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Annual
Report
United Utilities Group PLC
Annual Report and Financial Statements
for the year ended 31 March 2016
slugline
United Utilities is the UK’s
largest listed water company
Through its subsidiary, United Utilities Water Limited, it manages
the regulated water and wastewater network in the North West
of England, providing services to around seven million people and
businesses. The vast majority of the group’s assets and profit are
derived from its regulated UK water business.
Our vision
Our vision is to be the best UK water and wastewater company,
providing great service to our customers.
Where we operate
Key facts
Carlisle
Workington
Whitehaven
Barrowin Furness
Kendal
Lancaster
Blackpool
Burnley
Preston
Blackburn
Bolton
Liverpool
Manchester
Warrington
Stockport
Chester
Crewe
We help to protect
over 400km of
coastline and
around 7,000km
of rivers flowing
through the
North West
We deliver around
1,700 million
litres of safe clean
drinking water
to our customers
every day through
around 40,000km of
water pipes
We produced
138 GWh of
renewable energy
in 2015/16 through
sludge treatment
centres and solar
installations,
enough to power
over 40,000 homes
We look after
more than 55,000
hectares of
catchment land,
helping to protect
the quality of our
water resources
Carlisle
Workington
Whitehaven
Barrowin Furness
Kendal
Lancaster
Blackpool
Burnley
Preston
Blackburn
Bolton
Liverpool
Manchester
Warrington
Stockport
Chester
Crewe
slugline
Our approach to sustainable shareholder value creation
– Clear vision to be the best UK water and wastewater company,
– Significant improvements in customer service and operational
providing great service to our customers
performance, with more to come
– Management team with extensive commercial, operational
– Externally recognised responsible business credentials
and regulatory experience
– Track record of regulatory outperformance; exceeded 2010–15
targets
– Customer and environmental benefits delivered through
substantial capital investment, which drives long-term growth
in the regulatory capital value
– Wholesale revenue and asset base linked to RPI inflation to at
– Robust capital structure: stable A3 credit rating
least 2020
– Sustainable dividend policy targeting a growth rate of at least
– Clarity on allowed returns through to 2020
RPI inflation per annum to at least 2020
– Total dividend per share of 38.45 pence for 2015/16
What’s in this report
Our annual report and financial statements aims to meet the
information needs of our investors as a whole, to help them
to make informed decisions regarding their participation – for
example, whether to buy, sell or hold our shares or bonds,
whether to engage with management on issues and how to
vote their shares. This includes information which we believe is
material to these decisions and we present it in a way which we
believe is fair, balanced and understandable.
We recognise that this report will be read by a wide variety of
other stakeholders including customers, suppliers, employees,
contractors, competitors, government, politicians, regulators, press,
analysts and non-governmental organisations. Where we believe
that a topic is material to a large number of them we either include
it in this report or cross refer to other reports and information
(such as our customer communications, our sustainability web
pages or our regulatory reports).
We believe this approach meets the requirements of company law,
the UK Corporate Governance Code, IFRS and the Framework
and that we go beyond those requirements where we feel it is
particularly helpful to do so and where that can be done without
making the report unnecessarily lengthy or difficult to read.
Important information
Cautionary statement:
The annual report and financial statements (the annual report) contains certain
forward-looking statements with respect to the operations, performance and
financial condition of the group. By their nature, these statements involve
uncertainty since future events and circumstances can cause results and
developments to differ materially from those anticipated. The forward-looking
statements reflect knowledge and information available at the date of preparation
of this annual report and the company undertakes no obligation to update these
forward-looking statements. Nothing in this annual report should be construed as a
profit forecast. Certain regulatory performance data contained in this annual report
is subject to regulatory audit.
Terms used in this report:
Unless expressly stated otherwise, the ‘group’, ‘United Utilities’, ‘UU’ or ‘the
company’ means United Utilities Group PLC and its subsidiary undertakings; the
‘regulated business’, ‘regulated activities’ or ‘UUW’ means the licensed water and
wastewater activities undertaken by United Utilities Water Limited (formerly United
Utilities Water PLC) in the North West of England.
Strategic
Report
Details on our performance over the
year and how it has been achieved,
alongside our vision and strategy for
future years.
Our
Governance
Information on the board and its
activities and those of the various
committees.
Pages 04–49
Pages 50–109
Financial
Statements
Our full audited financial results for
the year.
Shareholder
Information
Key dates, shareholder facts and
registrar details.
Pages 110–163
Pages 164–165
Integrated report
This annual report has been prepared in accordance with the
International Framework published by the International
Integrated Reporting Council in December 2013.
01
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
Operational highlights 2015/16
Further improvements
in customer satisfaction:
Service Incentive Mechanism
score up year-on-year
‘Water Plus’ Business
Retail JV with Severn Trent:
First mover advantage and
economies of scale
Retained ‘World Class’
rating in Dow Jones
Sustainability Index and
sector leading status
Accelerated investment to deliver
early operational benefits:
£799m
capital invested in 2015/16
Reward of:
£2.5m
achieved on outcome delivery
incentives, against a tough set
of targets
See how we performed against Our Operational KPIs
on page 29
Read more about Our Operational Performance
on pages 31 to 38
Online annual report
Our annual report is available online at:
corporate.unitedutilities.com
02
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Financial highlights 2015/16
Revenue
£1,730m
m
0
2
7
,
1
m
0
3
7
,
1
m
9
8
6
,
1
m
6
3
6
,
1
m
5
6
5
,
1
Revenue was up £10 million at £1,730 million,
despite the new regulated price controls. This is
because we benefitted this year from higher than
assumed volumes, along with an increase in non-
regulated sales, and last year was impacted by the
£21 million special discount we applied to customer
bills.
11/12
12/13
13/14
14/15
15/16
Underlying operating profit*
£604.1m
m
3
.
4
6
6
.
m
6
4
3
6
m
1
.
4
0
6
m
2
.
4
0
6
m
1
.
4
9
5
Underlying operating profit was lower by £60
million, at £604 million, as expected, reflecting
the new regulated price controls, an increase
in infrastructure renewals expenditure as we
accelerate the investment programme to deliver
early operational benefit, along with increases in
depreciation and other costs, partly offset by a
reduction in bad debts, power and regulatory fees.
11/12
12/13
13/14
14/15
15/16
Total dividend per share
38.45p
p
4
0
6
3
.
p
2
3
.
4
3
p
1
0
.
2
3
p
5
4
8
3
.
p
0
7
.
7
3
Total dividend per ordinary share for 2015/16 of
38.45 pence. This is an increase of 2.0 per cent
on last year, in line with our policy of targeting an
annual growth rate of at least RPI inflation through
to 2020.
11/12
12/13
13/14
14/15
15/16
* A reconciliation between underlying operating profit and reported operating
profit is shown on page 44.
See how we performed against
Our Financial KPIs on page 28
Read more about Our Financial Performance
on pages 39 to 45
03
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
Delivering
our strategy
The strategic report
details our performance over the
past year and how it has been achieved
alongside our vision and strategy for future years.
Pictured: We’ve installed Europe’s largest floating
solar power project at Godley reservoir in Greater
Manchester.
Read the full story
on page 37
04
slugline
SSttrraattegicegic
eportt
RRepor
Chairman’s and Chief Executive Officer’s statement
Chairman and Chief Executive Officer’s review
How we create value within our operating environment
How we create value within our operating environment
Our industry and market
Our industry and market
Our vision
Our vision
Key resources
Our business model
External environment
Key resources
Internal environment
External environment
Planning (25, 5, 1 year)
Internal environment
Outcomes
Planning (25, 5, 1 year)
Outcomes
Our key performance indicators 2015–20
Our performance 2015/16
Our key performance indicators 2015–20
Principal risks and uncertainties
Our performance 2015/16
Principal risks and uncertainties
••
6
••
10
••
10
••
10
••
12
••
13
••
17
••
21
••
23
••
26
••
28
••
30
46
05
slugline
Chairman and Chief Executive
Officer’s review
We are pleased to report
a continuing improvement
in underlying performance
and customer satisfaction,
in a year that presented
some difficult operational
challenges.
Customers
In recent years, we have made great strides in improving customer
satisfaction, underpinned by better operational performance. We
are pleased to report another year in which underlying customer
satisfaction has again improved. However, the last 12 months
presented a number of very significant operational challenges
and we feel it is appropriate to note the enormous effort by the
company’s employees, its partners and other stakeholders to
sustain water and wastewater services to customers.
Water quality incident
On 5 August 2015, routine sampling identified contamination
by cryptosporidium of water leaving our treatment works
at Franklaw, affecting over 300,000 homes and businesses in
Lancashire. With public health our first priority, we quickly moved to
issue an advice notice to affected customers advising they boil their
water before drinking it, whilst we sought to identify and eliminate
the source of contamination. Having made so much progress
in recent years, we were disappointed to have inconvenienced
customers and we are enormously appreciative of their patience and
understanding whilst we worked to address the incident.
We have already acted on lessons learned from the incident
(see case study, page 32) and we have worked closely with our
water quality regulator, the Drinking Water Inspectorate, on a
lengthy and complex investigation into its cause. We await the
Inspectorate’s report on the matter. We would like to thank all
those who gave their support and assistance during the incident.
Flooding
December 2015 will be remembered as an awful time for many
customers in Cumbria, Lancashire and Greater Manchester when
communities were inundated by flooding caused by unprecedented
rainfall (see case study, page 35). The storms at the beginning of
December affected over 85 of our wastewater treatment works
and a number of other facilities. Dealing with the earlier water
quality incident had heightened our readiness. Once again, our
appreciation goes to our employees, suppliers and partners who
worked tirelessly to maintain the supply of water and return
wastewater treatment facilities to service, giving up their Christmas
to help families and businesses affected by the floods.
Steve Mogford, Chief Executive Officer and Dr John McAdam, Chairman
This is the first year of the new 2015–20 regulatory period and
one in which, notwithstanding several challenges, we took
another step towards our vision of becoming the UK’s best water
and wastewater company, providing customers with great service.
Financial performance
We improved performance for shareholders and customers
over the last regulatory period providing a strong platform for
us to deliver further value across the 2015–20 period, including
sustainable dividends.
Group revenue was slightly higher than last year, up £10 million at
£1,730 million, as the impact of lower allowed regulated revenue
for 2015/16 was more than offset by higher than assumed
volumes and an increase in sales in our non-regulated business.
Underlying operating profit, at £604 million, was in line with
management expectations, albeit £60 million lower than 2014/15,
following the new regulated price controls and impacted by the
planned acceleration in our investment programme. Underlying
profit before tax, at £408 million, was down by £39 million, as
we benefitted from a £21 million reduction in underlying net
finance expense. Underlying earnings per share was 47.7 pence,
more than covering the dividend. The board is proposing a final
dividend of 25.64 pence per ordinary share, making a total of
38.45 pence per ordinary share for the 2015/16 financial year.
This represents an increase of 2.0 per cent, in line with our policy
of targeting an annual growth rate of at least RPI inflation through
to 2020.
To support the retention of a robust capital structure, we aim
to maintain efficient access to debt capital markets throughout
the economic cycle. We have debt costs locked-in at attractive
rates and are on track to beat Ofwat’s allowed cost of debt for
the 2015–20 period. The board believes it is appropriate to keep
gearing, measured as net debt to regulatory capital value, within
our existing target range of 55 to 65 per cent. We aim to maintain,
as a minimum, our existing credit ratings of A3 with Moody’s and
BBB+ with Standard & Poor’s for United Utilities Water Limited.
06
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Underlying improvement
Notwithstanding the impact on our customers of the water
quality incident and the severe flooding events, we were pleased
to see a further improvement in customer satisfaction with an
increase in our score on Ofwat’s service incentive mechanism
(SIM) compared with last year. Considering the challenges
associated with the storms, we were particularly pleased that
customers rated us ‘very highly’ for wastewater services where
we achieved first place among the 10 water and sewerage
companies for the winter period and second place over the
full year. We recognise that we have more to do, particularly in
respect of our water services. Whilst we are one of the water and
wastewater companies with the fewest customer complaints, we
are no better than average in how well customers feel we address
their complaint. This is an area of particular focus for us and we
are revising our training, policies, processes and systems to drive
improvement. In addition, we are implementing a new customer
relationship management (CRM) system aimed at offering an
improved customer experience, as well as delivering further
efficiencies in our customer-facing operations. The incidents
we experienced last year showed us there is more we can do to
help customers at such times and we launched our new ‘Priority
Services’ offer in May 2016. With the help of third sector groups
and other stakeholders, we developed an approach to provide
targeted support to customers who are experiencing short or long
term difficulties and we are working hard to encourage customers
to register with the scheme.
Systems thinking
We have coined the phrase ‘systems thinking’ to capture the
key themes of our new operating model, aimed principally at
improving the operational efficiency and effectiveness of our
wholesale business. We are investing in our new operating model
over this five-year regulatory period with efficiency savings
contributing to achievement of our totex targets. Those key
themes are:
The reliable and efficient operation of our assets. This is critical
to both customer service and our environmental performance
and we are driving a shift from a reactive to proactive mind-set,
seeking, where possible, to address problems before they affect
customer service. We are in the final stages of commissioning
our new asset management system to deliver much improved
preventative and ‘on condition’ maintenance scheduling and
control. We are progressively deploying engineering teams in the
field to ensure best performance of our assets throughout their
expected life-span – often saving capital expenditure through
more effective operational interventions.
Better use of data to monitor, control and optimise asset
performance. Our new integrated control centre (ICC) acts as the
data hub where we plan, monitor and increasingly control assets.
We are close to completing installation of our new telemetry
backbone, which acts as the ‘data highway’ between our assets
and the ICC. Under this programme, production sites are being
equipped to monitor and optimise site performance.
Think system. Our 91 water treatment works form part of
an integrated water supply network and our new production
planning system provides real time modelling capability to
optimise the cost of total production. It provides us with the
capability to re-plan as events occur and this proved invaluable
in addressing the considerable water quality challenges created
by the storms last year. On wastewater, we are piloting whole
drainage area system management, fusing weather and asset
data to predict problem ‘hotspots’ and act to optimise drainage
system performance for the benefit of customers and the
environment.
Organisation and empowerment. We have shifted away from
the typical functional organisation in the water sector to a
‘production line’ model where multi-disciplinary teams are
aligned to water or wastewater production sites and networks.
This is delivering much higher levels of performance through
increased end-to-end ownership of our assets.
Operational performance
Targeted investment in our assets, processes and the people who
operate them has supported sustained improvement in recent
years in our environmental performance, as measured by the
Environment Agency (EA). We have again been assessed by the
EA as one of the best performers in our sector. Performance of
our water business scored average or above on four out of six
metrics used by the Drinking Water Inspectorate to assess our
performance in 2015. However, over the same period, we saw
a disappointing growth in the number of water quality events
across the business, positioning us in the lower quartile for
the sector. We have grasped this issue and set about a number
of improvements in training, processes and asset standards.
Early results are encouraging and this area will remain a
focus of management attention until we are satisfied that the
improvement is sustainable.
Performance against our final determination
In setting pricing, we are very conscious of the need to balance
investment requirements against the impact on customer bills,
particularly given the high levels of economic deprivation in the
communities we serve. Our price review settlement includes
some challenging total expenditure targets to help deliver this
balance. We have worked hard to find ways to make these savings
and are pleased to report that we are implementing a range of
initiatives to deliver over £400 million of savings to meet our total
expenditure allowance, as set by Ofwat. This will still enable us to
invest substantially in our assets for the benefit of our customers
and the environment. A key feature will be improving resilience,
the importance of which was emphasised by the operational
incidents we faced this year.
07
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT Chairman and Chief Executive
Officer’s review
Our economic regulator, Ofwat, has introduced a new set of
incentives for this five-year regulatory period called outcome
delivery incentives, or ODIs. Each carries a potential for penalty
or reward based on the company’s performance in achieving
the operational targets, which generally become tougher over
the five-year period. Consultation with customers ahead of
submission of our five-year business plan indicated that they
were generally content with the level of service provided and so
there was little support for rewards attached to ODI performance.
