IFRS presentation to analysts and investors - About United Utilities

United Utilities PLCInternational Financial Reporting Standards (IFRS)Presentation to Analysts and Investors19 July 2005www.unitedutilities.com

Cautionary statementInternational Financial Reporting Standards (‘IFRS’) are being applied in theEuropean Union for the first time. New standards and interpretations may beissued by IASB and / or endorsed by the EU prior to the completion of our first fullreporting period under IFRS on 31 March 2006. There are a number of new andrevised Standards included within the body of Standards that compriseIFRS. There is not yet a significant body of established practice upon which todraw in forming opinions regarding their interpretation and application. Accordingly,practice is continuing to evolve. At this stage, therefore, the full financial effect ofreporting under IFRS, as it will be applied and reported on in the Group’s first IFRSfinancial statements, cannot be determined with certainty and may be subject tochange. The financial information which follows represents our current view andmay be impacted by changes in the business or to IFRS or the interpretationthereof. This presentation should be treated with appropriate caution and shouldnot be relied upon.

Simon BateyGroup Finance DirectorGood morning ladies and gentlemen, and welcome to our presentation on theimpacts of International Financial Reporting Standards. With me on the platformis Martin Beesley, Finance Director of our United Utilities North West business,the business which contributes the bulk of the IFRS impacts.Before we start, could you I remind you to please turn off any portable devicessuch as mobile phones and blackberrys. Thank you.

Agenda• Headlines• Background to IFRSSimon Batey,Group FinanceDirector• United Utilities’ basis of preparation• Major IFRS adjustments• Impact assessment• Earnings• Distributable reserves• Key ratios and financials• Commercial impact• SummaryMartin Beesley,Finance DirectorUnited UtilitiesNorth WestSimon Batey,Group FinanceDirector• Q&A4In a moment I’ll take you through the headlines and provide a brief backgroundto IFRS and the timetable implications for United Utilities.Martin will then talk about our basis of preparation, the major IFRS adjustmentsthat represent significant differences from UK GAAP, and their impact on ouraccounts.After Martin has finished, I’ll then focus on the effects on earnings, distributablereserves and key financials, and I’ll outline the commercial position and round upwith a summary of the key points.At the end we’ll be pleased to answer your questions.

IFRS conversion timetable31/03/04 31/03/05 31/03/0630/09/04 30/09/0530/09/06UK GAAPFirst IFRSResultsH1 05/06Publish FirstAnnual Reportand AccountsIFRS RestatementIFRS ReportingTransitionalDate for IFRSAdoption Date ofIAS 32 and IAS 39under transitionalrules5This chart outlines the timeline for IFRS conversion.The application of IFRS for listed companies commences for accounting periodsstarting on or after 1 January 2005. For United Utilities, this applies from 1 April2005.Although the standards are being adopted by United Utilities from the 2005/06financial year, IFRS continues to develop and there may be further accountingadjustments in the future.United Utilities has chosen to apply IAS 32, Financial Instruments: Disclosureand Presentation, and IAS 39, Financial Instruments: Recognition andMeasurement, from 1 April 2005.The company’s first set of results under IFRS will be the six month period to 30September 2005 and will be communicated to the City, as usual, at an interimresults presentation in the autumn.Our first annual report and accounts under IFRS, relating to the 2005/06 financialyear, will be published in the summer of 2006.

Summary• Overall impact on profit before tax in 2004/05 is not material• Whilst earnings are affected by an increase in reported deferred tax, there isno impact on the group’s cash flow position or financing arrangements• A potential increase in volatility to the income statement is anticipated,primarily due to derivatives recognised at fair value• Net assets fall from £3,119m to £2,144m, primarily due to deferred tax andpensions adjustments• No effect on regulatory asset base or allowed returns• No impact on payment of dividends to shareholders– United Utilities PLC parent company retained earnings largely unaffected– dividend policy unaffected6The overall impact of IFRS on 2004/05 profit before tax is not material.Earnings are largely unaffected on a pre-deferred tax basis.Whilst earnings will be affected by the requirement to provide in full for deferredtax, this is a non-cash adjustment which means that there will be no impact onthe group’s cash flow position or financing arrangements.We expect an increase in volatility to the income statement, primarily due toderivatives being recognised at fair value.Net assets fall from £3.1 billion to £2.1 billion, primarily due to deferred tax andpensions adjustments, which we’ll cover later in the presentation.However, there will be no effect on our regulatory asset base or allowed returnsand no impact on payment of dividends to our shareholders. The United UtilitiesPLC parent company retained earnings, from which we pay dividends, arelargely unaffected.Our dividend policy remains unchanged, that is, a target of increasing dividendsin line with inflation for the next five years.

IFRS headlines – effect on 2004/05 income800£m (2004/05)7006005004003002001000Operating Profit* Profit before Tax* Profit after TaxPrimarily due to anincrease in the deferredtax charge, which is anon-cash itemUK GAAPIFRS* before deferred tax and goodwill and exceptional items (UK GAAP) and,before deferred tax and intangibles previously classified as goodwill under UK GAAP and restructuring costs (IFRS)7This chart underlines the minimal effect on operating profit and profit before tax.The effect on profit after tax relates to deferred tax, which is a non-cash item.

