November 2020 of one section. The remaining sections are due to be replaced as part of Haweswater Aqueduct Resilience Programme (HARP) by 2032/33.

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

3. Wastewater network failure

Risk exposure: Equipment failure, collapses/ bursts or inadequate hydraulic/operational capacity to cope with extreme weather and population growth, resulting in sewer flooding and non-compliant discharges from combined sewer overflows.

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

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

4. Failure to meet the Totex efficiency challenge

Risk exposure: Totex efficiencies designed for AMP7 are under significant challenge through a combination of factors including supply chain issues, inflationary pressure on labour costs, and additional investment to deliver performance improvements.

Control/mitigation: We have further developed our approach to Integrated Business Planning (IBP) with the inclusion of a Strategic Programme Board and the development of an agreed prioritisation framework across the business including detailed efficiency tracking with sponsors assigned to each strategic project.

Assurance: Assurance is provided through the Quarterly Business Reviews, Integrated Business Planning (IBP), Strategic Programme Board and monthly monitoring against the Company Business Plan. Internal Audit undertake cyclical third line assurance over the business planning process.

5. Cyber

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

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

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

6. Water sufficiency event

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

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

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

7. Carbon commitments

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

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

Assurance: Water industry research and technical support combined with a climate change mitigation steering group provides second line assurance. An internal audit is scheduled and external assurance of emissions, regulatory reporting lines and science-based targets has been established.

8. Recycling of biosolids to agriculture

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

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

Assurance: Wholesale assurance and engineering technical governance provide second line assurance. Subject to both cyclical internal and external audit.

9. Failure to treat sludge

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

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

Assurance: Wholesale assurance and engineering technical governance provide second line assurance. Subject to cyclical internal audit and ad-hoc external strategic reviews.

10. Price Volatility

Risk exposure: This risk reflects the inflationary pressures across all commodities, notably energy, associated with the post Brexit effects in the supply chain, the COVID-19 economic bounceback and the ongoing conflict in Ukraine.

Control/mitigation: Contract provision with suppliers, hedging policies, and supply arrangements manage volatility and minimise vulnerability in the contract and price risk with the suppliers including periods of fixed pricing and negotiation of CPI/H uplift on an annual basis. Operational optimisation programmes also seek to reduce exposure to price through efficient use.

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

High impact, low likelihood risks

A. Erosion of Pension Scheme Surplus

Risk exposure: The potential for the pension scheme surplus to be eroded due life expectancy rates increasing, defaults on corporate bond investments and/or insufficient collateral being available to support the interest rate hedge.

Control/mitigation: Constant monitoring combined with hedging against interest rates, inflation and growth asset risk. Notwithstanding the above, the recent volatility in gilt yields has highlighted systemic issues with the use of Liability Driven Investment portfolios in pension schemes, and the ability to provide collateral under stressed market conditions. Immediate steps have been taken to mitigate risks in the short-term, however a full review of investment strategy will follow.

Assurance: Policy and oversight is led by the pensions review management group, taking into account advice from accountancy and pension specialists, and law firms. Pension governance is subject to periodic internal audits.

B. Financial Outperformance

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

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

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

C. Dam failure

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

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

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

D. Disease pandemic

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

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

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

E. Terrorism

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

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

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

Material litigation

In relation to the Manchester Ship Canal Company matter reported in previous years, a hearing was held in the Court of Appeal at the end of March 2022. The Court of Appeal has dismissed the main additional points raised by MSCC, although MSCC have now been granted leave to appeal to the Supreme Court. The final appeal is scheduled to be held in early March 2023 which may provide further clarity in relation to the rights and remedies afforded to the parties and others in relation to discharges by water companies into the canal and other watercourses.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

LEI 2138002IEYQAOC88ZJ59

Classification - Half Year Results

Consolidated income statement

Consolidated statement of comprehensive income

Consolidated statement of financial position

Consolidated statement of changes in equity

Six months ended 30 September 2022

Six months ended 30 September 2021

Year ended 31 March 2022

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

Consolidated statement of cash flows

(1) Cash and cash equivalent is stated net of £12.1 million (30 September 2021: £20.3 million; 31 March 2022: £20.8 million; 1 April 2021: £10.5m) of book overdrafts, which are included in borrowings in the statement of financial position. Book overdrafts, which result from normal cash management practices, represent the value of cheques issued and payments initiated that had not cleared as at the reporting date.