As a consequence, our cumulative ODIs are skewed toward
penalty with very few areas in which we can earn a substantive
reward. At the beginning of last year, we set out a soft target
range for our cumulative ODI performance between a £100
million net penalty and a £50 million net reward. We are pleased
to report a better than expected performance over the last year
resulting in a £2.5 million net reward and we have revised our
target range to between £70 million net penalty and £30 million
net reward over the five years.
ODIs and the serviceability they represent will benefit from our
investment programme in this regulatory period and we have
accelerated our £3.5 billion investment programme to deliver
improvements as early as possible. During the year we invested
£799 million in our assets and systems, around one-third more
than the first year of the last regulatory period, and our time, cost
and quality index, which measures how effectively we are making
that investment, has once again scored highly at around 90 per
cent. We expect this front-end loading of investment to continue
into the second year of this regulatory period.
Economic environment
Although unemployment in the North West has reduced over
the last 12 months, our region continues to have the highest
proportion of economically deprived households in England.
We have more customers who struggle to pay, with customer
indebtedness continuing to be a significant challenge for us.
We place significant focus on helping customers who are
struggling to pay and continue to offer a wide range of ways to
help them back into regular payment. This includes a new social
tariff and an independently administered trust fund for which
we increased our annual contribution following a cash tax refund
from HMRC. Our new Priority Services scheme supports those
customers who may be suffering physical or mental illness as well
as those in financial difficulty.
Our debt management processes have been independently
assessed as being of a very high standard. We recently
implemented a data sharing process with the credit reference
agency ‘Equifax’ and this is helping to distinguish between those
customers who are facing genuine hardship and those who try to
avoid paying their bill for other reasons.
Non-household retail
We secured our Scottish retail licence in 2012 and have since
been a leading competitor in the Scottish non-household
(business) retail market. We now have approximately 300
customers, covering around 3,500 sites. Overall, our business
retail operation has achieved a net increase in annualised revenue
of £18 million. During this period, we have seen a significant
increase in the number of active market participants in Scotland
and the Water Act 2014 has confirmed plans to open the English
business retail market for water and wastewater services in 2017.
We are well advanced in our preparations for full English market
opening, having implemented a new customer relationship
management system at the end of 2014. However, recognising the
relationship between scale and cost to serve for a retail organisation,
we saw the benefit of combining our business retail operation with
that of another company to create a competitive proposition for
the English and Scottish market. We were delighted to find similar
thinking in Severn Trent and on 1 March 2016 we announced that we
had entered into a joint venture (JV) to combine the two companies’
non-household water and wastewater retail businesses, principally
comprising billing and customer service activities, to be centrally
located in Stoke-on-Trent.
This new company, ‘Water Plus’, will combine the complementary
skills of both companies, including business strategy, sales,
customer service and credit management, to deliver an attractive
and competitive choice for large and small business customers
across England and Scotland. Bringing the businesses together
will create a joint venture with the synergies to provide an
efficient and cost-effective operation focused on improved
customer service and growth.
We are delighted that the JV has received the approval of the
Competition and Markets Authority and we are in the process of
progressively transferring operations to the new location.
Long-term planning
Our Strategic Direction Statement, ‘Playing our part to support
the North West’, reflects extensive consultation with customers
and other stakeholders to create our best view of what the next
25 years holds for our region. This includes economic, social and
environmental developments such as the predicted impact of
climate change.
Our Water Resources Management Plan, which describes the
projected pattern of water resource activity in our region until
2040, projects that the majority of the North West will be in
surplus. Customers benefit from an integrated network that
supports movement of water around the region to accommodate
its changing supply and demand balance. Our plan includes a
new Thirlmere pipeline to extend our integrated network to
encompass West Cumbria.
08
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
As a lone agent, United Utilities could not deliver the scale of
required environmental improvement at an acceptable level of
cost. Instead we are committed to partnering with others who
can support the achievement of our required outcomes – such
as our ‘Turning tides’ partnership with the EA, local authorities,
the Marine Conservation Society and other interested parties to
improve bathing waters in the North West.
Water 2020
Ofwat is assessing a range of options for the next price review,
including competition in the areas of water resources and sludge
processing, along with the possible transition from RPI to CPI
inflation. We have been actively involved in discussions with
the industry and regulators and have submitted comprehensive
responses to Ofwat’s various consultation papers. Ofwat has
recently published its views on a range of options for Water 2020
and we are currently undertaking a detailed review of these
documents. We will respond in due course, with customers and
shareholders at the heart of our thinking.
Responsible business
We aim to build on our notable achievements across the 2010–15
regulatory period and remain highly focused on delivering the
best service to customers, at the lowest sustainable cost, while
acting in a responsible manner.
Our environmental and sustainability performance has received
external recognition. We retained our ‘World Class’ rating as
measured by the Dow Jones Sustainability Index and again
achieved industry leading status in the multi-utility/water sector.
In addition, at the PwC 2015 Building Public Trust Awards, United
Utilities was selected as joint winner for ‘Excellence in reporting
in the FTSE 100’.
We continue to support partnerships, both financially and
in terms of employee time through volunteering, with other
organisations across the North West. We recently set up
‘Catchment Wise’, our new approach to tackling water quality
issues in lakes, rivers and coastal waters across the North West.
Our employees
We would not have been able to deliver the significant
improvements for customers over recent years without the
enthusiasm and commitment of our employees. We are proud
of their unrelenting dedication and of our sub-contracting
partners who have worked very hard all year round in supporting
customers and the environment and we would like to thank them
for their significant contribution.
The company has seen significant change over the last few years
and we continue to move through a period of transformation, as
we respond to the demands of the new regulatory price control.
We remain focused on maintaining high levels of employee
engagement. Although it has fallen slightly this year at 75 per
cent, this continues to demonstrate that our employees have a
strong capability to adapt. We have been successful in attracting
and retaining good people and have continued to expand our
apprentice and graduate programmes, with many now having
secured permanent roles across our business. We have received
external recognition for our apprentice and graduate schemes.
Health and safety will always be a key focus area and, as part
of our health and safety improvement programme, we have
implemented a number of initiatives which helped reduce the
employee accident frequency rate further in 2015/16. However,
we recognise that we still have more to do, as we strive for
continuous improvement.
Our board
We aim to operate in a manner that reflects the highest standards
of corporate governance. Our company structure and governance
standards are designed to ensure that our board continues to
provide sound and prudent governance in compliance with the
principles of the UK Corporate Governance Code.
We would like to say thank you and farewell to Catherine Bell who
will be standing down at the company’s general meeting in July,
after nine years on the board. Catherine is chair of the corporate
responsibility committee and a member of the nomination,
audit and remuneration committees and has provided invaluable
guidance to United Utilities throughout her time on the board.
We are pleased to welcome Alison Goligher to the board with
effect from 1 August 2016. Alison’s industrial and engineering
background from her roles with Royal Dutch Shell and
Schlumberger will be a great asset to the board.
Outlook
We are confident that we can build on our strong operational and
environmental performance and improve further as we progress
through this new regulatory period, supported by our ‘systems
thinking’ approach to operating the business. We are accelerating
our 2015–20 capex programme and substantial investment in
our assets will continue, driving benefits for our customers and
the environment. Our progress over the first year of this new
regulatory period underpins our confidence in delivering our
targets. For shareholders, we are targeting dividend growth of at
least RPI inflation each year through to 2020, all underpinned by
a robust capital structure.
Dr John McAdam
Chairman
Steve Mogford
Chief Executive Officer
The strategic report on pages 4 to 49 was approved at a meeting of the board on 25 May 2016 and signed off on its behalf by
Steve Mogford, Chief Executive Officer.
09
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
How we create value within our operating environment
Our industry and market
Our vision
Every day, over 50 million
household and business consumers
in England and Wales receive
water and wastewater services.
These are served by 10 licensed
companies which provide both
water and wastewater services.
We are the second largest of these based on the size of our asset base,
as measured by Regulatory Capital Value (RCV). We, along with these
other nine companies, comprise the vast majority of the total water
and wastewater sector, as depicted on the pie chart below.
Additionally, there are licensed companies which provide water-
only services and tend to be smaller in size.
As each company in the water sector operates as a regional
monopoly for its services, they are subject to regulation in terms
of both price and performance.
The privatisation of the industry over two decades ago has been
widely perceived as a success, making a significant contribution
to public health. It has led to improvements in the quality of
services provided to customers, higher environmental standards
and superior quality drinking water at lower estimated costs to
customers than if the water sector was still owned by the UK
Government. Since privatisation, the water industry has invested
over £100 billion in maintaining and improving assets and services.
Competitive environment
The other water companies in England and Wales are naturally
our main competitors and we benchmark our performance
against them using comparative performance reports from our
economic regulator, Ofwat, and our environmental regulator, the
Environment Agency. Away from the water sector, in line with
our vision to be the best UK water and wastewater company, we
also benchmark our customer service performance against other
leading service providers in our region. In addition, as a publicly
listed FTSE 100 company, the other UK and worldwide listed
utilities are competitors from an investment perspective.
The customers we serve
United Utilities Water holds licences to provide water and
wastewater services to a population of approximately seven
million people in the North West of England. We provide services
to approximately three million households in our region and this
generates around two-thirds of our total revenues. We also serve
approximately 200,000 businesses, ranging in size from large
manufacturing companies to small shops.
Water sector RCV
United Utilities
16%
Other nine water and
wastewater companies 79%
Total RCV for all
water-only companies
5%
Our vision is to be the best UK
water and wastewater company,
providing great service to our
customers.
Over the last five years we have made significant progress
towards our vision, having achieved industry-leading status on
many performance metrics used by our regulators and other
stakeholders. We realise, however, that we have more to do and
that the environment in which we operate is changing – adding to
both the challenge and opportunity.
We were one of the most improved companies in our sector
for customer satisfaction over the last regulatory period and
underlying performance last year showed another year on year
improvement. Our ambition is to be highly regarded by the
customers we serve and so, in addition to water sector measures,
we regularly rank customer perception of our performance against
other leading brands operating in the North West. We score well in
this survey, just behind the well-regarded brands of John Lewis and
Marks and Spencer. What is clear is that customer expectations are
ever increasing. Improvements since privatisation mean that water
supply interruption is very much the exception and customers’
expectation of compensation for service failure is growing. Our
service proposition must adapt accordingly and we are investing in
a complete overhaul of our day to day customer service proposition
to provide customers with a best-in-class offering. In addition, the
incidents we experienced last year showed us that there is more
we can do to help customers at difficult times in their lives and in
May 2016 we launched our ‘Priority Services’ offering to provide
targeted support to customers who are experiencing short or long
term difficulty.
The 2015 storms in the North West demonstrated the importance
of infrastructure resilience and the ability to minimise the
impact of severe weather events. Climate change predictions
indicate that we can expect more frequent periods of intense
rainfall and drought across the UK. Whilst it is impractical to
believe we can protect customers fully from the implications of
climate change, we can take measures aimed at reducing the
impact of weather events and enabling recovery to be as fast
as possible. Over recent years, we have invested significantly in
enhancing the resilience of our systems and this proved to be
of considerable benefit during last year’s events. Our plans over
this five year regulatory period include investment in enhanced
resilience. Water companies are currently working with other
stakeholders, including Defra, our regulators and leading research
establishments, to consider what additional measures we can
take both individually and collectively to enhance our resilience to
climate change. We are playing an active role in this dialogue.
In order to deliver our vision, we will need to continue to make
significant improvements in our operational efficiency. We have
looked for best practice inside and outside our sector and we are
progressively transforming our operating model using what we
call ‘systems thinking’. For water, our philosophy is to consider our
landscape of reservoirs, aqueducts, process sites and distribution
networks as a ‘big system’ and to use processes and technology
10
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
to deliver uninterrupted, wholesome water to customers at
lowest cost. It means changing the culture of our organisation
from reactive to proactive, finding and fixing problems before
they affect our services to customers. A recent example is our
Thirlmere pipeline project where our integrated approach
enabled us to consider a wide range of factors in determining
what we believe to be the best solution for customers,
shareholders, local communities and the environment. The
project is designed to protect the environment as well as
providing long-term resilience of water supplies in West Cumbria.
On wastewater, we are currently piloting the integration of our assets
across a full drainage area to understand how we can improve our
response to weather and customer activity. Through this work we
are seeking to develop systems to optimise the performance of our
wastewater network in different conditions, to benefit environmental
outcomes, energy generation from renewables and reduce operating
cost. Our first ‘systems thinking’ investment was delivered towards
the end of the last regulatory period with the opening of our new
integrated control centre and more capability will be delivered
over the next 18 months. Our plans for the next regulatory period
are currently being developed, taking learning from using the
capability in this period and looking to exploit falling sensor costs and
developments in artificial intelligence.
Our vision recognises that the market in which we operate is
changing. The Water Act 2014 introduced the potential for wide
ranging change, commencing with the opening of the non-
household retail market to competition in April 2017. The UK
Government recently asked our economic regulator, Ofwat, to
consider the merits of opening the household retail market to
competition and Ofwat will present its conclusions later this year.
In addition, under a strategy of progressive evolution of the water
market, Ofwat declared its intent to open the market for water
resources and sludge processing to competition from 2020.
These developments represent the most significant structural
change for the water sector since privatisation and we are
working constructively with the government and our regulators to
understand the implications for customers and shareholders and
offer solutions for their effective implementation. We will continue
to put effort into being competition ready as is evidenced by our
recent move in forming a joint venture with Severn Trent for the
non-household retail market, building on our successful entry into
the Scottish market and our investment in new systems to provide
an enhanced offering to business customers.
How we create value
We create value for our stakeholders principally by agreeing and
then delivering, or outperforming, our regulatory contract. The
way we use our key resources, manage our internal environment
and interact with our ever-evolving external environment,
influenced by our long-term strategic approach, helps to achieve
value creation. This facilitates the delivery of outcomes for our
customers, employees, the environment and communities,
alongside ensuring investors receive an appropriate return.
This is represented in the diagram on the next page, with the
subsequent pages of this report mapping to its colour-coded sections.
Our key performance indicators for 2015–20 measure our
progress against some of the most important value drivers for
the business, feeding through from our strategic themes: the
best service to customers; at the lowest sustainable cost; and in a
responsible manner.
‘Systems thinking’ lies at the heart of our day-to-day decision
making, right through from approving our capital expenditure
programmes to agreeing our supply-chain partners. Whilst the
financial impact is a key driver in decision-making, this is always
set in the context of the impact on customers, shareholders, the
environment, employees and communities. For many years we
have included corporate responsibility (CR) factors as strategic
consideration, supported by our CR committee which is chaired
by one of our non-executive directors (more details are provided
in the corporate governance section on pages 80 to 81).
We are committed to delivering our
services in a responsible way and our
approach to responsible business
practice is outlined in our Business
Principles document available on our
website at corporate.unitedutilities.
com/united-utilities-business-
principles
Pictured opposite: Our new £200 million
extension to Liverpool wastewater treatment
works had its official opening in April 2016 when
Her Royal Highness the Princess Royal visited
our Sandon Dock site (read the full story on page
38). As part of the development of the site, a
new Sequencing Batch Reactor (SBR) treatment
facility has been built, capable of cleaning 11,000
litres of wastewater every second, serving
600,000 people.
11
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
cial
o
S
.
y
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.
How we create value within our operating environment
Our business model
Key Resources
Natural
Resources
– Water
–
Waste
–
Catchment land
People
– Employees
– Suppliers
– Relationships
– Capability
Assets
– Reservoirs
– Treatment works
– Networks
– Systems
Financing
– Debt
– Equity
Read more on Key Resources
on pages 13 to 15
Read more on Planning
on pages 23 to 25
EVIE W
R
Wholesale
Water
Domestic
Retail
P
L
A
N
(
2
5
,
5
,
1
y
e
ar)
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o
v
e
r
n
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e
.