IFRS headlines – summary impactFull Year 2004/05IFRSUK GAAPMovementOperating profit£676m 1£692m 2(2%)Profit before tax£395m 1£408m 2(3%)Adjusted Basic EPS59.5p 361.4p 4(3%)Basic EPS36.5p46.8p(22%)As at 31 March 2005Net assets£2,144m£3,119m(31%)Net debt£4,279m£4,141m3%United Utilities PLC ParentCompany DistributableReserves£1,182m£1,194m(1%)1before intangibles previously classified as goodwill under UK GAAP and restructuring costs2 before goodwill and exceptional items3 before deferred tax and intangibles previously classified as goodwill under UK GAAP and restructuring costs4before deferred tax and goodwill and exceptional items8This slide shows the effect of IFRS on some of our key financial measures.The impact on operating profit and profit before tax is just 2 per cent and 3 percent, respectively.Earnings per share, on a pre-deferred tax basis, moves by around 3 per cent. Themovement in basic earnings per share is primarily attributable to the non-cashdeferred tax adjustment.Our net assets are affected by the requirement to make full provision for deferredtax, under IAS 12, and the recognition of pension scheme deficits under IAS 19.Net debt increases by £138 million due to the proportional consolidation of jointventure debt, which is typically non-recourse to the group. However, thedistributable reserves of United Utilities PLC parent company, from whichdividend payments are made, are largely unaffected.Martin will say more about the impacts of IAS 12 and IAS 19 later in thepresentation.

Segmental operating profit£mIFRS 1UK GAAP 2MovementYear ended 31 March 2005Licensed multi-utility operations562588(26)Infrastructure management907911Business process outsourcing2426(2)Telecommunications(5)(5)0Other activities880Corporate costs(3)(4)1Total operating profit676692(16)1 before intangibles previously classified as goodwill under UK GAAP and restructuring costs2 before goodwill and exceptional items9Before handing over to Martin, I would like to briefly outline the effect of IFRSon our segmentals. This table shows the adjustments to operating profit bybusiness. The main adjustments relate to our licensed multi-utility operationsbusiness, where operating profit decreases by around £26 million, principally dueto the treatment of infrastructure assets, and our infrastructure managementbusiness, which sees an increase of around £11 million principally due to thetreatment of profits on disposals, previously treated as exceptional. Smalleradjustments to our business process outsourcing business and to corporate costsresult in a net decrease in total operating profit of £16 million under IFRS. As Isaid on the previous slide, this £16 million reduction represents just 2 per cent ofthe group’s total operating profit.Now I’ll hand over to Martin who will take you through the adjustments that weare making.

Martin BeesleyFinance Director, United Utilities North WestThank you Simon, and good morning ladies and gentlemen.

United Utilities’ basis of preparation• Under IFRS transitional rules, United Utilities has made the followingprincipal choices:– to apply IAS 32 (Financial Instruments: Disclosure and Presentation)and IAS 39 (Financial Instruments: Recognition and Measurement),from 1 April 2005;– to use the fair value at the date of transition to establish a deemed costfor the opening balance sheet value of the infrastructure fixed assets;and– to recognise in full all actuarial gains and losses relating to pensionschemes both at the opening balance sheet date and prospectivelythrough the Statement of Recognised Income and Expense11Before I deal with the detail, let me talk a little bit about the choices we havemade. As Simon has already said, we’ve opted to apply IAS 32 and IAS 39 from1 April 2005, making use of the IFRS transitional rules. Consequently, there areno restatements relating to derivatives for 2004/05 accounts.As a result of changes in accounting for infrastructure assets, we’ve chosen to usethe fair value, at the date of transition, to establish a deemed cost for the openingbalance sheet value of the infrastructure fixed assets.The other principal choice we’ve made is to recognise, in full, all actuarial gainsand losses relating to our pension schemes, both at the opening balance sheetdate and prospectively through the Statement of Recognised Income andExpense.

Major IFRS adjustments representing materialdifferences from UK GAAP• Infrastructure Accounting (IAS 16)• Interests in Joint Ventures (IAS 31)• Defined Benefit Pension Scheme Accounting (IAS 19)• Business Combinations (IAS 38 / IFRS 3)• Deferred Tax (IAS 12)• Dividends (IAS 10)• Accounting for Derivatives (IAS 39)12This slide outlines the major IFRS adjustments that represent a significantdifference from UK GAAP.What I’d now like to do is talk about each of these adjustments in turn andexplain their impact on operating profit and net assets.