NOTES

1. Basis of preparation and accounting policies

The condensed consolidated financial statements for the six months ended 30 September 2022 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and International Accounting Standard 34 'Interim Financial Reporting' (IAS 34) as published by the International Accounting Standards Board (IASB) and adopted by the UK.

The condensed consolidated financial statements do not include all of the information and disclosures required for full annual financial statements, do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006, and should be read in conjunction with the group's annual report and financial statements for the year ended 31 March 2022.

The comparative figures for the year ended 31 March 2022 do not comprise the group's statutory accounts for that financial year. Those accounts have been reported upon by the group's auditor and delivered to the registrar of companies. The report of the auditor was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The annual financial statements for the year ended 31 March 2022 were prepared in accordance with the requirements of the Companies Act 2006, and with UK-adopted international accounting standards. They were prepared on the going concern basis under the historical cost convention, except for the revaluation of financial instruments, accounting for the transfer of assets from customers and the revaluation of infrastructure assets to fair value on transition to IFRS.

The accounting policies, presentation and methods of computation used in these condensed consolidated interim financial statements are the same as those used in the audited financial statement of United Utilities Group PLC for the year ended 31 March 2022.

Going concern

The interim condensed consolidated financial statements for the six months ended 30 September 2022 have been prepared on the going concern basis as the directors have a reasonable expectation that the group has adequate resources for a period of at least 12 months from the date of their approval, and that there are no material uncertainties to disclose.

In assessing the appropriateness of the going concern basis of accounting, the directors have reviewed the resources available to the group in the form of cash and committed bank facilities, as well as considering the group's capital adequacy, along with a baseline plan reflecting current best estimates of forecasted future business performance. Liquidity forecasts used in the directors' going concern assessment reflect best estimates of the impact of high levels of inflation and interest (and volatility thereon) currently being experienced, and how this would be expected to impact the resources available to the group.

The directors have considered the magnitude of potential impacts resulting from uncertain future events or changes in conditions, and the likely effectiveness of mitigating actions that the directors would consider undertaking.

The baseline position has been subjected to a number of severe but plausible downside scenarios in order to assess the group's ability to operate within the amounts and terms (including relevant covenants) of existing facilities. These scenarios consider: the potential impacts of increased totex costs, including a significant one-off totex impact arising in the assessment period; lower CPIH inflation; elevated levels of bad debt; outcome delivery incentive penalties; and the impact of these factors materialising on a combined basis. Mitigating actions were considered to include deferral of capital expenditure; a reduction in other discretionary totex spend; the close out of derivative asset balances; and the deferral or suspension of dividend payments.

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

Update on critical accounting judgements and key sources of estimation uncertainty

As the impact of the Ukraine war and the broader associated inflationary pressures continue to be felt, there remains a great deal of uncertainty in the current political and economic environment. We are mindful that unprecedented inflation levels are likely to drive further increases to the cost of living and may have a significant impact on many of the group's customers. The following are the critical accounting judgements and key sources of estimation uncertainty considered most likely to have an impact in the next 12 months, or that have been significant in recent years and may be impacted by ongoing developments:

Accounting estimate - retirement benefit obligations:*

The group operates two defined benefit pension schemes which are independent of the group's finances. Actuarial valuations of the schemes are carried out as determined by the trustees at intervals of not more than three years. Profit before tax and net assets are affected by the actuarial assumptions used. The key assumptions include: discount rates, pay growth, mortality, and increases to pensions in payment and deferred pensions. It should be noted that actual rates may differ from the assumptions used due to changing market and economic conditions and longer or shorter lives of participants and, as such, this represents a key source of estimation uncertainty.

In the immediate period leading up to 30 September 2022, there was significant volatility in UK bond markets following the government's "mini-budget". The significant rise in corporate bond yields relative to the start of the year has led to a materially higher IAS 19 discount rate. As required by IAS 19, we have reflected market conditions as at the balance sheet date. In addition, broader economic volatility has increased the level of estimation uncertainty associated with assets classified as 'level 3' within the IFRS 13 fair value hierarchy at 30 September 2022. Details of the assumptions used in calculating the schemes' assets and liabilities are set out in note 12.