C
u
l
t
u
r
e
I
n
t
e
r
n
a
l
E
n
v
i
r
o
n
m
e
n
t
l
a
n
r
e
t
x
E
Wholesale
Wastewater
Business
Retail
Read more on External
Environment on pages 17 to 20
D
O
Read more on Internal
Environment on page 21
Outcomes
At the lowest
sustainable cost
Value for money
–
Improved efficiency
–
The best service
to customers
–
–
–
Provide great water
Dispose of wastewater
Deliver a service customers
can rely on
In a responsible
manner
–
Protect and enhance
environment
Support local communities
Support employees in safe
workplace
–
–
Provide an appropriate risk and return for investors
How we measure our performance KPIs
—
Read more on Outcomes
on page 26
Read more on Risks
on pages 46 to 49
–
–
–
–
Wholesale ODIs
SIM qualitative
SIM quantitative
Business retail customer
growth
–
–
–
Totex outperformance
Financing outperformance
Domestic retail cost to serve
–
–
–
Leakage
EA performance assessment
Dow Jones Sustainability
Index
Read more on KPIs
on pages 28 to 29
c
i
m
o
n
o
c
E
.
l
a
r
u
t
a
N
12
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Key resources
Natural resources
Whilst rainfall in the North West of England is greater than other
parts of the country, and thus supply is not as constrained, it
is still in everyone’s interest to make the most of this precious
resource. We have encouraged customers to use water more
efficiently and have increased the number of households fitted
with meters. We also have a regulatory annual leakage target,
based on the sustainable economic level of leakage, which we
aim to meet each year.
We own over 55,000 hectares of land around our reservoirs.
Our sustainable catchment management programme (SCAMP)
has shown that we can effectively manage these catchments to
protect and enhance water quality and to provide other benefits
such as an improved natural environment. Our new Catchment
Wise project is looking at working with others to improve the
lakes, rivers and coastal waters where we return wastewater to
benefit the natural environment of the North West.
As well as water and our catchment land, another key resource
is waste. Sludge from wastewater can be processed to generate
renewable energy, helping to save power costs and protect the
environment. Our advanced digestion facility at Davyhulme is one
of the largest works of its type in the world and in 2016 we began
injection of biogas from Davyhulme’s wastewater treatment into
the national gas network. We also recycle waste by supplying
treated biosolids to agriculture, which provides a valuable
resource to farmers.
In order to utilise these key natural resources to create value
for our business, our ‘Instrument of Appointment’ or Licence is
integral. This was granted to us as part of the privatisation of the
water industry in 1989.
What we do – our water cycle
We collect water from the environment, clean it and distribute
it to our customers before collecting it, treating it, and then
returning it back to the environment.
a
k
a
c
s e
W e c o l lect waterfrom
t h e e nvironment
Water is collected from our
catchment land and stored
in our 175 reservoirs or
taken directly from
boreholes.
W
e
c
l
e
w
a
t
a
n
e
r
t
h
e
w ate r b
an d th e
The treated
water is then
returned safely into
rivers and the sea.
Water is
treated in our 91
water treatment works
to produce high quality
drinking water.
recycle
rivers
e
W
to
e
h
t
t
a
e
r
t
e
W
r
e
t
a
w
e
t
s
a
w
Wastewater is
treated in our 568
wastewater treatment works
so that it meets stringent
environmental standards and
is ready to return to
the environmentt.
United
Utilities
Water
Cycle
Clean water is
protected in our
covered reservoirs.
c
l
W
e
s
t
o
r
e
t
h
e
e
a
n
w
a
t
e
r
Wastewater is
collected from our
customers and taken
to our treatment
works using our
78,000km of
sewerage pipes.
W
w
e
a
c
s
t
e
olle
w
ct
a
t
e
r
3m households
and 200,000
business customers
can enjoy our water
supply and wastewater
24 hours a day.
Customers u s e
the water
A clean, reliable
supply of around 1,700
million litres of water a
day is distributed to our
customers’ taps using
our 43,000km
network of pipes.
distribute
th e w ater
W e
13
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
How we create value within our operating environment
People
Our employees play a critical role in increasing long-term
value generation. Fundamental to the decisions we take and
operational performance we deliver is a skilled, engaged and
motivated team.
We place a strong emphasis on providing comprehensive training
and development opportunities to develop our existing employees,
improving our internal skill-base as well as providing a more
engaged workforce. By enhancing our understanding of best
business practices in other companies and sectors around the
world and bringing this learning back to our business we have
increased our organisational knowledge and capability, which has
been integral to developing our ‘systems thinking’ approach to
operating our business. Our award-winning apprentice scheme,
coupled with our graduate recruitment programme, is helping to
ensure we can continue to attract and train up a high calibre of
engineers, in a profession which has seen declining numbers in the
UK in recent years.
All of our employees are paid at least the Living Wage as defined
by Living Wage Foundation and independent studies have shown
that this enhances the quality of work of staff, increases staff
retention, reduces absenteeism as well as providing societal
benefits. Management has a range of incentives which focus on
performance over a number of years, rather than just the current
year, to encourage the delivery of benefits over the longer term.
Our policies on maternity, paternity, adoption, personal and
special leave go beyond the minimum required by law. For
disabled applicants and existing employees, we are committed
to fulfilling our obligations in accordance with the relevant
legislation. Applicants with disabilities are given equal
consideration in the application process. Disabled colleagues
have equipment and working practices modified for them as far
as possible and wherever it is safe and practical to do so. We
also have procedures and policies in place to ensure we act in
accordance with the Universal Declaration of Human Rights.
We value diversity, providing equality of opportunity and
recruiting and promoting on merit, which we believe provides
the benefits of a more comprehensive and balanced skills-set.
Despite being a highly engineering-based organisation, women
are represented at all levels of our company, with one-third of our
combined board and executive team being female, as the charts
show below.
The health and safety of our employees is fundamental, most
importantly to the welfare of our employees but also to the
reputation and performance of our company. This continues
to be a significant area of focus as we strive for continuous
improvement We have implemented a number of initiatives over
recent years which have helped to reduce the employee accident
frequency rate, as detailed on page 38.
Our suppliers and contractors provide us with essential services
which we rely on to deliver our strategy and we work with those
whose business principles, conduct and standards align with our
own. Our key suppliers have committed to our Sustainable Supply
Chain Charter, further supporting the delivery of these benefits.
It is fair to say that our suppliers are contributing significantly
towards our c£9 billion forecast contribution to the regional
economy over the 2015–20 period.
Maintaining a good relationship with our key stakeholders such
as our suppliers, investors, regulators and customers is vital
for the success of our business. For example, on large capital
projects we work closely with our suppliers and by maintaining
a good relationship and working towards the same goals we can
help ensure the delivery of projects on time, to budget and with
minimum customer impact. Maintaining regular contact and
positive relations with investors may help encourage them to buy
or retain our shares or finance our future capital programmes.
Engagement with regulators may help positively influence
future policy. Our stakeholder relationships are influenced by
our reputation and so we try to ensure our strong values and
performance are accurately portrayed externally.
Group board
Executive team*
Senior managers
Wider employees
2
6
3
4
Male
75%
Female 25%
Male
57%
Female 43%
* Figures exclude CEO and CFO, who are included in group board figures.
9
2,209
38
Male
81%
Female 19%
3,411
Male
63%
Female 37%
Note:
There are 13 male (81 per cent) and 3 female (19 per cent) employees who are appointed as statutory directors of subsidiary group companies but who do not fulfil the
Companies Act 2006 definition of ‘senior managers’.
14
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Assets
Financing
Our fixed assets (including all our reservoirs, treatment works
and pipes) have a gross replacement cost of around £90 billion
which is the estimated amount it would cost for another company
to build similar assets and networks. However, it is not the
replacement cost of our assets upon which we are allowed to
earn a return, through our revenues. We earn a return on our
regulatory capital value (RCV), a regulatory measure of the value
of our capital base, which is currently just over £10 billion, so it is
this asset value which is more important economically.
We aim to maintain a robust and responsible capital structure,
balancing both equity and debt to achieve a strong investment
grade credit rating. Our proactive equity and credit investor
programmes allow us to engage effectively with investors. Issuing
new debt is particularly important as our capital investment is
largely financed through a mix of debt and cash generated from
our operations. We maintain access to a broad range of sources
of finance in a number of markets across which best relative value
is sought when issuing new debt.
Locking in long-term debt at good relative value can help keep our
finance costs low and enables us potentially to outperform the
industry-allowed cost of debt. Sustained low-cost finance across
the industry benefits customer bills. The average life of our term
debt is around 20 years. Our prudent financial risk management
policies covering credit, liquidity, interest rate, inflation and
currency risk help reduce the group’s exposure to the economic
and regulatory environment.
Pictured right: The European
Investment Bank is our largest
lender with over £2.0 billion
of debt and undrawn facilities,
including a new £250 million loan
signed in April 2016.
Many of our assets are long-term in nature – for example, our
impounding reservoirs have a useful economic life of around
200 years. By carefully reviewing our potential capital projects,
considering the most efficient long-term solutions, we can
save future operating costs, also helping to reduce future
customer bills and contributing to being able to operate in a
more sustainable manner. It is also important that we have the
right systems and procedures in place in order to monitor and
control the assets efficiently and effectively within our network.
Embracing innovation in our asset configuration and work
processes can help to make our future service better, faster or
cheaper.
Since privatisation in 1989, total capital investment of over £15
billion has provided substantial benefits to our customers and our
region’s environment as well as contributing to the North West
economy through job creation, both within our company and in
our supply chain. Disciplined investment, along with RPI inflation,
also grows our RCV, increasing future revenues.
We expect to invest around £3.5 billion across 2015–20 and
to continue with a substantial investment programme for the
foreseeable future in order to meet more stringent environmental
standards from the European Union and to maintain and
improve the current standards of our assets and services. When
deciding on our investment strategy we have to be mindful of
the impact on our customers’ bills and this is why, for example,
we are spreading some of the environmental spend required by
European legislation over the next 15 years.
Pictured right: Stakeholder manager Steve Wong, alongside our new
outfall pipe in Blackpool. The 2,000 tonne, one kilometre long pipe acts
as a release valve when the sewer system reaches its maximum capacity
when, for example, there is extremely heavy rainfall. The new pipe,
which took a week to arrive in Blackpool from Norway, is part of our £125
million investment programme along the Fylde coast to improve the
existing sewer network.
15
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
How we create value within our operating environment
Business
Insight
Investing in resilient services
Any provider of essential utility services, such as water, has
to be prepared for ‘shocks’ to the system, such as extreme
weather events. Responsible service providers prepare
on two fronts – first they invest in their assets so, as far as
possible, they continue to provide services to customers
when the shocks occur but, secondly, if those services are
interrupted, robust contingency plans exist to restore normal
operation as soon as possible.
’
This approach has characterised the company s planning for
resilience and is illustrated by specific investment projects
from AMP5. For example, between 2010 and 2015, 30 cross-
connections linking parts of the water network together
were installed to give greater flexibility to move water
around. At a larger scale, the £150 million West-East pipeline
between Manchester and Liverpool was completed, allowing
water from Wales to supply Manchester and supplies from
the Lake District to reach Liverpool, further integrating the
water network to improve its resilience.
This planning has extended to water quality. As well as
supplying Manchester, the Haweswater aqueduct delivers
water to places such as Accrington and Burnley. Ultraviolet
equipment has been installed where these supplies are
taken, improving treatment capability and reducing the
risk of water quality problems such as cryptosporidium.
When raw water quality, sourced from reservoirs, boreholes
and rivers, is affected in some way, we have piloted new
operational practices to ensure that when the water
treatment works first starts up again, this water does not
enter the distribution network.
As we moved from AMP5 to AMP6, we opened the new
digital’ brain of our operation, the Integrated Control Centre
‘
(the ICC, pictured below). As well as delivering customer
service benefits, the capabilities now available in the ICC
help us provide more resilient services. For example, we can
now better manage the movement of water supplies across
the region, balancing where that water is available with the
lowest cost of providing that water, ensuring we balance our
stocks and keep pressure off customer bills.
Investment in asset resilience will continue to 2020 and
beyond. We will invest in excess of £15 million to protect
water quality within our service reservoirs. The pilot at water
treatment works, to better manage water when works first
start up, will be extended across the region. In Cumbria, our
£300 million project to link the west of the county to the
regional supply network, scheduled for completion in 2022,
will provide more resilient supplies to over 150,000 people.
As we begin planning for the AMP7 investment period,
from 2020 to 2025, our approach will remain unchanged as
planning to deliver a resilient service is embedded in what
we do. Maintenance work is planned on the Haweswater
aqueduct following its first inspection in over 50 years in
2013. In addition, we will continue to build climate change
projections into our wastewater modelling and water
resource management plans to understand better possible
future ‘shocks’. Once a comprehensive review of the
resilience of our assets is complete, which takes into account
the experiences of the 2015 winter floods, we will develop
the next iteration of our asset resilience programme.
16
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
External environment
Natural
Whether it’s treating and delivering drinking water for our
customers, or returning treated wastewater to rivers and the
sea, the natural environment is fundamental to our business. We
continue to invest to protect and, where appropriate, enhance
the natural environment of the North West which, in turn, brings
economic benefits such as underpinning the region’s tourist
industry.
We plan far into the future to ensure we are prepared for the
changing natural environment, most notably the effects of climate
change. With severe dry periods becoming increasingly common,
we must ensure we continue to have resilient water resources
and an infrastructure capable of moving water efficiently around
the region. The potential effect of climate change on our future
water resources is included in our 25-year Water Resource
Management Plan.
We must tackle flooding incidents caused by the intensive bursts
of rainfall which are becoming more frequent due to changing
weather patterns. This was evident in December 2015, when
Honister in Cumbria broke existing UK records for the most
rainfall over a 24-hour period, with the consequential devastating
flooding across the region. More details on the flooding incidents
in December 2015 and how we responded are shown in the
business insight on page 35.
Additionally, we must ensure we are able to meet increased
demand on our sewerage network as the regional population is
expected to increase. A phased, long-term approach ensures that
the necessary work can be delivered whilst not placing too much
pressure on customer bills.
We have a responsibility to return water to the environment
safely. Spills from our network can lead to pollution which can
damage the natural environment and could lead to loss of
reputation and financial penalties, depending on their severity.
Our number of serious pollution incidents has decreased
over recent years and it is an important area of focus within
our 25-year Strategic Direction Statement. The Environment
Agency assesses water companies’ performance across a basket
of measures including pollution and its overall assessment is
included as one of our KPIs (see page 29) with all of the pollution
sub-measures also reported within our Corporate Responsibility
pages on our website at: corporate.unitedutilities.com/cr
environment.
We can make an important contribution to protecting and
enhancing the natural environment by using fewer natural
resources. We have been driving down our carbon footprint over
the last decade (22 per cent fall in CO2 emissions since 2005/06)
and have plans to reduce further going forward. Less than 10
per cent of our waste goes to landfill and our use of recycled
products is increasing. We are increasing our renewable energy
production with plans to almost double our renewable energy
production from 2015 to 2020, the main contributor being solar
opportunities. This will provide environmental benefits and add
value to shareholders through energy cost savings.
Economic
Changes in the economy, such as inflation, interest rates or
unemployment levels, can influence our ability to create value.
Whilst outside of our direct control, we can mitigate some of the
potential adverse impact associated with market movements,
such as on inflation and interest rates, through our hedging
strategies.
In recent years, unemployment in the North West has generally
been higher than the national average. However, over the last
year the North West unemployment rate has improved faster
than the national average and is now broadly in line. A report
from the Department for Communities and Local Government,
published during 2015/16, reaffirmed that the North West
continues to have more of the most deprived areas in England
than any other region. Even as the North West economy recovers
it is unlikely to have a significant impact on deprivation, which
is the principal driver of our higher than average costs to serve
our household customers. This is currently recognised by Ofwat
through a special allowance for deprivation of £20 million per
annum over the 2015–20 period.
Bad debts remain a risk to which we are exposed, particularly
with the continuing tightening of real disposable incomes and the
impact of recent welfare reforms likely to intensify. Whilst our
debt management processes have been externally benchmarked
as efficient and effective, we will continue to refine and enhance
them whilst also helping customers back into making regular
payment through use of manageable payment plans.
Interest rates have remained below the long-term trend and
we have benefitted from this as we drew down or raised over
£600 million of new debt in 2015/16. Comparatively low interest
rates have also been beneficial to our future cost of debt as we
continue with our interest rate hedging strategy.