Infrastructure Accounting (IAS 16)• Accounting policies applied under UK GAAP in respect of all fixed assets,aside from water and wastewater infrastructure assets, are compliant withIFRS and remain the most representative mechanism by which to recordthose assetsOptions Available• In respect of the water and wastewater networks, 14 separate segmentshave been identified and useful lives assigned to each, ranging from 15 to300 years• IAS 16 requires that depreciation charged over an asset’s useful life isbased on the difference between cost and residual value• In the case of the water and wastewater network segments, the residualvalues are assumed to be insignificant13Before explaining the options available under IAS 16 and our basis ofpreparation, I’d like to highlight that in terms of impact, the accounting policiesapplied under UK GAAP in respect of all fixed assets, with the exception ofwater and wastewater infrastructure assets, are compliant with IFRS and remainthe most representative mechanism by which to record those assets.Various options are available when applying accounting for the water andwastewater infrastructure networks, since the standard is not prescriptive incertain areas.No concept of size is indicated by the standard when identifying the size andnumber of segments that should be individually recorded and depreciated withina single asset.We have therefore taken the view that an appropriate number has been reachedwhen it is not possible to significantly change the depreciation charge byrecognising a greater number of segments.This approach has led to our identifying fourteen separate segments, within thewater and wastewater networks, based on the classification of the components.Examples include water mains, sewers and tunnels. These have been allocateduseful lives ranging from 15 – 300 years.The total depreciation that is charged over an asset’s useful life is the differencebetween the asset’s cost and residual value. In the case of the water andwastewater networks it has been assumed that the residual values areinsignificant and that, at the end of a segment’s useful life, it will not have amaterial value.

Infrastructure Accounting (IAS 16)Basis of Preparation• Under FRS 15:– each infrastructure network is assumed to be one asset– depreciation charged is based on the estimated annual expenditurerequired to maintain the operating capacity of the network– actual expenditure is then capitalised as incurred• Infrastructure renewals accounting is not permitted under IAS 16– each infrastructure network has been divided into a number ofsegments and, for each, a useful life has been determined so as todepreciate the segments individually14It may be worth reminding you of how infrastructure accounting is treated underFRS15. This will help to highlight the differences between UK GAAP and IFRSand explain our basis of preparation.Under FRS 15, each infrastructure network is assumed to be one asset.Depreciation charged is based on the estimated annual expenditure required tomaintain the operating capacity of the network. Actual expenditure is thencapitalised as incurred.Under IAS 16, infrastructure renewals accounting is not permitted. As discussedon the previous slide, it has therefore been necessary to divide each infrastructurenetwork into a number of segments. For each segment a useful life has beendetermined, so as to allow each segment to be depreciated individually.

Infrastructure Accounting (IAS 16)Impact• No change to treatment of enhancement and maintenance expenditure– increases in capacity or enhancements of the network are treated asadditions– amounts incurred in maintaining the operating capability of the networkare expensed in the year• Opening balance sheet value of infrastructure renewals is established byreference to the fair value at the date of transition (as per IFRS 1)– results in £27m additional depreciation charge being introduced to the2004/05 results, impacting on profit before tax– fair value of network has increased by £145m (net of deferred tax),representing an upward adjustment to net assets of over 4%• this results in a net increase to shareholders’ funds15There has been no change to the treatment of enhancement or maintenanceexpenditure. Increases in capacity or enhancements of the network are treated asadditions, whereas amounts incurred in maintaining the operating capability ofthe network are expensed in the year.However, because the individual network segments identified have been assumedto have zero residual values at the end of their useful lives, this results in anadditional depreciation charge of around £27 million when compared to UKGAAP. This, therefore, impacts on operating profit and profit before tax.Net assets increase by around £145 million, net of deferred tax. This is due toelecting to measure the net book values of the water and wastewaterinfrastructure networks at fair value and to use those fair values as their deemedcost.This results in a net increase to shareholders’ funds.There is no impact of IFRS on electricity infrastructure assets.

IFRS impact – 2004/05 operating profit*Operating Profit (£m)700650600550500450£646m(£27m)400UK GAAPInfrastructure Assets* after exceptional items and intangibles previously classified as goodwill under UK GAAP and restructuring costs16This chart shows the adjustment to operating profit as a result of IAS 16.

IFRS impact – net assets at 31 March 200535003000£3,119m£145mNet Assets (£m)25002000150010005000UK GAAPInfrastructure Assets17As you can see, net assets increase by around £145 million, net of deferred tax.

Major IFRS adjustments representing materialdifferences from UK GAAP• Infrastructure Accounting (IAS 16)• Interests in Joint Ventures (IAS 31)• Defined Benefit Pension Scheme Accounting (IAS 19)• Business Combinations (IAS 38 / IFRS 3)• Deferred Tax (IAS 12)• Dividends (IAS 10)• Accounting for Derivatives (IAS 39)18Now, moving on to IAS 31 and interests in joint ventures.

Interests in Joint Ventures (IAS 31)• Under IAS 31 we have the option of adopting equity accounting orproportional consolidation• United Utilities has elected to apply proportional consolidation– this is more representative of the group’s activities– joint venture interest and tax is reflected on the appropriate lines inthe income statement• No impact on operating profit, profit before tax or net assets• Typically, joint venture net debt is non-recourse to United Utilities• Overall, net debt increases by £138m as a result of IAS 31– no change to the financial resources of the business19Under IAS 31, we have the option of adopting equity accounting or proportionalconsolidation.The group has elected to apply proportional consolidation, as it is morerepresentative of the group’s activities than equity accounting. The joint ventureinterest and tax is reflected on the appropriate lines in the income statement,rather than being subsumed within operating profit.Overall, there is no impact on operating profit, profit before tax or net assets.However, there are a number of reclassification adjustments that net off, which Iwill address in the next two slides.Before moving on to that, it is worth pointing out that, although net debtincreases by around £138 million as a result of IAS 31, joint venture debt istypically non-recourse to United Utilities.There is no change to the financial resources of the business.