Accounting estimate - non-household credit note provisioning:**

In accordance with IFRS 15 'Revenue from contracts with customers', revenue is only recognised where it is deemed probable of recovery. Any gross debt that is not expected to be recovered through future cash collection must be provided against through either an allowance for expected credit losses (non-collection) or credit note provision (incorrectly billed).

For any period, the credit note provision is built up across two types of loss which can be incurred against non-household revenue: allowances pending payment, and future pre-market allowances. The former relate to data changes following the final bill issued for a period (received approximately 16 months after the initial estimate for the period), while the latter relate to data changes resulting in a reduction in revenue recognised in a period pre-dating the non-household market.

At 30 September 2022 the total credit note provision in respect of non-household revenue was £18.0 million, compared with £21.0 million at 31 March 2022 and £24.5 million at 30 September 2021. While the provision has fallen by £3.0 million since 31 March 2022, this includes the impact of payments to non-household retailers of £7.5 million during the period in respect of allowances relating to periods from November 2018 to December 2020. The size of payments made in respect of these periods and additional claims received in respect of historic periods has therefore increased the average daily allowance values that are now reflected in the credit note provision. This increase offsets the reduction that might have been expected based on payments made in the year.

To forecast future pre-market allowances, historic information has been used. Determining the ageing analysis of allowances raised since the opening of the non-household market is not straightforward, and work is ongoing between wholesalers and retailers to improve the quality of market data. Notwithstanding the increases seen in the average daily allowance values, it is therefore reasonable to expect that the value of allowances relating to final bills for a period (referred to as 'RF' within the market mechanisms and received around 16 months after the initial estimate) to reduce over time, as data for more recent periods since the opening of the water retail market should not be subject to the same legacy issues as earlier periods. Had it been assumed that future average daily allowances continue at the current daily average, the credit note provision recorded at 30 September would have been £2.2 million higher than that recorded.

The forecast does not consider the impact of any large one-off allowances that could be received in the future, but we have no evidence from the data available to suggest that this would be probable.

Accounting estimate - allowance for expected credit losses in respect of household trade receivables:**

As a result of the Covid-19 pandemic and more recently ongoing cost of living pressures, recent years have seen a higher level of uncertainty around how economic conditions may impact the recoverability of household receivables for a significant proportion of the group's customer base. A range of collection scenarios have been used to inform the allowance for expected credit losses charged to the income statement during the period. These take account of cash collection rates in the current year as well as in recent years incorporating the onset of the Covid-19 pandemic, periods of lockdown, and periods of recovery, as well as current levels of economic uncertainty in order to provide a range of views as to how recoverability of household receivables may be impacted by different conditions.

The group has historically used the average collection evidenced in the previous two years as a basis for estimating future collection, however cash collection during the current year has been particularly strong whereas in contrast the two year look-back period has also included periods impacted by the Covid-19 pandemic where collection was below what is typically seen. Accordingly, this approach used historically may not provide a representative view of future cash collection, particularly in light of current levels of economic uncertainty. Accordingly, we have taken a similar approach to that used as at 31 March 2022 and have calculated the allowance for expected credit losses based on the average cash collection history over the last four years, which is considered to give a more balanced position. This supports a charge equivalent to around 1.8 per cent of household revenue recorded during the period, which is broadly consistent with the position at 31 March 2022 and 30 September 2021.

Had average cash collection rates for the last two years been used instead of the last four years, the charge would have decreased by £1.1 million to 1.6 per cent of household revenue, however as at 30 September 2022 a charge of 1.8 per cent is considered to be appropriate given prevailing levels of uncertainty and recognising the level of estimation uncertainty associated with the assumptions made in forecasting the year end debt position upon which the allowance for expected credit losses is based.

*Judgements/estimates that could reasonably give rise to a material adjustment to the carrying value of assets or liabilities in the short term.

**Other judgements/estimates considered less likely to give rise to a material adjustment to the carrying value of assets or liabilities in the short term.

2. Segmental reporting

The board of directors of United Utilities Group PLC (the board) is provided with information on a single segment basis for the purposes of assessing performance and allocating resources. The group's performance is measured against financial and operational key performance indicators, underlying operating profit, operating profit, assets and liabilities, regulatory capital expenditure, and regulatory capital value gearing at a consolidated level. In light of this, the group has a single segment for financial reporting purposes and therefore no further detailed segmental information is provided in this note.