Despite picking up recently to 1.6 per cent at March 2016, RPI
inflation has been relatively low over the last couple of years,
impacted by the falls in oil and commodity prices. The prices we
charge our customers (and therefore revenues), as well as our
asset base, are linked to RPI inflation, so lower RPI has meant
slightly lower growth on these measures.
17
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT How we create value within our operating environment
Business
Insight
Systems thinking
Underpinning our improving operational performance is our
drive toward ‘systems thinking’ based on four key themes:
–
improving the reliability of our assets with the
object of reducing unplanned, and therefore costly,
service interruptions;
–
improved use of data at local asset level and
centrally for performance optimisation;
– adopting a systems approach to our regional water
system and wastewater drainage areas to optimise
cost and service performance; and
– resource allocation to production teams with full
accountability for asset and system performance.
We are investing in this regulatory period in our new
wholesale operating model and are progressing rolling out
of this radically different capability. Our production line
model is well established and last April we opened our new
integrated control centre (ICC). This is increasingly becoming
a central hub for planning and control of our operations and
proved to be a tremendous asset during our handling of the
major incidents we had to address last year.
Our new telemetry backbone has been successfully
installed across our estate with only a small number of sites
to complete. This provides the ‘data highway’ between
our sites and the ICC, enabling enhanced monitoring and
intervention.
We have full regional production planning up and running
for both water production and sludge processing, supported
by more enhanced decision-making systems capability at
site level.
We are in the final stages of testing of our new maintenance
system, providing more effective tasking of field
engineering. We have also improved asset availability.
And, we are also using more sensors in our network and
better analysing other data, such as weather forecasting,
to help reduce costs and improve operational performance
and, importantly, prevent issues before they impact the
customer.
This is all supported by our digital strategy in which we have
already seen our IT systems overhauled and for which data
and its exploitation becomes central to our thinking.
Our ‘systems thinking’ approach is expected to deliver
benefits of over £100 million across the 2015-20 regulatory
period, which were already built into our business plan
assumptions.
However, we also have a large quantity of index-linked debt which
means our finance costs decrease as inflation falls, providing
a partial economic offset to revenue (although this is not a
perfect hedge as changes to revenue and index-linked finance
costs are based on differing lagged measures of inflation). Our
pension liabilities are also linked to inflation, which provides an
additional economic offset against our asset base. Overall, we
are currently more inflation-hedged than the other listed water
and wastewater companies so we are better protected in a low
inflation environment.
Read more on Principal risks
on pages 46 to 49
United Utilities’ total forecast contribution to the regional
economy over 2015–20 is estimated at £9 billion. Direct economic
contributions from our activities include the purchase of goods
and services and providing extensive employment. There is
also an indirect economic contribution, for example when our
suppliers, in turn, make purchases from their suppliers and when
people whose jobs are supported by United Utilities spend their
personal incomes.
Technological
Advances in technology can be used to help deliver improvements
in the quality or cost of our service. Embracing innovation, using
modern technology or techniques, is at the heart of how we do
business. Our ‘systems thinking’ approach across the wholesale
business is a key example of this.
Read more on this approach in our
Business insight in the column on the left
We have also been utilising technology within our energy self-
generation. For example, our Davyhulme sludge recycling centre
employs a ground-breaking configuration of thermal hydrolysis
to maximise energy generation from sludge and won an Annual
Institute of Chemical Engineers award for innovation in 2013/14.
During 2015/16, we built Europe’s largest floating solar array
system on our Godley reservoir, more details of which are shown
within our business insight on page 37.
We also have to be mindful of our customers’ ever increasing
use of technology. We have recognised the increasing power of
social media as communication channels for customers in doing
business with us and we recently completed investment in a
new digital external communications capability and a number
of website improvements. This proved invaluable in handling
the unprecedented increase in communication necessary with
customers during the Lancashire water quality incident in
summer 2015.
Technological advances give rise to greater risks as well as
presenting opportunities. Cyber-crime has been on the increase
in recent years and, as the holder of customer information, is a
threat we take very seriously.
Read more on Principal risks
on pages 46 to 49
18
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Political and regulatory
Over a long time frame the political and regulatory environment
can change significantly. In the 27 years since the water
industry was privatised by the UK Government, we have seen
substantial tightening of laws and regulations. Whilst to some
extent, changes to the regulatory environment are outside of
our direct control, maintaining a good reputation is important
to enable positive participation in regulatory discussions. By
positively engaging and using our industry knowledge, we can
help influence future policy with the aim of achieving the best
outcome for our customers, shareholders and other stakeholders.
Economic regulation
The water industry currently operates within five-year planning
cycles known as Asset Management Plan (AMP) periods. Prior
to the start of each five-year period, companies submit their
business plans which include their projected expenditure in
order to enhance and maintain their assets. Following review of
these plans, Ofwat sets the prices each company can charge their
customers across the period. We have just finished the first year
of the 2015–20 (AMP6) period.
Ofwat introduced a number of important changes for the 2015–
20 price review, with the aim of evolving the sector in order to
meet future challenges and placing greater focus on customers’
needs.
Moving away from one single price control, there are now four
separate price controls:
– wholesale water, covering the physical supply of water;
– wholesale wastewater, covering the removal and treatment of
wastewater;
– domestic retail, covering customer-facing activities (principally
customer contact, billing, meter reading and cash collection)
for household customers; and
– business retail, covering customer-facing activities for business
customers.
Separate retail price controls should provide retail businesses
with greater incentives and focus on delivering more efficient
service to business customers as competition expands, and also
to household customers under a new industry average cost to
serve approach.
The way companies’ operating and capital costs are assessed
has been modified to encourage companies to utilise the most
efficient, sustainable solutions under a new ‘totex’ model. Where
companies outperform their totex allowance, this gain would be
shared between investors and customers, ensuring both receive
the benefit.
There was also a move to a more outcomes-based approach,
with greater emphasis being placed on customer engagement to
agree the outcomes. Companies’ performance will be measured
through a range of outcome delivery incentives (ODIs) covering a
wide range of measures assessing operational and environmental
performance, with associated rewards or penalties.
Ofwat’s SIM assessment is continuing, which will reward companies
who perform well on customer service, or penalise companies who
perform badly, relative to other water companies.
Each year all water companies are required to publish an annual
performance report, the first of which is due in July 2016 and
our report will be made available on our website at corporate.
unitedutilities.com.
Ofwat (the Water Services
Regulation Authority) is the
economic regulator of the
water and sewerage sectors
in England and Wales,
responsible for ensuring the
companies provide customers
with good-quality, efficient
service at a fair price.
Read more online at
www.ofwat.gov.uk
Changes in regulation opening up
the competitive arena
Currently only very large business customers are allowed to
choose their water supplier. Under this arrangement, the new
water supplier would buy water directly from the regional
water company and be allowed to use its network for this
water supply. Although very few users have switched supplier
in England, the 2014 Water Act aims to open up future retail
competition to all business customers, including sewerage as
well as water services from 2017. We are well positioned for
this expansion of competition following our experiences in the
Scottish market and our recently announced joint venture with
Severn Trent, combining our business retail businesses (see
page 31 for more details on this joint venture).
Following a request from government, Ofwat is currently
assessing the potential costs and benefits of extending retail
competition to household customers, with a paper scheduled
to be published in the next few months. Ofwat expects to
factor in the UK Government’s conclusions and decisions in
this area at its next price review in 2019.
The Water Act also paves the way for the future introduction
of competition for certain parts of the wholesale, or upstream,
business. Following this, Ofwat proposed, in its Water
2020 consultation document in December 2015, to open
up competition in the areas of water resources and sludge
treatment from 2020. We are fully engaged with regards to
market reform, being always mindful of the potential impact on
our customers and the value implications for our shareholders.
19
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
How we create value within our operating environment
Social
We see some significant societal trends that we plan to address
in our long-term strategy. We anticipate an increase in the North
West population of around 600,000 by 2040 (more than the
population of a large city such as Liverpool). We are planning
to ensure our services and supporting infrastructure meet the
needs of this growing population, which will include a higher
proportion of older people. The North West remains the most
socially and economically deprived region in England and so we
can anticipate continued hardship for a number of communities
and difficulties for some customers in paying their bills. We will
remain committed to supporting these customers through a suite
of payment assistance schemes and looking at new ways to help,
like the introduction of our social tariff in 2015, supporting elderly
customers. We are also adapting to the increasing use of social
media from our stakeholders.
Read more on Technological external
environment on page 18
The communities in which we operate are of great importance
to our business – it is where our customers and employees live
and work. We continue to invest in our local communities both
financially and through employee volunteering. We recognise the
effect that our operations can have on the community and invest
in programmes that support affected areas or help tackle current
social issues.
Pictured: Outreach manager Carole Quinn (right) from United Utilities
and Moira Osborne from Age UK Rochdale help to promote our new
social tariff (entitled 'Help to Pay'). The scheme caps water bills for low
income pensioners who may be struggling to pay their water bill and our
partnership with Age UK Rochdale is helping to increase awareness of our
social tariff directly to those customers who will benefit from this scheme.
Environmental and quality regulation
The water and wastewater industry in the UK is subject to
substantial domestic and European Union regulation, placing
significant statutory obligations on water and wastewater
companies with regard to, among other factors, the quality of
drinking water supplied, wastewater treatment and the effects of
their activities on the natural environment.
Defra is the UK Government department
responsible for water policy and regulations
in England and Wales; it also sets drinking
water quality and environmental standards
(many based on European law) which water
companies must meet. www.gov.uk/defra
The Environment Agency controls how much
water can be drawn from the environment
and the quality of water returned to rivers
and the sea. The EA produces an assessment
of water and wastewater companies’ annual
performance, and we include this as one of our
KPIs, see page 29. www.gov.uk/government/
organisations/environment-agency
The Drinking Water Inspectorate is
responsible for ensuring compliance with
the drinking water quality regulations.
www.dwi.gov.uk
Natural England is responsible for the
protection of designated sites for nature
conservation, for example Sites of Special
Scientific Interest. Companies are required
to manage these sites and to protect and
enhance biodiversity.
www.naturalengland.org.uk
The Consumer Council for Water (CCW)
represents customers’ interests relating
to price, service and value for money. It
also investigates customer complaints.
Customers who remain dissatisfied can refer
their complaint to be adjudicated by an
independent service, WATRS (see below).
www.ccwater.org.uk
WATRS is an independent service designed
to adjudicate disputes that have not been
resolved through the water company’s
customer service teams or by referring the
matter to the Consumer Council for Water.
www.watrs.org
20
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Internal environment
Governance
Culture
We operate under the three core values of integrity, innovation
and customer focus. Acting with integrity, both at board level and
as a company, underpins our approach to responsible business
and building trust. Our employees are integral to value creation
and we actively encourage our people to express their opinions
and views, through, for example, our annual ‘Your Opinion
Survey’.
Innovation is a critical enabler in creating value, helping to
keep us ahead of our competitors. Our employees are given
the opportunity to develop and present their ideas to senior
management, facilitating an innovative environment. Utilising
innovation from our suppliers is part of our supply chain
approach, which also provides another avenue to benefit from
new ideas and technologies.
Over recent years, we have instilled a more customer-centric
approach right across our organisation and this evolving culture
has been a key driver to the major improvements in customer
service we have been able to deliver. Putting customers right
at the heart of what we do has also helped deliver benefits for
shareholders and wider stakeholders.
Good governance lies at the heart of all successful organisations
and leads to better management decisions as well as helping
to avoid exposure to potential risks. We strive to operate in
a manner that reflects the highest standards of corporate
governance. Our company structure and governance standards
are designed to ensure that our board continues to provide sound
and prudent governance in compliance with the principles of the
UK Corporate Governance Code.
As you would expect of the provider of an essential service, we
adopt a prudent approach to managing risks to our business. That
being said, accepting some level of risk is a normal consequence
for a commercial organisation. Also, given the complex legal and
regulatory environment within which we operate, there is a range
of risks to which we are exposed. Risks can be in the form of
possible non-compliance with existing laws or regulations or failure
to meet the terms of our current 2015–20 regulatory contract.
We also face risks in relation to potential future changes in
legislation or regulation.
An important risk to our business is ensuring that we get the
constituent elements of our five-yearly business plans correct to
ensure our financeability, and that they are agreed by Ofwat in
its final determination, as we are bound by these plans for the
following five-year period with limited opportunity to change
them. See pages 46 to 49 for more details on what we consider to
be our top risks.
Identifying and then being able to act upon potential
opportunities can be a key determinant for adding value. Each
quarter, senior management across each main area of the group
routinely undertakes business reviews, including the identification
and evaluation of potential opportunities.
The governance section of the annual report on pages 50 to 109
presents information on the board of United Utilities and its
activities and those of the various board committees. It also sets
out how the board demonstrates leadership, effectiveness and its
accountability to the company’s stakeholders.
21
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
How we create value within our operating environment
Our business model
EVIE W
R
Wholesale
Water
Domestic
Retail
Wholesale
Wastewater
Business
Retail
D
O
P
L
A
N
(
2
5
,
5
,
1
y
e
ar)
In line with Ofwat’s evolution from one single price control to four
(see political and regulatory environment on page 19), we have
structured our business into four distinct areas: Wholesale water;
Wholesale wastewater; Domestic retail; and Business retail.
Each business area undertakes both long-term and shorter-term
planning to identify how it can best deliver its outcomes. We
adopt an integrated approach which considers a whole range of
stakeholders including customers, investors, the environment,
our employees and local communities. These plans also take into
account the internal and external factors described on pages 17
to 21. Underpinning our approach to planning, we undertake a
cycle of continuous assessment using KPIs and other performance
measures which helps formulate future plans, with a view to
delivering further improvements for our various stakeholders.
All the group’s RCV of just over £10 billion sits within the
wholesale water and wholesale wastewater business areas and
we are allowed to earn an annual return on this asset base based
on an industry-allowed cost of debt and equity, set by Ofwat.
Allowed costs for both wholesale price controls are determined
by Ofwat using its totex cost assessment models. Our cost
performance against our allowed cost of debt and totex will
determine how much outperformance or underperformance
we generate.
Allowed costs within the domestic retail price control are
determined using a water industry average cost to serve
approach, rewarding companies who are able to achieve costs
below industry average costs. The business price control is being
increasingly opened up, with full competition expected from
2017, providing a strong incentive for water companies to deliver
efficiencies and service improvements in this area.
What we aim to do:
We will adopt all
private pumping
stations
We will be ready when
full retail competition
for business customers
is introduced
Over 90% of
meters will be
automatically
read
We will reduce
by more than
40% the number
of properties
flooded internally
by sewage
We will continue
to improve bathing
waters to at least
‘sufficient’ or ‘good’
status
We will extend our
integrated water
supply network into
West Cumbria
7
1
0
2
0
2
0
2
+
0
2
0
2
5
2
0
2
6
1
0
2
22
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Planning
Planning – 25 years+
In order to maintain a reliable, high quality water service for our
customers in the future, we have to look a long way ahead and
anticipate those changes and core issues that are likely to impact
on our activities. Our long-term strategy helps us to define what
we need to deliver over the shorter term, which in turn helps to
create value.
In the next 25 years, we will face many challenges and
opportunities including:
– climate change and its implications for water resources
and flooding;
– the emergence of a more open, competitive UK water market;
– more rigorous environmental regulations; and
– the ever-present need to combine affordable bills with a
modern, responsive water and wastewater service.
By anticipating these changes we can ensure that we continue
to deliver what customers want at a fair price and in a
responsible way.
Our Strategic Direction Statement, ‘Playing our part to support
the North West’ (which can be downloaded at corporate.
unitedutilities.com/future), sets out our long-term strategy for
the next quarter of a century. It examines the challenges ahead
and explains how we will focus our resources and talents in order
to meet them. We consulted with thousands of customers and
stakeholders to ensure their expectations are reflected in our plans.
Some of the key ways we create value over this longer time frame
are by:
–
investing in our people to ensure a committed, capable and
motivated workforce which delivers high performance;
– close collaboration with suppliers;
– efficiently implementing a robust and appropriate mix of debt
and equity financing;
– disciplined investment, based on a sustainable whole-life cost
modelling;
– embracing innovation to make our future services better,
faster or cheaper;
–
long-term planning and management of water resources –
25-year Water Resource Management Plan;
– responding to climate change; and
– sustainable catchment management.