Interests in Joint Ventures (IAS 31)adjustments to income• Proportional consolidation adjusts certain items in the income statement,but the net effect is no impact on profit£mUK GAAPAdjustmentsIFRSRevenue: group and share of joint ventures114.3(30.8)83.5Less: share of joint ventures(114.3)114.3-Revenue-83.583.5Other income-1.21.2Purchases and production costs-(51.3)(51.3)General administration-(10.7)(10.7)Total operating costs-(60.8)(60.8)Operating profit-22.722.7Share of joint venture operating profit22.7(22.7)-Total operating profit22.70.022.720Looking at income statement adjustments, IAS 31 results in the inclusion of jointventure revenue within the group’s revenue. Previously under UK GAAP, groupturnover excluded the group’s share of joint venture turnover. Therefore,revenue increases by £84 million under IFRS.The revenue increase is partially offset by an increase in operating costs of £61million, thereby increasing reported group operating profit by £23 million.This is then netted off via a negative entry of £23 million, relating to the share ofjoint venture operating profit, resulting in no overall change to total operatingprofit.This reflects the investments in joint ventures line under UK GAAP beingsubstituted by the specific balance sheet components under IFRS.

Interests in Joint Ventures (IAS 31)adjustments to assets• Proportional consolidation increases non-current assets by £147m andcurrent assets by £75m, offset by an adjustment of £39m to currentliabilities and £183m to long-term liabilities£mAdjustments£mAdjustmentsIntangible assets11.3Current tax payable1.4Property, plant and equipment206.0Trade and other payables37.3Other investments(70.5)Total current liabilities38.7Total non-current assets146.8Financial liabilities178.9Inventories2.6Other payables2.6Trade and other receivables31.8Provisions1.1Other investments(1.3)Total non-current liabilities182.6Cash and cash equivalents41.4Total current assets74.5TOTAL ASSETS221.3TOTAL LIABILITIES221.321Turning to the balance sheet, there are a number of significant reclassificationadjustments.Notably, tangible fixed assets increase by £206 million, offset by a reduction inintangible fixed assets and other investments of £59 million, resulting in anincrease to non-current assets of £147 million. Current assets increase by £75million, providing for an overall increase in total assets of £221 million.This is offset by an increase of £183 million in non-current liabilities and £39million in current liabilities, of which £138 million relates to debt.

Major IFRS adjustments representing materialdifferences from UK GAAP• Infrastructure Accounting (IAS 16)• Interests in Joint Ventures (IAS 31)• Defined Benefit Pension Scheme Accounting (IAS 19)• Business Combinations (IAS 38 / IFRS 3)• Deferred Tax (IAS 12)• Dividends (IAS 10)• Accounting for Derivatives (IAS 39)22Now, focusing on pensions.

Defined Benefit Pension Scheme Accounting (IAS 19)• Pension scheme surplus or deficit must be recognised as an asset or liabilityon the balance sheet– increases profit before tax by £4m, of which £3m relates to a reduction ininterest and £1m to an increase in operating profit– reduces net assets (net of tax) by £332m– comprises:• SSAP 24 prepayment reversal of £272.4m, which reflects the £320m(pre-tax) pensions pre-funding payment made on 31 March 2005; and• recognition of a deficit of £59.2m under IAS 19• Regulatory determinations make explicit allowance for funding of the relevantelements of the pension scheme deficits23The group prepared its 2005 UK GAAP results in accordance with SSAP 24, with FRS17 transitional disclosures applied within the notes to the accounts. FRS 17 became fullyeffective for accounting periods beginning on or after 1 January 2005. The group has notadopted FRS 17 and will move directly to IAS 19.Under SSAP 24, any pension scheme surplus or deficit, identified at the most recentactuarial valuation, is recognised gradually through the profit and loss account over theexpected future working lifetime of current employees. The difference between actualemployer’s contributions paid and the net pensions charge is recognised as a prepaymentor accrual. This results in a balance sheet value that does not reflect the actuarialposition.Under IAS 19, any pension scheme surplus or deficit must be immediately recognised asan asset or liability on the balance sheet. Where actual experience differs from theassumptions made at the start of the financial year, actuarial gains and losses will berecognised through the Statement of Recognised Income and Expense.The impact of IAS 19 is to increase profit before tax by around £4 million, comprising a£3 million reduction in interest costs and £1 million increase in operating profit.Net assets are reduced by £332 million, net of tax. This comprises a SSAP 24prepayment reversal of £272.4 million, which reflects the £320 million pensions prefundingpayment made on 31 March 2005, on a pre-tax basis, and the recognition of a£59.2 million deficit, net of deferred tax, under IAS 19.You will, of course, recall that the regulatory determinations make explicit allowance forfunding of the relevant elements of the pension scheme deficits.