3. Revenue

The £13.0 million decrease in revenue for the half year ended 30 September 2022 compared with the same period in the prior year is largely attributable to lower consumption more than offsetting the allowed inflationary increase.

Residential retail charges relate solely to the margin applied to the wholesale amounts charged to residential customers. The wholesale charges and retail margin are combined in arriving at the total revenues relating to water and wastewater services provided to household customers.

Other revenues comprise a number of smaller non-core income streams including those relating to property sales, energy generation and export, and those associated with activities, typically performed opposite property developers, which impact the group's capital network assets including diversions works to relocate water and wastewater assets, and activities that facilitate the creation of an authorised connection through which properties can obtain water and wastewater services.

4. Other operating costs

Other operating costs have increased compared with the same period in the prior year predominantly due to inflationary pressures, in particular on the cost of energy which has increased our power costs, as well as our materials costs for consumables such as chemicals, and inflationary pressures experienced by subcontractors that have been passed on to us, which are included within hired and contracted services.

In order to give a clearer view of the group's total staff costs, since 31 March 2022 wages and salaries and amounts charged to other areas including regulatory capital schemes have included the costs of non-permanent staff who have worked for the group, whose costs were previously included within hired and contracted services presented within other operating costs. Accordingly, these amounts for the six months to 30 September 2021 have been re-presented to show this information on a consistent basis, which has resulted in an increase in staff costs and reduction in the costs of hired and contracted services of £6.7 million compared with what was presented in the interim condensed consolidated financial statements for that period.

5. Investment income

6. Finance expense

Interest payable is stated net of £62.9 million (30 September 2021: £21.4 million; 31 March 2022: £52.7 million) of borrowing costs capitalised in the cost of qualifying assets within property, plant and equipment and intangible assets during the period. Interest payable includes a £251.7 million (30 September 2021: £92.8 million; 31 March 2022: £227.9 million) non-cash inflation expense in relation to the group's index-linked debt.

Net fair value gains on debt and derivative instruments includes £14.7 million income (30 September 2021: £14.6 million income; 31 March 2022: £4.9 million income) due to net interest on derivatives and debt held under fair value option, and £37.8 million expense (30 September 2021: £10.3 million expense; 31 March 2022: £28.3 million expense) due to non-cash inflation uplift on the group's index-linked derivatives.

7. Profit on disposal of subsidiary

On 29 September 2022 the group sold the entire issued share capital of its wholly owned subsidiary United Utilities Renewable Energy Limited (UURE) to SEEIT Holdco Limited.

Profit on disposal is shown below and included within the group's consolidated income statement:

Management does not consider UURE to meet the definition of a discontinued operation as set out in IFRS 5 'Non-current assets held for sale and discontinued operations' as it is not considered a separate major line of business for the group, accounting for around £3.5 million of external revenue included in the group's consolidated financial statements for the six months to 30 September 2022 (six months to 30 September 2021: £2.3 million; year to 31 March 2022: £3.5 million), with the majority of UURE's revenue relating to a long-term power purchase agreement with UUW that continues in place following the disposal. As such, no separate disclosures relating to discontinued operations have been included in the group's income statement or the notes to the interim financial statements.

The total consideration received in relation to the disposal of UURE is reconciled to the net cash income on disposal of the subsidiary per the consolidated statement of cash flows as follows:

8. Tax

The total effective tax rate for the six months to 30 September 2022 was 17 per cent, compared with 22 per cent for the same period in the prior year, the decrease being mainly due to the non-taxable profit on the disposal of United Utilities Renewable Energy Limited and an increase in capital allowances "super-deductions". The split of the total tax charge between current and deferred tax was due to ongoing timing differences in relation to tax deductions on capital investment and unrealised gains and losses on treasury derivatives.

The current tax charge of £4.3 million for the six months to 30 September 2022 reflects the impact of the capital allowances "super deductions", announced in the March 2021 Chancellor's Budget and affecting our eligible plant and machinery additions in 2022 and 2023.

The tax adjustments taken to equity primarily relate to remeasurement movements on the group's defined benefit pension schemes and on hedge effectiveness.