Planning for future water demand
Our 25-year Water Resource Management Plan sets out the
investment needed to ensure that we have sufficient water
to continue supplying our customers, taking into account the
potential impact of climate change.
Read more online at
unitedutilities.com/waterresourcesplan
We will improve all
inland rivers to be at
least ‘good’ status
We will work with
others to achieve
‘Blue Flag’ beaches
along our coastline
We will serve
600,000 more
households in the
North West
We will install 3 million
extra water meters
covering 76% of
households
7
2
0
2
0
3
0
2
0
4
0
2
23
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
How we create value within our operating environment
Planning – 5 years
Each five-year investment period is designed to help us achieve
our longer term vision.
By submitting a robust, balanced plan to Ofwat prior to the
start of each five-year regulatory period, we can help ensure
we receive a regulatory contract that allows for the best overall
outcomes for our customers, shareholders and the environment.
Once each five-year regulatory contract is set, we create value
principally by delivering or outperforming it by providing the
best service to customers, at the lowest sustainable cost and in
a responsible manner.
Our five-year plan for 2010–15 was focused on improving
customer satisfaction, meeting our statutory obligations and
delivering shareholder value and we delivered on all fronts. We
were the most improved water company as measured in Ofwat’s
SIM assessment, with customer complaints down approximately
75 per cent over 2010–15. We achieved upper quartile
performance on Ofwat’s and the Environment Agency’s respective
KPIs in both 2013/14 and 2014/15, met our annual leakage target
each year and retained our ‘World Class’ status in the Dow Jones
Sustainability Index. Our outperformance was generated mainly
through efficiency savings on operating and capital expenditure
and, in particular, by securing debt costs at below Ofwat’s allowed
industry cost of debt. For our shareholders, we delivered a strong
total shareholder return of 115 per cent, outperforming the
market. Our good performance over 2010–15 has provided a
strong platform to deliver further value over the 2015–20 period.
For the 2015–20 regulatory period, some of the key ways in which
we are aiming to create value are summarised below:
–
improving customer service, which will improve efficiency,
reduce costs and reduce potential penalties/increase rewards
from Ofwat, under its service incentive mechanism (SIM);
– enhancing our debt collection activities, which will reduce
our retail costs. Alongside this, we continue to provide
comprehensive support for customers struggling to pay;
– raising low-cost finance, which helps us outperform the
finance costs allowed in our regulatory contract. This is our
main area of outperformance potential in the 2015–20 period.
–
implementing our hedging strategies, such as fixing medium-
term interest rates and power costs, to reduce the volatility of
these costs, helping us meet our regulatory contract;
– minimising total costs on a sustainable basis, such as on
power, materials and property rates, which helps us meet or
outperform totex costs allowed in our regulatory contract;
– delivering our operational and regulatory commitments,
which helps ensure we achieve high levels of customer service
and meet environmental standards. Our performance can
also result in potential financial rewards or penalties such as
those linked to our outcome delivery incentives (ODIs), which
include reliably delivered high-quality water and reducing
pollution and sewer flooding incidents;
– maintaining a robust supply and demand balance, which
provides water resource and customer supply benefits and
avoids any penalties or unfunded expenditure requirements
from our regulators; and
–
increasing our production of renewable energy from waste,
which helps protect us from rising energy costs and reduces
our carbon footprint.
Supporting this value generation, each of our
four business areas has plans over 2015–20 to
deliver as follows:
Wholesale water
– maintain existing high levels of reliability in the delivery of
day-to-day water services, making better use of technology
to monitor remotely and control more of our source-to-tap
assets;
– maintain existing high levels of water quality as measured at
customers’ taps and our water treatment works;
– reduce the number of contacts from customers regarding
water quality;
– maintain leakage at or below the sustainable economic level;
–
limit the impact on customers of increases in operating costs,
such as chemicals and rates, by making cost savings elsewhere
through the continuous improvement in the efficiency of our
operations; and
– commence work to link 150,000 customers in West Cumbria
to Thirlmere reservoir to ensure a long-term, reliable supply of
drinking water and to support the sensitive ecology in that area.
Wholesale wastewater
– build on the customer satisfaction improvements we have
already delivered. We will continue to improve the way
we operate our wastewater business, making better use of
technology, automation and control to drive better customer
service at reduced cost;
– reduce the number of our customers’ properties exposed to
sewer flooding by over 40 per cent, seeking opportunities to work
in partnership with others to deliver schemes cost-effectively and
promote the use of more sustainable drainage systems;
–
improve the region’s bathing waters, in light of tougher
regulatory standards;
– work with other organisations to support them in delivering
improvements to our region’s beaches;
–
–
improve the water quality in the North West’s rivers and lakes
through investment in our treatment works and at overflows,
reducing pollution. We are engaging with stakeholders to
explore innovative catchment management techniques to
control diffuse pollution in our catchments;
increase our production of renewable energy from waste to
help protect customers from rising energy costs and reduce
our carbon footprint; and
24
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Planning – 1 year
Each financial year we develop a business plan, approved by
the board, which sets our annual targets to help deliver further
improvements and move us towards achievement of our five-year
goals. This business plan covers a broad range of measures across
the three strategic areas of best service to customers, lowest
sustainable cost and responsible manner. Senior management has
quarterly business review meetings with the executive directors
to monitor and assess performance to help ensure we are on
track to deliver our targets.
At the end of every financial year, our performance is assessed
against this basket of measures and this determines employees’
annual bonuses right through the organisation. As well as
annual targets, our directors are assessed against three-year
performance covering total shareholder return, sustainable
dividends and customer service through long-term incentive
plans. Details of the 2015/16 annual bonus and vested long-term
incentive plans for our executive directors are shown on pages 92
and 94 respectively within the remuneration report.
Pictured below: United Utilities key customer manager Jill McGrath with
Steve Woods, Environmental and Health & Safety Technologist at Dairy
Crest. Our key customer managers play an important role in helping to
develop strong relationships with our commercial customers, acting as the
first point of contact to resolve any service issues and offer advice around
leakage detection and water efficiency.
– constrain costs associated with taking responsibility for all
private sewers and private pumping stations across the region,
through improvements to our operating model and efficient
delivery of our programme.
Domestic retail
– continue to improve the customer experience by being more
proactive with customers, anticipating problems before they
materialise and improving our communication channels so
that we are easier to do business with;
– reduce further the number of customer complaints and
to resolve them whenever we can, avoiding the need for
complaints to be referred to the Consumer Council for Water;
– reduce the debt burden on the company and its customers by
engaging with those who are struggling to pay, helping them to
return to sustained payment behaviour. We are extending our
options for assistance to hard-pressed customers, developing
a new social tariff from 2015, and we remain committed to
contribute annually to the United Utilities Trust Fund, which
has proven effective in helping customers in difficulty return to
regular payment; and
– reduce the cost to serve our customers through systems and
process improvement. This is particularly important under
the new price control methodology which uses an industry
average retail cost to serve to determine part of customer bills.
Business retail
– build stronger relationships with customers to develop tailored
plans to meet their needs;
– give customers greater choice in how they contact and
transact with us;
–
–
increase first point resolution and case ownership, reducing
cost to serve and improving customer satisfaction;
install meters in all business customer premises that give
automated meter reads (AMR) to facilitate billing for actual
consumption; and
– offering value-add additional services such as leakage
detection and repair and ways in which to reduce water use.
We are already starting to plan for the next price review which
will cover the 2020–25 period in order to achieve the optimal
plan for our stakeholders. In light of the 2014 price review, a key
area of focus is to compile more robust evidence to support our
cost requirements reflecting our significant regional differences.
For example, we have a higher proportion of industrial customers
whose potent wastewater is more expensive to treat. We also
have many designated sites of environmental importance, such as
the Lake District, which requires us to treat wastewater to higher
standards.
25
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
How we create value within our operating environment
Outcomes
By delivering our strategy in both the long and shorter term we aim to deliver the following key outcomes for our stakeholders:
The best service
to customers
Lowest
sustainable cost
Responsible
manner
Provide great water
– Drinking water is safe and clean
Give value for money
– Customer bills are fair
– Customers have a reliable supply of
– We support those customers who are
water now and in the future
struggling to pay
Dispose of wastewater
– Wastewater is removed and treated
without customers ever noticing
– The risk of sewer flooding for homes
and businesses is reduced
Deliver a service customers
can rely on
– Customers are highly satisfied with our
service
– Customers find it easy to do business
with us
– The North West’s economy is
supported by our activities and
investment
Improve efficiency
– Our services are provided in an
increasingly efficient way
– Efficiencies are delivered in a
sustainable way taking a long-term
view
Protect and enhance the
environment
– The natural environment is protected
and improved in the way we deliver our
services
– The North West’s bathing and shellfish
waters are cleaner through our work
– Our services and assets are fit for a
changing climate
Support local communities
– We invest in community partnerships
for mutual benefit
– Our employees make a positive
contribution to local communities
Support employees in a safe
workplace
– Provide safe, secure working conditions
– Provide competitive rewards to attract
and retain employees
– We invest in the learning and
development of our employees
Provide an appropriate risk and return for investors
Outcome: Give value for money
–
customer bills are fair
Our households currently pay just
over £1 per day on average for the
combined water and wastewater
services we provide. Our price
determination for 2015–20 means
customers will benefit from below
inflation increases to average
household bills for the decade to 2020.
26
)
£
(
l
l
i
l
b
d
o
h
e
s
u
o
h
e
g
a
r
e
v
A
Average household bill*
600
500
400
300
200
100
0
0
1
/
9
0
0
2
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
4
1
/
3
1
0
2
5
1
/
4
1
0
2
6
1
/
5
1
0
2
7
1
/
6
1
0
2
8
1
/
7
1
0
2
9
1
/
8
1
0
2
0
2
/
9
1
0
2
*Assumes 3% p.a. RPI inflation from 2017/18 to 2019/20
RPI
Average household bill
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
27
slugline Our key performance indicators (KPIs) 2015–20
To help measure our progress on how well we are adding value
for our stakeholders and delivering the outcomes described on
page 26, we focus on a range of financial and operational KPIs, as
defined below. These KPIs are set for the five-year period of our
short-term planning horizon and encompass the important areas
of customer service and environmental performance, as well as
financial indicators, taking into consideration the interests of all
of our stakeholders. Strong performance across these KPIs would
indicate that our strategy is delivering on our targeted outcomes,
helping us on our path to reaching our long-term strategic goals.
Our operational KPIs have evolved to reflect the move to a
totex price control for the 2015–20 regulatory period, with a
totex outperformance measure replacing the previous separate
opex outperformance and capex outperformance measures.
We now include an outcome delivery incentive (ODI) KPI in our
wholesale business to monitor our performance against these
important new operational measures. This replaces the previous
serviceability KPI which is incorporated within the ODI measures.
With the retail household price control now being separated,
we have introduced a new KPI to measure our costs in this
area. In the business retail price control, with the expansion of
competition, we have included a new KPI measuring the impact
of customer gains and losses.
Our financial KPIs are the same as for the previous year except
that we will no longer be including capital investment specifically
due to Ofwat’s move away from opex and capex and into the new
totex based price control for 2015–20.
Our executive bonuses and long-term incentives are intrinsically
linked to our financial and operational performance KPIs as
highlighted in the remuneration report on pages 82 to 101.
Financial KPIs
In respect of our financial KPIs, we use underlying profit measures as these enable more meaningful comparisons of the year-on-year
performance of our business.
KPI
Revenue
Definition
A definition of revenue is included within the ‘Accounting policies’ note
on page 155
Performance
£1,730m +0.6%
15/16
14/15
13/14
12/13
11/12
Underlying
operating
profit
Underlying
earnings per
share
The underlying operating profit measure excludes from the reported operating
profit any restructuring costs and other significant non-recurring items. The group
determines adjusted items in the calculation of its underlying operating profit measure
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 the
current year performance. A reconciliation is shown on page 44
£604m -9.1%
15/16
14/15
13/14
12/13
11/12
This measure deducts underlying net finance expense and underlying taxation
from underlying operating profit to calculate underlying profit after tax and
then divides this by the average number of shares in issuance during the year.
Underlying net finance expense makes adjustments to the reported net finance
expense, including the stripping out of fair value movements. Underlying taxation
strips out any prior year adjustments, exceptional tax or any deferred tax credits or
debits arising from changes in the tax rate from reported taxation. Reconciliations
to the underlying measures above are shown on page 44
47.7p -8.1%
15/16
14/15
13/14
12/13
11/12
Dividend per
share
This measure divides total dividends declared by the average number of shares in 38.45p +2.0%
issuance during the year
15/16
Group net debt (including derivatives) divided by UUW’s regulatory capital value
(Ofwat’s published RCV in out-turn prices)
Our target range is 55% to 65%
Gearing:
net debt to
regulatory
capital value
28
14/15
13/14
12/13
11/12
61% +2.0%
15/16
14/15
13/14
12/13
11/12
£1,730m
£1,720m
£1,689m
£1,636m
£1,565m
£604m
£664m
£635m
£604m
£594m
47.7p
51.9p
44.7p
38.7p
35.3p
38.45p
37.70p
36.04p
34.32p
32.01p
61%
59%
58%
60%
59%
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Operational KPIs
These operational KPIs feed through from our three strategic themes: the best service to customers; at the lowest sustainable cost; and
in a responsible manner.
Company objective/KPI Definition
Best service to customers
Wholesale outcome
delivery incentive
(ODI) composite
Service incentive
mechanism –
qualitative
Net reward/(penalty) accrued across United
Utilities’ 19 wholesale financial ODIs
Ofwat derived index based on quarterly customer
satisfaction surveys, measuring the absolute and relative
performance of the 18 water companies (previously 19
in 2014/15). Each company receives a score in the range
of zero to five, with five being the highest attainable
score
Service incentive
mechanism –
quantitative
Business retail
customer growth
Ofwat derived composite index based on the
number of customer contacts, assessed by type,
measuring the absolute and relative performance of
the 18 water companies (previously 19 in 2014/15).
Each company receives a SIM point total, where the
lowest score represents the best performance
Amount of additional annualised revenue from
winning customers from other water retail providers
less the amount of revenue lost from losing
customers to other water retail providers
Lowest sustainable cost
Totex
outperformance
Progress to date on delivering our promises
to customers within the cumulative 2015-20
wholesale totex final determination allowance
Financing
outperformance
Progress to date on financing expenditure
outperformance secured versus Ofwat’s industry
allowed cost of debt of 2.59 per cent real over
the 2015–20 period
Domestic retail cost
to serve
Cost to serve in our domestic retail business
compared with Ofwat’s revenue allowance
Responsible manner
Leakage – average
annual leakage
Average annual water leakage from our network
quantified in megalitres per day
Environment Agency
performance
assessment
Composite assessment produced by the
Environment Agency, measuring the absolute
and relative performance of the 10 water and
wastewater companies across a broad range of
areas, including pollution
Target
Performance
Range of +£30m to
-£70m over 2015–20
2015/16: £2.5m net reward
ODIs only introduced in 2015/16 so no prior year
comparators
To move towards the
upper quartile in the
medium-term
15/16
14/15
4.27
4.24
Sector best
Sector worst
New methodology for 2014/15, hence no prior
year comparators
To move towards the
upper quartile in the
medium-term
15/16
14/15
95
99
See note 1 below
Sector best (see note 2)
Sector worst (see note 2)
New methodology for 2014/15, hence no prior
year comparators
15/16
14/15
13/14
12/13* £0m
£18m
£15m
£10m
*Scottish licence granted in 2012/13
To meet Ofwat’s
final determination
totex allowance
2015–20: On track to meet the final
determination allowance
Totex new measure for 2015-20 period hence no
prior years’ comparators
To beat Ofwat’s
industry allowed
cost of debt
2015–20: On track to beat Ofwat
allowance
2010–15: Exceeded £300m target
To minimise costs
compared with
Ofwat’s revenue
allowance
2015/16: £10m outperformance
Domestic retail allowance first introduced by
Ofwat for 2015-20 period hence no prior years’
comparators
To meet our
regulatory leakage
target, as set by
Ofwat
To be a first quartile
performer on a
consistent basis
2015/16: 463Ml/d - Met target
2014/15: 454Ml/d – Met target
2013/14: 452Ml/d – Met target
2012/13: 457Ml/d – Met target
2011/12: 453Ml/d – Met target
14/15*
2nd
2nd
13/14
12/13
11/12
10/11
2nd
3rd
7th
*2014/15 latest available assessment
2015/16: ‘World Class’
2014/15: ‘World Class’
2013/14: ‘World Class’
2012/13: ‘World Class’
2011/12: ‘World Class’
Dow Jones
Independent rating awarded using sustainability
Sustainability Index metrics covering economic, environmental, social Class’ rating each
rating
and governance performance
To retain ‘World
year
Our performance and the progress we have made against our objectives and their associated KPIs are included within the business
performance section on pages 30 to 45.