IFRS impact – 2004/05 operating profit*700Operating Profit (£m)650600550500450£646m(£27m)£1m400UK GAAPInfrastructure AssetsPensions* after exceptional items and intangibles previously classified as goodwill under UK GAAP and restructuring costs24Here you can see a minor increase of £1 million to operating profit as a result ofIAS19.The £3 million adjustment to interest, of course, impacts on profit before tax,which I will cover at the end of my session.

IFRS impact – net assets at 31 March 200535003000£3,119m£145m (£332m)Net Assets (£m)25002000150010005000UK GAAPInfrastructure AssetsPensions25This chart highlights the reduction in net assets of £332 million, representingaround 10 per cent of the net assets value under UK GAAP.

Major IFRS adjustments representing materialdifferences from UK GAAP• Infrastructure Accounting (IAS 16)• Interests in Joint Ventures (IAS 31)• Defined Benefit Pension Scheme Accounting (IAS 19)• Business Combinations (IAS 38 / IFRS 3)• Deferred Tax (IAS 12)• Dividends (IAS 10)• Accounting for Derivatives (IAS 39)26Turning to business combinations.

Business Combinations (IAS 38 / IFRS 3)• Under IFRS, the recognition test for intangible fixed assets acquired inbusiness combinations is less restrictive than that of UK GAAP– therefore, more intangible assets will be separately identified fromgoodwill• Goodwill is not amortised under IAS 38, but rather subject to annualimpairment reviews– 2004/05 profits and earnings increase by £5m, comprising:• a £7m amortisation reduction; offset by• a £2m reduction in profit on business disposals– there is a minimal impact on net assets, with the reduction in goodwillbroadly offset by the recognition of newly identified intangible assets27The principal adjustments in this area arise from the treatment of intangible fixedassets and goodwill.Under IFRS, the recognition of intangible fixed assets acquired in businesscombinations is less restrictive than that of UK GAAP. In contrast to FRS 10,IAS 38 does not require an intangible to be separable from its owner, if itsownership can be demonstrated through contractual or legal rights. Therefore,more intangible assets will be separately identified from goodwill. Intangibleassets are stated at cost less accumulated depreciation and are amortised overtheir useful lives on a straight line basis.Negative goodwill cannot be recognised on the balance sheet and is credited tothe income statement in the period of acquisition.Positive goodwill is not amortised under IAS 38, but rather subject to annualimpairment reviews. Therefore, although it may be possible to carry goodwillfor longer if the future cashflows are strong, increased volatility will beintroduced to the income statement.Since goodwill is no longer being amortised, the 2004/05 amortisation chargereduces by around £7 million. This is partially offset by a £2 million reduction inprofit relating to business disposals.There is a minimal impact on net assets, with the reduction in goodwill broadlyoffset by the recognition of newly identified intangible assets from businesscombinations.

IFRS impact – 2004/05 operating profit*700Operating Profit (£m)650600550500450£646m(£27m)£1m £5m400UK GAAPInfrastructure AssetsPensionsBusiness Combinations* after exceptional items and intangibles previously classified as goodwill under UK GAAP and restructuring costs28This chart shows the £5 million increase in operating profit, which flows throughto earnings.

IFRS impact – net assets at 31 March 200535003000£3,119m£145m (£332m)£3mNet Assets (£m)25002000150010005000UK GAAPInfrastructure AssetsPensionsBusiness Combinations29As I said, there is a minimal impact on net assets.

Major IFRS adjustments representing materialdifferences from UK GAAP• Infrastructure Accounting (IAS 16)• Interests in Joint Ventures (IAS 31)• Defined Benefit Pension Scheme Accounting (IAS 19)• Business Combinations (IAS 38 / IFRS 3)• Deferred Tax (IAS 12)• Dividends (IAS 10)• Accounting for Derivatives (IAS 39)30Now, moving on to deferred tax.

Deferred Tax (IAS 12)• IAS 12 does not permit discounting of deferred tax– increases the deferred tax position by £952m; and– increases the 2004/05 tax charge by £66m• Increase in deferred tax liability reduces consolidated retained profit by acorresponding £952m• However, this does not affect the United Utilities PLC parent companybalance sheet and therefore does not impact on payment of dividends toshareholders• Also, the regulatory determinations set prices allowing for tax on ananticipated cash basis and are therefore unaffected by deferred tax• In addition, deferred tax restatements arise on other IFRS adjustments31The major impact for the group under IAS 12 is that the discounting of deferredtax is not permitted. This is of particular significance to a utility company, whichtends to have long asset lives, and therefore the cash impact of the reversal oftiming differences is likely to be deferred long into the future.The reversal of discounting will result in a significant increase in the balancesheet deferred tax liability of £952m, with a corresponding reduction in reserves.However, let me underline the fact that this does not affect the United UtilitiesPLC parent company balance sheet and therefore does not impact on payment ofdividends to shareholders.It is also worth reminding you that the regulatory determinations set pricesallowing for tax on an anticipated cash basis and are therefore unaffected bydeferred tax.The 2004/05 tax charge also increases by £66 million. Whilst this affectsreported earnings, it is a non-cash adjustment.In addition, deferred tax restatements arise in relation to other IFRS adjustments.