9. Earnings per share

Basic and diluted earnings per share are calculated by dividing profit/(loss) after tax by the weighted average number of shares in issue during the period.

As per paragraph 43 in IAS33 'Earnings per share', when potential ordinary shares increase earnings per share, or decrease loss per share upon their conversion to ordinary shares, they are considered antidilutive. In line with the standard, antidilutive potential ordinary shares are excluded from the calculation of diluted earnings per share.

10. Dividends

The interim dividends for the six months ended 30 September 2022 and 30 September 2021, and the final dividend for the year ended 31 March 2022, have not been included as liabilities in the respective condensed consolidated financial statements at 30 September 2022 and 30 September 2021, and the consolidated financial statements at 31 March 2022, because they were approved after the reporting date.

The interim dividend of 15.17 pence per ordinary share (year ended 31 March 2022: interim dividend of 14.50 pence per ordinary share, final dividend of 29.00 pence per ordinary share) is expected to be paid on 1 February 2023 to shareholders on the register at the close of business on 23 December 2022. The ex-dividend date for the interim dividend is 22 December 2022.

11. Interests in joint ventures and other investments

The group's interests in joint ventures mainly comprises its 50 per cent interest in Water Plus Group Limited (Water Plus), which is jointly owned and controlled by the group and Severn Trent PLC under a joint venture agreement.

The group's total share of Water Plus profits for the six months ended 30 September 2022 was £0.2 million (six months ended 30 September 2021: £1.8 million share of losses; year ended 31 March 2022: £1.8 million share of losses), all of which has been recognised in the income statement.

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

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

12. Retirement benefit surplus

The main financial assumptions used by the group's actuary to calculate the defined benefit surplus of the United Utilities Pension Scheme (UUPS) and the United Utilities PLC Group of the Electricity Supply Pension Scheme (ESPS) were as follows:

 (1) The CPI price inflation assumption represents a single weighted average rate derived from an assumption of 2.90 per cent pre-2030 and 3.70 per cent post-2030.

The immediate period leading up to 30 September 2022 saw significant volatility in UK government bond markets following the "mini-budget" announced by the UK Government on 23 September 2022. This resulted in a significant rise in yields in a matter of days. On 28 September the Bank of England intervened in the markets to restore order which immediately offset some of the significant yield rises, although they remained volatile over the month end. As a result, as at 30 September we have seen a significant increase in corporate bond yields relative to the start of the year, leading to a materially higher IAS 19 discount rate. In accordance with the requirements of IAS 19 'Employee benefits', the figures presented are reflective of market conditions as at the balance sheet date. It should be noted, however, given the volatility in the markets, that the assumptions could be materially different shortly before or after 30 September.

This market volatility, together with volatility in the broader economic environment, has resulted in a higher degree of estimation uncertainty in respect of assets held by the group's defined benefit pension schemes that are classified as 'level 3' within the IFRS 13 fair value hierarchy, as prices are not directly observable in the market. The fair value of these assets at 30 September 2022 was £235.4 million, which includes an adjustment to reflect estimated movements in market values since the date of the last valuations performed in respect of these assets based on movements in indices identified as being reasonable proxies for the assets held. Had this adjustment not been included in the valuation, the defined benefit pension assets (and therefore the defined benefit pension surplus) would have been £11.9 million lower.

The discount rate is consistent with a high quality corporate bond rate, with 5.35 per cent being equivalent to gilts + 160bps (30 September 2021: 2.05 per cent being equivalent to gilts + 75bps; 31 March 2022: 2.80 per cent being equivalent to gilts + 110bps).

At 30 September 2022 and 31 March 2022 mortality in retirement is assumed to be in line with the Continuous Mortality Investigation's (CMI) S3PA year of birth tables (30 September 2021: S2PA year of birth tables), with scaling factor of 109 per cent and 115 per cent for male pensioners and non-pensioners respectively (30 September 2021: 106 per cent and 109 per cent), and 110 per cent and 111 per cent for female pensioners and non-pensioners respectively (30 September 2021: 104 per cent and 105 per cent), reflecting actual mortality experience. At both 30 September 2022 and 31 March 2022, mortality in retirement is based on CMI 2021 long-term improvement factors, with a long-term annual rate of improvement of 1.25 per cent (30 September 2021: CMI 2020, long-term annual rate of improvement of 1.25 per cent).

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

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