Note 1: No target set due to the proposed joint venture of United Utilities’ and Severn Trent’s non-household retail businesses.
Note 2: Sector best and worst on quantitative SIM based on datashare of 10/19 water companies for 2014/15 and 13/18 water companies for 2015/16 (based on nine
months of actuals).
29
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
Our performance 2015/16
Full year results for the year ended 31 March 2016
Continuing operations
Revenue
Underlying operating profit(1)
Operating profit
Total dividend per ordinary share (pence)
RCV gearing(2)
Year ended
31 March 2016 31 March 2015
£1,720.2m
£664.3m
£653.3m
37.70p
59%
£1,730.0m
£604.1m
£567.9m
38.45p
61%
(1) Underlying profit measures have been provided to give a more representative view of business performance and are defined in the underlying profit measure tables on
page 44.
(2) Regulatory capital value or RCV gearing calculated as group net debt/United Utilities Water’s RCV (outturn prices).
(3) Time; Cost; Quality index (TCQi), which is an internal measure of the overall effectiveness of delivery of the capital investment programme (shown below).
Strong operational and environmental
performance
– Accelerated investment to deliver early operational benefit;
£799 million invested in 2015/16 and TCQi(3) at 90 per cent
‘Water Plus’ business retail JV with Severn
Trent approved by the CMA
– First mover advantage and economies of scale, ahead
of full market opening in 2017
– £2.5 million net reward achieved for 2015/16 on outcome
delivery incentives
Good financials
– Underlying operating profit down 9 per cent at £604 million,
– Benefitting from ‘systems thinking’ operational approach
as expected
and improved resilience of network
– Lower underlying net finance expense: benefit of lower
– Retained Dow Jones Sustainability Index ‘World Class’ rating
cost fixed debt and lower RPI inflation
– Robust capital structure with RCV gearing at 61 per cent,
comfortably within our target range of 55 per cent to
65 per cent
– Final dividend of 25.64 pence per share (total for the year
38.45 pence), an increase of 2 per cent in line with policy
and sector leading status
Further improvements in customer
satisfaction
– Service incentive mechanism score improved compared
with last year
– Customers continue to rate us very highly on wastewater
services
Implementing efficiency plans to
eliminate totex gap
– Business plan initiatives in place to meet totex allowance
– Good progress achieved in first year of the five-year
regulatory period
30
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Operational performance
United Utilities aims to deliver long-term shareholder value by
providing:
–
The best service to customers
–
At the lowest sustainable cost
–
In a responsible manner
Best service to customers
Customer service – our continuing strong focus on dealing
effectively with customer enquiries has helped us deliver
substantial improvements in our performance over recent years
and this was recognised by Ofwat in the final determination, with
United Utilities averting a possible revenue penalty for the 2015–
20 period. This is also reflected in a reduction of approximately
75 per cent in the overall number of customer complaints
received over the 2010–15 period, which has also contributed to
improvements in opex efficiency.
We have continued to develop our systems and processes to
deliver the experience our customers seek when they need to
contact us, including multi-channel contact centre technology.
We have placed a strong emphasis on striving for first time
resolution of customer enquiries, keeping customers informed
of progress until resolution. This has been underpinned by
investment in our people in terms of better training and improved
systems. We have also enhanced our customer feedback process
to help us respond to customers’ evolving needs and continually
improve.
Adjusting for the water quality incident, domestic customer
complaints in 2015/16 were lower than last year. Ofwat has
amended its SIM methodology for the 2015-20 period, based
on domestic retail only and with more emphasis on qualitative
performance. This revised methodology is based on a different
data set and, as we have highlighted previously, quarterly results
may well produce wider fluctuations compared with the last
regulatory period. Our SIM scores for 2015/16 have also improved
slightly on last year, as outlined in the KPIs section below, despite
the operational incidents we experienced in the year.
Improving customer service will continue to be a key area of
management focus and we see opportunities to deliver further
benefits for our customers.
Leading North West service provider – we are consistently
ranked third out of 10 leading organisations in the North
West, through an independent brand tracker survey which
is undertaken quarterly. This covers key attributes such as
‘reputation’, ‘trustworthy’ and ‘customer service’. We are behind
only Marks and Spencer and John Lewis, and ahead of seven
other major organisations covering utilities, telecoms, media and
banking services.
Robust water supply – our customers continue to benefit from
our robust water supply and demand balance, along with high
levels of water supply reliability. We continue to supply a high
level of water quality, with an improvement in our water quality
index ODI, despite the incident last August, although we did
separately incur compensation and other associated costs of
around £25 million. We have consistently delivered high quality
water and believe this incident was a one-off event for us. We
have consistently delivered a reliable water service, although we
experienced some water no-supply incidents in 2015/16. Whilst
this is disappointing, we have improved internal processes and
systems detection capability to help reduce the risk of these
incidents occurring in the future. We will also benefit from our
integrated control centre, enabling us to take corrective action
before the customer is impacted.
Reducing sewer flooding – we have continued to invest heavily in
schemes designed to reduce the risk of flooding of our customers’
homes, including incidence based targeting on areas more likely
to experience flooding and defect identification through CCTV
sewer surveys. Our plan for the 2015–20 period includes a target
of reducing sewer flooding incidents by over 40 per cent in line
with customers’ affordability preferences, and we have made a
good start. Our wastewater network will continue to benefit from
significant investment going forward, as we aim to help mitigate
changing weather patterns likely to result from climate change.
Ofwat KPIs – our strong overall operational performance is
reflected in Ofwat’s latest (2014/15) key performance indicators
report, which was published in September. The balance of ratings
for United Utilities across the 14 assessment measures represents
a joint first position, in respect of the 10 water and sewerage
companies. We are pleased that our good performance has been
recognised, although we remain strongly focused on improving
further.
Business retail: ‘Water Plus’ joint venture with Severn Trent
approved by the CMA – we have been building our capability to
ensure we are in a strong position as the competitive business
retail market evolves and our ‘Water Plus’ JV with Severn Trent
reinforces this position and gives us first mover advantage
ahead of full market opening in 2017. ‘Water Plus’ combines the
complementary skills of both companies to deliver an attractive
proposition for customers and will create synergies to provide
an efficient and cost-effective operation focused on improved
customer service and growth. Before the JV, United Utilities was
already very active in this expanding market. After attaining a
Scottish water supply licence in 2012, we quickly grew to be one
of the most successful new entrants in Scotland and we have
continued our expansion and have now won approximately 300
customers, covering around 3,500 sites. Overall, our business
retail operation has achieved a net increase in annualised revenue
of £18 million. We will continue to bid for business at attractive
margins and are not solely focusing on growing market share.
We also continue to offer and develop our range of value-added
services, such as leak detection and water efficiency advice.
31
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
Pictured: One of the UV rigs arrives at Warbreck in Blackpool.
We installed UV rigs at critical points on our network to eliminate
cryptosporidium.
Our performance 2015/16
Business
Insight
Lancashire water quality
incident
In early August 2015, traces of the parasite cryptosporidium
were found in drinking water supplies at Franklaw water
treatment works, near Preston, which supplies over 300,000
households across Lancashire including Preston, Blackpool
and Chorley. To protect public health, we issued a ‘boil water
advice’ to customers, advising they boil their tap water, prior
to drinking it, as a precautionary measure.
To eliminate the cryptosporidium, we installed ultraviolet
(UV) treatment units at critical points on our network. An
asset installation of this size and complexity would normally
take several months to complete; however, through working
around the clock, we completed the installation in just four
weeks. This enabled us to lift the boil water advice in stages
with the final one lifted on 6 September 2015.
Clearly, having the boil water advice in place for such a
prolonged period caused considerable inconvenience for
our customers and we made every effort to keep them
fully informed during the incident via leaflets, television
interviews, press, social media and our website. We provided
bottled water for those customers who needed it most
and were unable to boil their water safely. Compensation
payments followed quickly to all those customers and
businesses affected. Throughout the incident, we maintained
regular engagement with key bodies such as Public Health
England and local authorities, seeking their advice, input and
agreement to our proposed course of action.
At the time of writing, we await the Drinking Water
Inspectorate’s (DWI) report into this water quality incident.
This will set out its view of the cause of the incident and
what measures the Inspectorate considers the company
should undertake in response, as well as any action it
intends to take.
However, we have not waited for the publication of the DWI
report before taking action. We have installed permanent
UV treatment at Franklaw so that all flow leaving the site is
treated with UV. The scale and nature of the incident tested
our processes and procedures for vulnerable customers and,
applying lessons learned, in May 2016 we launched a new
service proposition called ‘Priority Services’. This provides
an enhanced, holistic service to customers who have needs
categorised as: physical, mental health, financial, language
and life events.
32
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Qualitative: Ofwat has now undertaken the four surveys for
2015/16 and United Utilities has improved its score to 4.27
points, compared with 4.24 points in 2014/15, despite the
Lancashire water quality incident and the unprecedented
flooding events. In particular, customers scored us highly for
our wastewater service. For 2015/16, United Utilities was in
12th position out of the 18 water companies.
Quantitative: the quantitative assessment measures customer
contacts and performance is assessed on both an absolute
and relative basis. Relative performance can only be assessed
following the end of each full financial year when the other
companies publish their respective results. On absolute
performance for 2015/16, our score of 95 points represents a
slight improvement on the previous year when we scored 99
points.
Business customer retail growth – Ofwat introduced a separate
price control for business retail for the 2015–20 period and,
with the expansion of competition, we have included a new
KPI measuring the impact of customer gains and losses. Our
business retail operation has now achieved a net increase in
annualised revenue of £18 million. This represents a steady
increase from £15 million in 2014/15 and £10 million in
2013/14. However, due to the joint venture between United
Utilities and Severn Trent, which has now received CMA
approval, we are not setting targets as we are reassessing the
appropriateness of this KPI for future reporting.
Key performance indicators:
Outcome delivery incentives (ODIs) – as outlined at our full
year results in May 2015, ODIs, which are a new feature of
the 2015–20 regulatory period, will form an important KPI
composite to monitor the operational performance of our
wholesale business. This replaces the previous serviceability
KPI which is incorporated within the ODI measures. There
are 19 wholesale financial ODIs and the risk is skewed to the
downside, with 10 attracting a penalty only. We will report
each year on our performance and provide a net reward or
penalty position across the range of our wholesale ODIs.
The impact of the Lancashire water quality incident has not had
a material impact on our ODIs, but we have already incurred
£25 million of associated costs, as outlined previously. Our
sewer flooding ODI is particularly challenging, although there
are a number of other areas where we have made a good start,
such as private sewers and pollution incidents. Overall, we are
encouraged to have achieved a net reward of £2.5 million. We
have benefitted from our proactive management approach
and the planned acceleration of our investment programme.
Our main areas of reward came through our good performance
in the areas of private sewers and pollution, with our main
penalty being on reliable water service where we experienced
some no supply events in the year.
Whilst this overall outcome was better than our initial
expectations, the ODI targets get tougher as we move through
the five-year regulatory period. Therefore, we need to make
further improvements to avoid penalties and this will be very
challenging for us. Nonetheless, our progress this year gives us
the confidence to improve our target to reflect a cumulative
net ODI outcome over the 2015–20 period of between plus £30
million and minus £70 million.
Service incentive mechanism (SIM) – United Utilities was the
most improved company on SIM during the 2010–15 regulatory
period, although we recognise that there is still more to do.
Our target is to move towards the upper quartile in the
medium-term.
33
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
We also continue to drive more effective and efficient delivery
of our capital programme and, for this regulatory period, we are
applying a tougher measurement mechanism to our Time: Cost:
Quality index (TCQi) score. This includes extending coverage to
relevant non-regulatory commitments, measuring cost in terms
of totex (previously capex only) and giving a greater weighting in
the cost element to our biggest capital projects. This has resulted
in a recalibration of the index. Despite this tougher approach, our
TCQi score remains high at 90 per cent which represents a very
good performance above our internal target of 84 per cent for the
first year of this regulatory period.
We have made a good start to the 2015–20 investment
programme and, as planned, are accelerating the five-year
programme to maintain and improve services for customers
and deliver early operational and environmental benefits.
Regulatory capital investment in 2015/16, including £169 million
of infrastructure renewals expenditure, was £799 million, in line
with our expectations.
Pictured: One of the concrete access shafts constructed as part of a major
£6.5 million sewer project in Manchester city centre. A section of the
Mancunian Way carriageway collapsed in August 2015 after heavy rainfall
caused a sink-hole to open up on the busy Manchester road, damaging
the brick-built Victorian sewer located underneath. The concrete shafts
were constructed to allow tunnelling machinery access to build the
replacement sewer underneath the carriageway.
Our performance 2015/16
Lowest sustainable cost
Power and chemicals – our asset optimisation programme
continues to provide the benefits of increased and more effective
use of operational site management to optimise power and
chemical use and the development of more combined heat and
power assets to generate renewable energy. Supplementing the
electricity we generate from sludge, we are developing other
renewable energy facilities, principally in the area of solar, where
we expect to invest over £100 million across the 2015–20 period
of which £32 million was invested in 2015/16. We have also
substantially locked in our power commodity costs across 2015–
20, providing greater cost certainty for the regulatory period.
Proactive network management – as part of our ‘systems
thinking’ approach to the way we run our business, we are being
more proactive in the management of our assets and networks.
We aim to improve our modelling and forecasting to enable us
to address more asset and network problems before they affect
customers, thereby reducing the level of reactive work and
improving efficiency.
Debt collection – our region suffers from high levels of income
deprivation and we offer wide-ranging schemes to help customers
struggling to pay, including our trust fund into which we paid a £6
million contribution in 2015/16. Notwithstanding our industry-
leading debt management processes, deprivation remains the
principal driver of our higher than average bad debt and cost to
serve and we expect this to continue to be a challenging area for
us.
In 2015/16, we have reduced bad debt expense to 2.3 per cent
of regulated revenue from 3.1 per cent last year. This reflects
our ongoing strong focus on managing bad debts, along with a
reduction in certain charges, related to our review last year of
operational debt processes and bad debt provisions, which were
not expected to continue at the same level.
Pensions – United Utilities has taken progressive steps to de-risk
its pension provision. The group had an IFRS retirement benefit
surplus of £275 million as at 31 March 2016, an increase in
surplus from £79 million as at 31 March 2015. Further details
of the group’s pension provision are provided in the pensions
section on page 43.
Capital delivery and regulatory commitments – the business is
strongly focused on delivering its commitments efficiently and
on time and has a robust commercial capital delivery framework
in place. To improve efficiency further, we implemented new
contracting arrangements for the 2015–20 regulatory period to
help deliver our regulatory capital investment programme of over
£3.5 billion. We re-tendered our engineering and construction
partners and selected a single engineering partner and four new
design and construction partners. We are involving our partners
much earlier in project definition and packaging projects by type,
geography and timing to deliver efficiencies. Projects will be
allocated to partners on an incentive basis or competed between
the partners and, where appropriate, third parties. Our partners
have come forward with a range of solutions, innovations and
pricing and early results are encouraging.
34
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com Business
Insight
Flooding and resilience
In December 2015, the UK was battered by a succession of
storms known as Desmond, Eva and Frank. These storms were
particularly severe in the North West causing widespread
flooding in Cumbria, Lancashire and Greater Manchester.