IFRS impact – net assets at 31 March 200535003000£3,119m£145m (£332m)£3m(£952m)Net Assets (£m)25002000150010005000UK GAAPInfrastructure AssetsPensionsBusiness CombinationsDeferred Tax32As you can see, net assets are reduced by around 30 per cent as a result ofdeferred tax under IAS 12.This represents the largest single adjustment to net assets.

Major IFRS adjustments representing materialdifferences from UK GAAP• Infrastructure Accounting (IAS 16)• Interests in Joint Ventures (IAS 31)• Defined Benefit Pension Scheme Accounting (IAS 19)• Business Combinations (IAS 38 / IFRS 3)• Deferred Tax (IAS 12)• Dividends (IAS 10)• Accounting for Derivatives (IAS 39)33Looking at dividends.

Dividends (IAS 10)• IAS 10 deals with events after the balance sheet date• Dividends may not be recognised until they have been appropriatelyauthorised• Since this normally occurs after the balance sheet date, the dividends arenot recognised as a liability at the balance sheet date– final dividend of £219m will be reversed, thereby increasing net assets• Furthermore, under IFRS, dividends are not recognised within the incomestatement, but rather reported in the Statement of Recognised Income andExpense34IAS 10 deals with events after the balance sheet date.Under IFRS, dividends may not be recognised until they have been appropriatelyauthorised. Since this normally occurs after the balance sheet date, the 2004/05final dividend of £219 million will not be recognised as a liability, at 31 March2005, and will be reversed. This increases net assets.Additionally, dividends are not recognised within the income statement, butinstead they’re reported in the Statement of Recognised Income and Expense.

IFRS impact – net assets at 31 March 200535003000£3,119m£145m (£332m)£3m(£952m)Net Assets (£m)2500200015001000500£219m0UK GAAPInfrastructure AssetsPensionsBusiness CombinationsDeferred TaxDividends35The reversal of the 2004/05 final dividend, as a balance sheet liability, increasesnet assets by £219 million.

Major IFRS adjustments representing materialdifferences from UK GAAP• Infrastructure Accounting (IAS 16)• Interests in Joint Ventures (IAS 31)• Defined Benefit Pension Scheme Accounting (IAS 19)• Business Combinations (IAS 38 / IFRS 3)• Deferred Tax (IAS 12)• Dividends (IAS 10)• Accounting for Derivatives (IAS 39)36Turning to accounting for derivatives, under IAS 39.

Accounting for Derivatives (IAS 39)United Utilities’ hedging policy• The group typically swaps fixed interest rate and currency debt to a sterlingfloating interest rate basis at the time of issue (the “Debt Swaps”)– this is a proxy for the index-linked nature of its sterling income streams• The group enters into further swaps, at the time of each regulatory review, tofix interest rates for the five-year review period (the “Regulatory Swaps”)– this hedges the interest cost implicit in the regulatory contracts• All swaps represent effective economic hedges37Before I discuss the impact of IAS 39, I would like to briefly outline our hedgingpolicy.Given the index-linked nature of the group’s income stream, we typically swapfixed interest rate debt and currency debt to a sterling floating interest rate basisat the time of the issue. These, we refer to as Debt Swaps.In order to hedge the interest cost implicit in the regulatory contracts, the groupthen enters into further swaps, at the time of each regulatory review, to fixinterest rates for the five-year review period. These, we refer to as RegulatorySwaps.All swaps represent effective economic hedges.

Accounting for Derivatives (IAS 39)Impact of IAS 39• United Utilities has elected to apply IAS 39 from 1 April 2005– the 2004/05 IFRS financial statements therefore reflect derivatives underthe existing UK GAAP accounting policy• Under IAS 39, debt is carried at amortised cost whilst derivatives arerecognised on the balance sheet at fair value– movements in the fair values of derivatives are reflected through theincome statement• However, to the extent that derivatives can be demonstrated to representeffective hedges under IAS 39– movement in the fair value of the debt is reflected through the incomestatement– the carrying value of the debt is adjusted to reflect its fair value in respectof the hedged risk38I shall now move on to the impact of IAS 39.As I said earlier, United Utilities has elected to apply IAS 39 with effect from 1April 2005, rather than 1 April 2004. This means that the 2004/05 accountsreflect derivatives under UK GAAP.The impact assessment of IAS 39 has, nonetheless, been carried out and has beenprepared on the assumption that the group will apply hedge accounting, to thefullest extent possible, to minimise potential income statement volatility.Under IAS 39, the default treatment is for debt to be carried at amortised cost,whilst derivatives are recognised on the balance sheet at fair value withmovements in those fair values reflected through the income statement.Whilst this will introduce volatility to the income statement, to the extent thatderivatives can be demonstrated to represent effective hedges, changes in therecognised value of hedged debt can be adjusted through the income statement.

Accounting for Derivatives (IAS 39)Impact of IAS 39• Due to the restrictions within IAS 39 on demonstrating hedge effectiveness, itwill not be possible to apply hedge accounting in respect of the RegulatorySwaps or a small proportion of the Debt Swaps• As a result of IAS 39 adoption, liabilities of £61m are recognised as at 1 April2005 in relation to derivative financial instruments. This is offset by a reductionin debt of £60m– the overall net assets movement is therefore a decrease of £1m (pre-tax)39It is also probably worth saying that, due to the restrictions within IAS 39 ondemonstrating hedge effectiveness, it will not be possible to apply hedgeaccounting in respect of the Regulatory Swaps and a small proportion of the DebtSwaps.Our assessment indicates that liabilities, in respect of derivatives, of around £61million should be recognised as at 1 April 2005. This adjustment will be largelyoffset by a reduction in debt .That is all I want to say on IAS 39.

Other IFRS adjustments• Other IFRS adjustments affecting United Utilities include:– the impact of fair valuing share options, granted after 7 November2002, which will have a progressive impact going forward;– adjustments to depreciation and amortisation due to differencesbetween FRS 11 and IAS 36 (Impairment of Assets);– reclassification of software;– long-term contract accounting; and– the deferred tax impact of all other adjustments• With the exception of deferred tax, the impact of these adjustments, bothindividually and in total, is not material to profit before tax or net assets– operating profit increases by around £11 million, profit before tax byaround £3m and profit after tax by £2m– net assets are reduced by £58m, primarily relating to deferred tax40Completing the picture, there are a number of other IFRS adjustments that affectthe group.With the exception of the deferred tax impacts relating to the IFRS adjustmentspreviously discussed, I shall not talk through these in detail since their impacts,both individually and in total, are not material.These adjustments, do however, include the impact of fair valuing share options,amended depreciation and amortisation, reclassification of software and longtermcontract accounting.The overall impact is to increase profit before tax by around £3 million, andprofit after tax by £2 million.Shareholders’ equity is reduced by £58 million, primarily relating to the deferredtax impacts of all the IFRS adjustments.

Operating Profit (£m)IFRS impact – 2004/05 operating profit*700650600550500450£646m (£27m)£1m £5m£11mOperating profitmovement of 1%£637m**400UK GAAPInfrastructure AssetsPensionsBusiness Combinations* after exceptional items and intangibles previously classified as goodwill under UK GAAP and restructuring costs** does not add due to roundingOtherIFRS41This chart outlines all the principal adjustments to operating profit as a result ofIFRS.As you can see, operating profit reduces by just 1 per cent, with infrastructureaccounting having the largest single impact.

IFRS impact – 2004/05 profit before tax*Profit Before Tax (£m)450400350300250200150100UK GAAP£370mInfrastructure Assets(£27m)Pensions£4m £5m £3mBusiness CombinationsOther£356m*** after exceptional items and intangibles previously classified as goodwill under UK GAAP and restructuring costs** does not add due to roundingIFRS42For completeness, this slide outlines the adjustments to profit before tax. Again,a similar pattern, with infrastructure accounting having the largest single impact.So, as you can see, there is no material impact on profit before tax.

IFRS impact – net assets at 31 March 200535003000£3,119m£145m (£332m)£3m(£952m)Net Assets (£m)2500200015001000500£219m (£58m) £2,144m0UK GAAPInfrastructure AssetsPensionsBusiness CombinationsDeferred TaxDividendsOtherIFRS43Whilst net assets reduce by around 31 per cent, there is no material effect on thedistributable reserves of the United Utilities PLC parent company balance sheet,from which dividend payments are made.Deferred tax and pensions constitute the two major adjustments to net assetsunder IFRS.I’ll now hand back over to Simon.

Simon BateyGroup Finance DirectorThank you Martin.

IFRS impact – 2004/05 earnings per share7060Primarily due to anincrease in the deferredtax charge, which is anon-cash itempence per share50403020100Adjusted Basic EPS*Basic EPSUK GAAPIFRS* before deferred tax and goodwill and exceptional items (UK GAAP) and,before deferred tax and intangibles previously classified as goodwill under UK GAAP and restructuring costs (IFRS)45So, as we’ve previously discussed, there is no material impact to earnings on apre-deferred tax basis.The change in treatment of deferred tax under IFRS, impacting on earnings,constitutes a non-cash adjustment.

Treatment of subsidiary companies under IFRS• IFRS is being adopted by United Utilities PLC (consolidated accountsand parent company accounts) and United Utilities Electricity PLC witheffect from 1 April 2005 due to the issuance of listed equity or debt bythose entities and the requirement to prepare consolidated accounts• All other group companies will remain under UK GAAP– matches the treatment applied in regulatory accounting– protects the reserves of United Utilities Water PLC• Only potential impact will be due to any future convergence between UKGAAP and IFRS46Before moving on to a more detailed look at retained earnings, I’d like to brieflytalk about how our subsidiary companies are treated under IFRS.IFRS is being adopted by United Utilities PLC and United Utilities ElectricityPLC with effect from 1 April 2005. This is due to the issuance of listed equity ordebt by those entities and the requirement to prepare consolidated accounts.All other group companies, including United Utilities Water PLC, will remainunder UK GAAP. We’ve chosen to keep UK GAAP for subsidiary companies sothat we remain aligned with regulatory accounting and the assumptions made inthe regulatory determinations. Retaining UK GAAP will also mean that thedistributable reserves of United Utilities Water PLC remain unaffected.The only potential impact going forward will be due to any future convergencebetween UK GAAP and IFRS.