Our services were also badly affected. Following storm
Desmond, water supplies to Keswick were interrupted
when its treatment works was inundated with flood water
(pictured below) and several large wastewater treatment
works were heavily flooded and operations impacted
severely. A key route linking north and south Cumbria – the
A591 – was badly damaged where it runs on our catchment
land alongside Thirlmere reservoir.
Work continues to repair the flood damage and improve
asset protection should similar events reoccur. To date, the
floods have cost the company around £19.5 million restoring
operations, repairing plant and machinery and writing off
assets. For example, at Kendal both primary and secondary
treatment was lost and the outfall returning treated water to
the river was washed away. Initial repair work is now largely
complete and, where we can, we have replaced damaged
assets in a way to be more resilient to future flooding.
We have been keeping all interested groups updated on our
progress, providing support for local recovery groups such
as those repairing the damage to the A591. Local managers
are actively reviewing the resilience of their assets, assessing
risks and compiling actions for mitigation, such as reviewing
procedures when amber flood warnings are given.
Alongside this immediate response, we are working with key
stakeholders to improve resilience to future flooding risk.
We are members of the Cumbrian Flood Partnership that,
amongst other things, is considering what flood defence
improvements may be needed such as upstream catchment
actions to reduce the intensity of water flows at peak
times. In addition, we are engaging with the Government s
National Flood Resilience Review which will assess how the
country can be better protected from future flooding and
increasingly extreme weather events.
’
We are also closely examining our own plans on resilience.
We are building upon AMP5 flooding assessments to
understand better the consequences of failure from extreme
or coinciding events, including environmental and financial
impacts, and developing solutions to mitigate risk from
extreme events.
35
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
Our performance 2015/16
Key performance indicators:
Financing outperformance – The low cost of debt we have
already locked-in places United Utilities in a strong position to
deliver our target for the 2015–20 period of beating Ofwat’s
industry allowed cost of debt.
Total expenditure (totex) outperformance – our KPIs have evolved
to reflect the move by Ofwat to a totex price control, with totex
outperformance for our wholesale business now replacing the
previous separate opex outperformance and capex outperformance
measures. We exceeded our 2010–15 outperformance targets for
both opex and capex. Although our totex allowance is tough, we are
implementing a range of initiatives and are confident of meeting our
target of delivering our promises to customers within the cumulative
2015–20 wholesale totex final determination allowance. Progress
in the first year has been good and we are on track to meet the five-
year target.
Domestic retail cost to serve – with the retail household price
control now being separated for the 2015–20 period, we are
introducing a new KPI to measure our costs in this area. Overall,
it will be very challenging to meet the regulatory assumptions
for domestic retail costs. This is primarily due to Ofwat’s price
review methodology at PR14 which made no allowance for
inflation in the domestic retail business and, in our view, made
insufficient allowance for dual service (water and wastewater)
companies. The regulatory assumptions for domestic retail
costs become progressively tougher as we move through the
2015–20 period. Our target is to minimise our costs compared
with Ofwat’s revenue allowance. We have delivered a good
performance in 2015/16 and outperformed this year’s revenue
allowance by around £10 million.
Pictured: Engineers at our Davyhulme wastewater treatment works in Manchester have taken delivery of a fleet of electric vehicles
which run on power generated by the plant itself in an effort to cut carbon emissions at the works – one of the biggest sewage plants
in the UK.
The new electric ‘Polaris’ vehicles are replacements for five diesel vans, helping to save around five tonnes of carbon a year. Each
vehicle charges up at its own docking station at Davyhulme’s award-winning sludge recycling plant.
Davyhulme wastewater treatment works is our biggest plant and will be energy neutral by 2018, thanks to the electricity generated on-
site from the biogas produced by the sludge digestion process.
The biogas is used in five combined heat and power engines to generate renewable electricity – up to 80GWh per year. The electricity
is retained on-site and used to power the entire Davyhulme wastewater treatment works process. The amount of renewable energy
being generated by the process has helped United Utilities to reduce its overall carbon footprint by 22 per cent since 2005/06.
36
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Responsible manner
Acting responsibly is fundamental to the manner in which we
undertake our business and the group has, for many years,
included corporate responsibility factors in its strategic decision
making. Our environmental and sustainability performance across
a broad front has received external recognition. Earlier in the
2015/16 financial year, we retained our ‘World Class’ rating in the
Dow Jones Sustainability Index for the eighth consecutive year,
again achieving industry leading performance status in the multi-
utility/water sector. Retaining ‘World Class’ status for this length
of time is a significant achievement, particularly as the assessment
standards continue to increase and evolve. In addition, at the PwC
2015 Building Public Trust Awards, United Utilities was selected as
joint winner for ‘Excellence in reporting in the FTSE 100’.
Leakage – strong, year round, operational focus on leakage, alongside
our network resilience improvements and the implementation of a
range of initiatives, such as active pressure management, enabled us to
again meet our leakage target in 2015/16.
Environmental performance – this is a high priority for us and
we were again an upper quartile company in the Environment
Agency’s latest performance metrics, as described in the KPIs
section below.
Carbon footprint – we are committed to reducing our carbon
footprint and increasing our generation of renewable energy. In
2015/16, our carbon footprint totalled 454,857 tonnes of carbon
dioxide equivalent, which is a 22 per cent reduction over the last
10 years (see pages 103 and 104, or visit corporate.unitedutilities.
com/cr-environment). Our renewable energy production in
2015/16 was 138 GWh, representing 17 per cent of our electricity
consumption in the year. This represents good progress over the
last few years, up from c13 per cent in 2012/13. We are already
implementing plans to significantly increase self-generation over
the next few years, with a target of around 35 per cent of our
electricity consumption by 2020, subject to there being sufficient
projects with acceptable returns.
Employees – we continue to work hard to engage all of our
employees in the transformation of the group’s performance.
Although employee engagement has fallen slightly from last
year, at 75 per cent this continues to demonstrate that our
employees have a strong capability to adapt. We remain focused
on maintaining high levels of employee engagement.
We have been successful in attracting and retaining people and have
continued to expand our apprentice and graduate programmes for
2015/16. We now have a total of 54 graduates and 93 apprentices
across the business. Our investment in recruiting graduates and
apprentices is already benefitting the company, with 49 of them now
having secured permanent roles across our business.
Business
Insight
Floating solar array
We have a programme for rolling out solar installations
across our sites using our extensive roof areas and
redundant land for solar farms. During 2015/16 we
completed the installation of what is now one of Europe’s
largest floating solar array systems on Godley reservoir, just
outside Manchester, pictured right. While floating solar has
been deployed elsewhere around the world, most notably
in Japan, it is a relatively new technology in the UK. The
installation at Godley consists of around 12,000 panels,
covering 45,000 square metres which is equivalent to the
size of six football pitches. This should contribute to keeping
our future energy costs down and benefit water bills – good
news for both shareholders and customers.
Overall, we plan to invest over £100 million across the
2015–20 regulatory period in our non-regulated energy
business, mainly in solar facilities. Subject to good projected
returns, we are aiming to double our energy self-generation
to around 35 per cent by 2020.
37
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
Our performance 2015/16
As part of our health and safety improvement programme, we
have implemented a number of initiatives which helped reduce
further the employee accident frequency rate to 0.104 accidents
per 100,000 hours for 2015/16, compared with a rate of 0.112
in 2014/15, 0.137 in 2013/14 and 0.188 in the previous year,
although we recognise that we still have more to do. Health and
safety will continue to be a significant area of focus, as we strive
for continuous improvement.
Communities – we continue to support partnerships, both
financially and in terms of employee time through volunteering,
with other organisations across the North West. We recently set
up Catchment Wise, our new approach to tackling water quality
issues in lakes, rivers and coastal waters across the North West, and
our ‘Beachcare’ employee volunteering scheme helps to keep our
region’s beaches tidy. We continue to support local communities,
through contributions and schemes such as providing debt advisory
services and our Community Fund, offering grants to local groups
impacted by our capital investment programme.
Business
Insight
Royal opening of Liverpool
wastewater treatment
works
-
Twenty five years after opening the original wastewater
treatment works in Sandon Dock, Liverpool, Her Royal Highness
the Princess Royal this year returned to the city to open the
£200 million extension to the works, built in the adjacent
Wellington Dock.
Funded in part by the European Investment Bank, this new
investment is a significant milestone in the clean-up of the
River Mersey. An additional treatment stage was needed
over and above what the original site was providing, to meet
the growing needs of the city.
In the mid-1980s the River Mersey had reached an all-
time low and was famously known as one of the dirtiest
in Europe. But when Sandon Dock was officially opened in
1991 all that changed. Since then the city s waterfront has
flourished and many aquatic species have returned to the
river including octopus, salmon, grey seals, large cod and
even dolphins and porpoises, evidence that the clean-up of
the river is working.
’
The site’s new Sequencing Batch Reactor (SBR) treatment
facility will clean 11,000 litres of wastewater a second, serving
38
Key performance indicators:
Leakage – Although leakage is included within our outcome
delivery incentives, we intend to continue publishing our
leakage position separately, with it being an important
measure from a corporate responsibility perspective. We
delivered a good performance in 2015/16 and have again
met our regulatory leakage target of 463 megalitres per day.
Environmental performance – On the Environment Agency’s
latest assessment (2014/15 report), which covers a broad
range of operational metrics, United Utilities is again an
upper quartile company. Based on our performance across
the range of metrics, this indicates we were in joint second
position among the 10 water and sewerage companies and
aligns with our medium-term goal of being a first quartile
company on a consistent basis.
Corporate responsibility – United Utilities has a strong focus
on operating in a responsible manner and is the only UK
water company to have a ‘World Class’ rating as measured
by the Dow Jones Sustainability Index. In 2015/16, we
retained our ‘World Class’ rating for the eighth consecutive
year and aim to retain this rating again this year.
some 600,000 people, before returning it to the Mersey. This
is the first multi-storey SBR plant and largest in the UK. By
stacking in this way, it fits within the limited footprint available
at Wellington Dock, minimises the environmental impact
on the surrounding area and minimises the impact on the
adjacent world heritage site.
We are proud that our investment to date has made an
important contribution to the renaissance of the Liverpool
waterfront and this new plant is our next step.
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Financial performance
Revenue
United Utilities has delivered a good set of financial results for the
year ended 31 March 2016. Revenue was up £10 million at £1,730
million despite the new regulated price controls, as we benefitted
from higher than expected volumes, non-regulated sales were
up and because last year was impacted by the £21 million special
discount we applied to customer bills.
Operating profit
Underlying operating profit at £604 million was £60 million lower
than last year, as expected. This reflects the new regulated price
controls, an expected increase in depreciation and other costs,
partly offset by a reduction in bad debts, power and regulatory
fees. In line with our planned acceleration, there was also a £21
million increase in infrastructure renewals expenditure this year.
Reported operating profit decreased by £85 million, to £568
million, reflecting the fall in underlying operating profit, along
with an increase in adjusting items. Adjusting items for 2015/16
included compensation and operating costs, totalling £25 million,
in relation to the Lancashire water quality incident in summer
2015. Additionally, there was an £11 million charge relating to
market reform restructuring costs incurred preparing the business
for open competition in the business retail market.
Also in adjusting items was a net credit of £1 million in relation
to the unprecedented flooding incidents which occurred in
December 2015. We incurred an £11 million impairment
charge on our property, plant and equipment plus £1 million
on infrastructure renewals expenditure and £7 million of other
operating costs. However, these costs were more than offset by
insurance proceeds recognised of £20 million.
Investment income and finance expense
The underlying net finance expense of £201 million was £21
million lower than the last year, mainly due to a lower cost of
debt locked-in on the group’s nominal debt and the impact of
lower RPI inflation on the portion of the group’s index-linked
debt with an eight month lag. Interest on non index-linked
debt of £112 million was £13 million lower than last year, due
to the lower rates locked in on our interest rate swaps from
2015, compared with our 2010–15 swaps. The indexation of the
principal on our index-linked debt amounted to a net charge in
the income statement of £38 million, compared with a net charge
of £47 million last year. As at 31 March 2016, the group had
approximately £3.4 billion of index-linked debt at an average real
rate of 1.5 per cent.
The lower cost of nominal debt along with the lower RPI inflation
charge compared with last year, contributed to the group’s
average underlying interest rate of 3.4 per cent being lower than
the rate of 4.0 per cent for the year ended 31 March 2015.
Reported net finance expense of £219 million was significantly
lower than the £317 million expense in 2014/15. This £98 million
decrease principally reflects a change in the fair value gains and
losses on debt and derivative instruments, from a £105 million
loss in 2014/15 to a £26 million loss in 2015/16. The fair value
losses in both years were largely due to a decrease in medium-
term interest rates, which impact our derivatives hedging interest
rates. The fair value loss in 2014/15 was greater than that in
2015/16, as the decrease in medium-term interest rates was
larger in 2014/15. The group uses these swaps to fix interest
rates on a substantial proportion of its debt to better match
the financing cash flows allowed by the regulator at each price
review. The group has fixed the substantial majority of its non
index-linked debt for the 2015–20 financial period.
Profit before tax
Underlying profit before tax was £408 million, £39 million lower
than last year, due to the £60 million decrease in underlying
operating profit, partly offset by the £21 million decrease in
underlying net finance expense. This underlying measure adjusts
for the impact of the costs associated with the flooding and
water quality incidents and retail business market reform, as
outlined in the operating profit section above, and other items
such as fair value movements in respect of debt and derivative
instruments, as outlined in the underlying profit measures table
on page 44. Reported profit before tax increased by £12 million
to £354 million, as the increase due to the aforementioned fair
value movements was largely offset by a reduction in reported
operating profit.
Tax
Consistent with our wider business objectives, we are committed
to acting in a responsible manner in relation to our tax affairs. Full
details of our tax policies and objectives are set out on page 102.
In 2015/16, we paid corporation tax of £53 million, which
represents an effective cash tax rate on underlying profits of 13
per cent, 7 per cent lower than the headline rate of corporation
tax of 20 per cent. Consistent with prior years, the key reconciling
item to the headline rate was allowable tax deductions on net
capital investment. We have expressed the effective cash tax
rate in terms of underlying profits as this measure excludes net
fair value movements on debt and derivative instruments and
thereby enables a medium-term cash tax rate forecast. We would
expect the average cash tax rate on underlying profits through
to the end of the current regulatory period in March 2020 to
be around 15 per cent. The key risk to sustaining this rate is
any unexpected changes in tax legislation or practice and, as
necessary, we would actively engage with the relevant authorities
in order to manage this risk.
The current tax charge was £53 million in 2015/16, compared
with £57 million in the previous year. In addition, there were
current tax credits of £9 million in 2015/16 and £10 million in
2014/15, both following agreement with the UK tax authorities of
prior years’ tax matters.
39
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT Our performance 2015/16
For 2015/16, the group recognised a deferred tax charge of £19
million, compared with a charge of £14 million for 2014/15. In
addition, in 2015/16 the group recognised a deferred tax charge
of £6 million relating to prior years’ tax matters, compared with
a charge of £9 million in 2014/15. In 2015/16, the group also
recognised a deferred tax credit of £112 million relating to the
enacted reduction in the headline rate of corporation tax to 18
per cent from 1 April 2020.
The total tax credit for 2015/16 was £44 million as compared to
a total tax charge of £70 million for 2014/15, the main difference
being the current year deferred tax credit of £112 million relating
to changes in tax rates. For both periods, the total underlying tax
effective rate was in line with the headline rate (currently at 20
per cent) and subject to any legislative or tax practice changes,
we would expect this to continue for the medium-term.
In addition to corporation tax, the group pays and bears further
annual economic contributions, typically of around £130-140
million per annum, in the form of business rates, employer’s
national insurance contributions, environmental taxes and other
regulatory service fees such as water abstraction charges.
Profit after tax
Underlying profit after tax of £325 million was £29 million lower
than last year, principally reflecting the £39 million decrease in
underlying profit before tax partly offset by lower underlying
tax on lower profits. Reported profit after tax was higher at
£398 million, compared with £271 million in the previous year,
as the reduction in underlying profit was more than offset by
the £112 million deferred tax credit in 2015/16 associated
with the enactment of the reductions in corporation tax plus
the £78 million movement in fair value on debt and derivative
instruments between the two periods.