Retained Earnings• The consolidated retained earnings decrease from £1,363m to £225m as aresult of IFRS adoption. This is due to:– disallowance of deferred tax discounting (£952m);– recognition of the pensions deficit under IAS 19 (£59m);– derecognition of the SSAP 24 prepayment (£272m); and– other net adjustments, representing an increase of £145m, whichinclude the reversal of the 2004/05 final dividend• However, the value of the IFRS restatements to the reserves of the UnitedUtilities PLC parent company balance sheet, from which dividendpayments are made, are not material47Now, turning to retained earnings.The consolidated retained earnings for the group decrease substantially from£1.36 billion to £225 million, under IFRS.As Martin said earlier, the main adjustments relate to the disallowance ofdeferred tax discounting and the derecognition of the SSAP 24 pensionsprepayment, coupled with the recognition of the pensions deficit.By far, the largest single adjustment relates to the treatment of deferred tax.

Movement in 2004/05 retained earnings18001600No impact on dividend capacity asUnited Utilities PLC parent companybalance sheet largely unaffected2004/05 Retained Earnings (£m)140012001000800600400ConsolidatedUnited Utilities PLC Parent Company2000UK GAAP IAS 10 Dividends IAS 12 DeferredTax DiscountIAS 19 Pensions SSAP 24Prepaym entDerecognitionOther“… the distributable reserves of the United Utilities PLC parent company balancesheet, from which dividend payments are made, are largely unaffected by IFRS …”48However, as this slide shows, the value of the IFRS restatements to the reservesof the United Utilities PLC parent company balance sheet are not material.In contrast to the consolidated accounts, you can see an almost unchangedposition in regard to the retained earnings of the United Utilities PLC parentcompany balance sheet, from which dividend payments are made.

IFRS impact on key ratios and financialsEBITDAOperating MarginInterest CoverDividend Cover(pre-deferred tax)Dividend CoverNet DebtGearing 5 (excludingjoint venture debt)Net AssetsIFRS£1,078m 128.9% 12.4x 11.3x0.9x 3£4,279m64%£2,144mUK GAAP£1,058m 230.7% 22.4x 21.3x1.1x 4£4,141mNet Debt (excluding£4,141m£4,141m-Gearing 5 67%57%(10%)joint venture debt)57%£3,119mMovement£20m(1.8%)--(0.2x)(£138m)(7%)(£975m)1before intangibles previously classified as goodwill under UK GAAP and restructuring costs2 before goodwill and exceptional items3 before deferred tax and intangibles previously classified as goodwill under UK GAAP and restructuring costs4before deferred tax and goodwill and exceptional items5net debt / net debt plus shareholders’ funds49I’d now like to focus on some key financial measures.EBITDA marginally increases by just under 2 per cent under IFRS.Our operating margin falls by around 2 per cent, with the change in treatment ofinfrastructure assets a main contributor.Interest cover remains broadly unchanged, as does dividend cover on a predeferredtax basis.Net debt increases by £138 million, representing an increase of just over 3 percent, but this primarily relates to joint venture debt which is typically nonrecourseto United Utilities.Gearing is up 10 per cent to 67 per cent, with a smaller increase of 7 per cent, to64 per cent, when joint venture debt is excluded. This is because, although thenet debt increase primarily relates to joint venture debt, the required IFRSadjustments, principally deferred tax, reduce net assets.

Commercial impact• Regulatory contracts not affected– regulated on a cash tax basis, therefore no deferred tax impact– explicit allowance is made for funding of the relevant elements of thepension scheme deficits• No cash flow or financing implications• No impact on financial covenants• Increase in reported net debt primarily reflects joint venture debt• No impact on dividend policy50In this presentation we’ve provided details of the effects of IFRS on ouraccounting statements.It is also important to consider the commercial impact on the group.A key point to make is that our regulatory contracts are not affected by IFRS.We’re regulated on a cash tax basis and therefore deferred tax has no impact. It’salso worth reminding you that the regulators make explicit allowance for fundingof the relevant elements of the pension scheme deficits.IFRS presents no cash flow or financing implications. Also, there’s no impact onour financial covenants which continue to be calculated in accordance with UKGAAP.As discussed on the previous slide, the increase in reported net debt primarilyreflects joint venture debt, which is typically non-recourse to United Utilities.And, finally, there’s no impact on our dividend policy.So, as you can see, there is very little commercial impact on the group as a resultof IFRS.

Summary• Overall impact on profit before tax in 2004/05 is not material• Whilst earnings are affected by an increase in reported deferred tax, there isno impact on the group’s cash flow position or financing arrangements• A potential increase in volatility to the income statement is anticipated,primarily due to derivatives recognised at fair value• Net assets fall from £3,119m to £2,144m, primarily due to deferred tax andpensions adjustments• No effect on regulatory asset base or allowed returns• No impact on payment of dividends to shareholders– United Utilities PLC parent company retained earnings largely unaffected– dividend policy unaffected51I’d like to finish by reiterating that shareholders will not be affected, as a resultof IFRS, and the group’s dividend policy remains unchanged. That is, a target ofincreasing dividends in line with inflation for the next five years.Thank you for listening, we’ll now take questions.

Q & A