Summary of net debt movement
Earnings per share
Underlying earnings per share decreased from 51.9 pence to 47.7
pence. This underlying measure is derived from underlying profit
after tax. Basic earnings per share increased from 39.8 pence to
58.3 pence, for the same reasons that increased profit after tax.
Dividend per share
The board has proposed a final dividend of 25.64 pence per
ordinary share in respect of the year ended 31 March 2016.
Taken together with the interim dividend of 12.81 pence per
ordinary share, paid in February, this produces a total dividend
per ordinary share for 2015/16 of 38.45 pence. This is an increase
of 2.0 per cent, compared with the dividend relating to last year,
in line with the group’s dividend policy of targeting a growth
rate of at least RPI inflation each year through to 2020. The
inflationary increase of 2.0 per cent is based on the RPI element
included within the allowed regulated revenue increase for
the 2015/16 financial year (i.e. the movement in RPI between
November 2013 and November 2014).
The final dividend is expected to be paid on 1 August 2016 to
shareholders on the register at the close of business on 24 June
2016. The ex dividend date is 23 June 2016.
In light of the Financial Reporting Lab’s recent report entitled
‘Disclosure of dividends – policy and practice’ which provided
best practice guidance, we have enhanced our dividend policy
disclosure as outlined below.
Dividend policy – a growth rate target of at least RPI inflation
each year through to 2020.
Policy period – the dividend policy aligns with the five-year
regulatory period which runs from 1 April 2015 to 31 March 2020.
.
0
4
2
9
5
,
.
6
1
8
6
.
4
2
4
.
9
7
3
.
5
1
.
5
5
0
9
.
8
6
6
1
.
1
3
5
.
7
8
5
2
.
5
0
6
2
6
,
Net debt
at 31/03/15
Operating
cash flow
Dividends
Interest
Tax
Net
capex
Fair value
movements
Other
Net debt
at 31/03/16
Inflation
uplift on
index-linked
debt
7,000
6,500
6,000
5,500
5,000
4,500
£m
40
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Risks to policy sustainability:
2015–20 – The policy is considered by the board to be robust to
reasonable changes in assumptions, such as inflation, opex, capex
and interest rates.
Extreme economic, regulatory, political or operational events,
which could lead to a significant deterioration in the group’s
financial metrics during the policy period may present risks to
policy sustainability.
2020–25 – A dividend policy for the post 2020 period will be
formulated when the outcome of the next regulatory price review
is known.
Cash flow
Net cash generated from continuing operating activities for the
year ended 31 March 2016 was £686 million, compared with
£707 million in the previous year. This reduction mainly reflects
lower profit partly offset by an improvement in working capital
cash flows and, to a lesser extent, lower corporation tax paid.
The group’s net capital expenditure was £682 million, principally
in the regulated water and wastewater investment programmes.
This excludes infrastructure renewals expenditure which is
treated as an operating cost under IFRS.
Net debt including derivatives at 31 March 2016 was £6,261
million, compared with £5,924 million at 31 March 2015. This
increase reflects regulatory capital expenditure and payments of
dividends, interest and tax, partly offset by operating cash flows.
Fair value of debt
The group’s gross borrowings at 31 March 2016 had a carrying
value of £6,978 million. The fair value of these borrowings was
£7,461 million. This £483 million difference principally reflects
the significant fall in real interest rates, compared with the rates
at the time we raised our index-linked debt. This difference has
decreased from £705 million at 31 March 2015 due primarily to
an increase in credit spreads.
Gross debt – total carrying value £6,978.0m
Yankee bonds (USD)
£792.9m
Euro bonds (EUR)
£521.2m
GBP bonds
£1,300.8m
GBP index-linked bonds
£1,792.3m
EIB and other
index-linked loans
£1,655.0m
Other EIB loans
£500.0m
Other borrowings
£415.8m
Policy approval process – the dividend policy was considered
and approved by the United Utilities Group PLC Board in January
2015, as part of a comprehensive review of the 2015–20
regulatory final determination in the context of a detailed
business planning process, with due regard for the group’s
financial metrics, credit ratings and long-term financial stability,
and is reviewed at least annually.
Distributable reserves – as at 31 March 2016, the company
had distributable reserves of £3,205 million. The total external
dividends relating to the 2015/16 financial year amounted to
£262 million. The company distributable reserves support over 12
times this annual dividend.
Financing headroom – supporting the group’s cash flow, United
Utilities adopts a funding/liquidity headroom policy of having
available resources to cover the next 15–24 months of projected
cash outflows.
Cash flows from subsidiaries – the directors consider that the
group’s principal operating subsidiary, United Utilities Water
Limited, has sufficient resources to pay dividends to United Utilities
Group PLC for the duration of the current dividend policy period to
support the external payment of dividends to shareholders.
Financial stability – the water industry has invested significant
capital since privatisation in 1989 to improve services for customers
and provide environmental benefits, a large part of which is driven
by legislation. Water companies have typically raised borrowings
to help fund the capital investment programme. Part of total
expenditure is additive to the regulatory capital value, or RCV, on
which water companies earn a return allowed by the economic
regulator, Ofwat. RCV gearing is useful in assessing a company’s
financial stability in the UK water industry and is one of the key
credit metrics that the credit rating agencies focus on. United
Utilities has had a relatively stable RCV gearing level over the last
five years, always comfortably within its target range of 55 per cent
to 65 per cent, supporting a solid A3 credit rating with Moody’s.
RCV gearing at 31 March 2016 was 61 per cent and the movement
in net debt is shown on the previous page.
Dividend sustainability – in approving the policy, the board is
satisfied that across the current regulatory period, the projected
dividend is adequately covered by underlying profit after tax.
Separately, the executive directors’ long-term remuneration plan
is directly linked to a measure of sustainable dividends. Whilst
specific targets are not disclosed in advance, for commercial
sensitivity reasons, there is a major focus on the creation of
strong earnings that ensure the sustainability of dividends.
Viability statement – the dividend policy is underpinned by
the group’s long-term viability statement (page 71). Assurance
supporting this statement is provided by the review of: the group’s
key financial measures; the key credit financial metrics; the group’s
liquidity position; and the contingent liabilities of the group.
Annual dividend approval process – the group places significant
emphasis on strong corporate governance and before declaring
interim and proposing final dividends, the United Utilities group
board undertakes a comprehensive assessment of the group’s key
financial metrics.
41
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
on this facility. In March 2015, UUW arranged a £100 million, 10-
year index-linked loan with an existing relationship bank.
In April 2015, UUW’s financing subsidiary, United Utilities Water
Finance PLC (UUWF), issued two index-linked notes totalling
£60 million, consisting of a £25 million, 10-year maturity and a
£35 million, 15-year maturity. UUWF also issued a €52 million
note (swapped to floating sterling) with a 12-year maturity. All
these notes were issued via private placement off our EMTN
programme.
In the second half of 2015/16, UUW arranged two £100 million
loans with existing relationship banks; a seven-year floating
rate loan, drawn down in December 2015 and a 10-year index-
linked loan, drawn down in March 2016. UUWF issued a €30
million private placement note (swapped to floating sterling),
with a 15-year maturity, off our EMTN programme in October
2015. In addition, the group agreed £50 million of new five-year
committed bank facilities.
In April 2016, UUW signed a £250 million index-linked term loan
facility with the EIB to support the delivery of UUW’s AMP6
investment programme. This is an amortising facility with an
average loan life of 10 years and a final maturity of 18 years from
draw down and is the first tranche of an anticipated £500 million
funding package for AMP6 from the EIB, with the second tranche
expected to be made available for signature later in the AMP. In
May 2016, United Utilities PLC signed a new seven-year revolving
credit facility with an existing relationship bank. Following the
signing of these facilities, the group now has headroom to cover
its projected financing needs through until mid-2018.
Our performance 2015/16
Debt financing and interest rate management
Gearing (measured as group net debt divided by UUW’s
regulatory capital value) was 61 per cent at 31 March 2016, an
increase of 2 per cent compared with the position at 31 March
2015, remaining comfortably within our target range of 55 per
cent to 65 per cent.
UUW has long-term credit ratings of A3/BBB+ and United
Utilities PLC has long-term credit ratings of Baa1/BBB- from
Moody’s Investors Service (Moody’s) and Standard & Poor’s (S&P)
Ratings Services respectively. The split rating reflects differing
methodologies used by the credit rating agencies. Moody’s has
the group’s ratings on a stable outlook, whereas S&P has the
group’s ratings on a positive outlook.
The group has access to the international debt capital markets
through its €7 billion euro medium-term note programme
(EMTN). The EMTN programme does not represent a funding
commitment, with funding dependent on the successful issue of
the notes.
Cash and short-term deposits at 31 March 2016 amounted to
£214 million. Over 2015–20 we have financing requirements
totalling around £2.5 billion to cover refinancing and incremental
debt, supporting our 2015–20 investment programme and we
have now already raised around £1.4 billion of this requirement
(including the most recent £250 million loan with the European
Investment Bank (EIB), signed in April 2016). In December 2013,
UUW agreed a new £500 million term loan facility with the EIB
and we drew down the final £150 million on this facility during
the first half of 2015/16, all on a floating rate basis. In March
2015, UUW signed a new £250 million index-linked term loan
facility with the EIB. This is an amortising facility with an average
loan life of 10 years and a final maturity of 18 years from draw
down and as at 31 March 2016 we had drawn down £175 million
Term debt maturity per regulatory period*
3,000
2,000
1,000
£m
0
To 31 March
2020
202025
202530
203035
203540 204045
204550
205055
205560
* Future repayments of index-linked debt include inflation based on an average annual RPI rate of 3%.
Years
42
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com United Utilities believes that it operates a prudent approach to
managing banking counterparty risk. Counterparty risk, in relation
to both cash deposits and derivatives, is controlled through the
use of counterparty credit limits. United Utilities’ cash is held
in the form of short-term money market deposits with prime
commercial banks.
United Utilities operates a bilateral, rather than a syndicated,
approach to its core relationship banking facilities. This approach
spreads maturities more evenly over a longer time period,
thereby reducing refinancing risk and providing the benefit of
several renewal points rather than a large single refinancing
requirement.
Pensions
As at 31 March 2016, the group had an IAS 19 net pension surplus
of £275 million, compared with a net pension surplus of £79
million at 31 March 2015. This £196 million favourable movement
mainly reflects the impact of a significant increase in credit
spreads, reducing the IAS19 pension liability, partially offset by an
increase in inflation assumptions. In contrast, the scheme specific
funding basis does not suffer from volatility due to inflation and
credit spread movements as it uses a fixed inflation assumption
via the inflation funding mechanism and a prudent, fixed credit
spread assumption. Therefore, the recent inflation and credit
spread movements have not had a material impact on the deficit
calculated on a scheme specific funding basis or the level of
deficit repair contributions.
Further detail on pensions is provided in note 18 (‘Retirement
benefit surplus’) of these consolidated financial statements.
Long-term borrowings are structured or hedged to match assets
and earnings, which are largely in sterling, indexed to UK retail
price inflation and subject to regulatory price reviews every
five years.
Long-term sterling inflation index-linked debt provides a natural
hedge to assets and earnings. At 31 March 2016, approximately
55 per cent of the group’s net debt was in index-linked form,
representing around 34 per cent of UUW’s regulatory capital
value, with an average real interest rate of 1.5 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
20 years.
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
10 years on a reducing balance basis. This is supplemented by
fixing substantially all remaining floating rate exposure across
the forthcoming regulatory period around the time of the price
control determination.
In line with this, the group has fixed interest costs for substantially
all of its floating rate exposure over the 2015-20 period, locking in
an average annual interest rate of around 3.7 per cent (inclusive
of credit spreads). For 2015/16, the rate was slightly higher, as we
transitioned between the two regulatory periods.
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. The
group’s €7 billion euro medium-term note programme provides
further support.
Available headroom at 31 March 2016 was £269 million based on
cash, short-term deposits, committed bank facilities, along with
the undrawn portion of the EIB term loan facilities (signed at that
time), net of short-term debt as well as committed facilities and
term debt falling due within 12 months.
43
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
Our performance 2015/16
Underlying profit
In considering the underlying results for the period, the directors have adjusted for the items outlined in the table below to provide
a more representative view of business performance. Reported operating profit and profit before tax from continuing operations are
reconciled to underlying operating profit, underlying profit before tax and underlying profit after tax (non-GAAP measures) as follows:
Operating profit
Operating profit per published results
Water quality incident
Flooding incidents (net of insurance proceeds recognised)
Business retail market reform(1)
Restructuring costs
Underlying operating profit
Net finance expense
Finance expense
Investment income
Net finance expense per published results
Adjustments:
Net fair value losses on debt and derivative instruments
Interest on swaps and debt under fair value option
Net pension interest (income)/expense
Capitalised borrowing costs
Underlying net finance expense
Profit before tax
Share of profits of joint ventures
Profit before tax per published results
Adjustments:
Water quality incident
Flooding incidents (net of insurance proceeds recognised)
Business retail market reform(1)
Restructuring costs
Net fair value losses on debt and derivative instruments
Interest on swaps and debt under fair value option
Net pension interest (income)/expense
Capitalised borrowing costs
Underlying profit before tax
Profit after tax
Underlying profit before tax
Reported tax credit/(charge)
Deferred tax credit – change in tax rate
Agreement of prior years’ UK tax matters
Tax in respect of adjustments to underlying profit before tax
Underlying profit after tax
Earnings per share
Profit after tax per published results (a)
Underlying profit after tax (b)
Weighted average number of shares in issue, in millions (c)
Earnings per share per published results, in pence (a/c)
Underlying earnings per share, in pence (b/c)
(1) Relates to market reform restructuring costs incurred preparing the business for open competition in the business retail market.
44
Year ended
Year ended
31 March 2016 31 March 2015
£m
653.3
–
–
–
11.0
664.3
£m
567.9
24.8
(0.6)
11.1
0.9
604.1
£m
(224.4)
5.0
(219.4)
26.3
16.5
(3.1)
(21.3)
(201.0)
£m
5.0
353.5
24.8
(0.6)
11.1
0.9
26.3
16.5
(3.1)
(21.3)
408.1
£m
408.1
44.0
(112.5)
(3.4)
(10.9)
325.3
£m
(317.8)
1.0
(316.8)
104.7
4.0
7.0
(20.9)
(222.0)
£m
5.1
341.6
–
–
–
11.0
104.7
4.0
7.0
(20.9)
447.4
£m
447.4
(70.4)
–
(0.7)
(22.2)
354.1
£m
397.5
325.3
681.9m
58.3p
47.7p
£m
271.2
354.1
681.9m
39.8p
51.9p
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Underlying operating profit reconciliation
The table below provides a reconciliation between group underlying operating profit and United Utilities Water Limited (UUW)
historical cost regulatory underlying operating profit (non-GAAP measures) as follows:
Continuing operations
Underlying operating profit
Group underlying operating profit
Underlying operating loss not relating to UUW
UUW statutory underlying operating profit
Revenue recognition
Capitalised borrowing costs
Other differences (including non-appointed business)
UUW regulatory underlying operating profit
Year ended
31 March 2016
£m
604.1
7.2
611.3
(0.2)
2.8
(8.3)
605.6
45
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
Principal risks and uncertainties
Figure 1: United Utilities’ governance and
reporting structure for risk management and
internal control
Group Board
Reviews the nature and extent
of risk, confirms the
company s viability
’
and reports on effectiveness
of risk management and
internal control
Group Audit &
Risk Board
Reviews governance, risk
and compliance-related
matters
Audit
Committee
Reviews the effectiveness
of risk management and
internal control systems
Corporate
Risk Team
Second line framework
development, advisory,
assurance and reporting
Corporate
Audit Team
Third line review and
assurance of risk
management and
internal controls
Business Areas
and Projects
First line identification,
analysis, evaluation and
management of risk
Read our Long-term viability statement
on page 71
We identify and manage
risks using our risk
management framework
As a business our strategy is to deliver value by providing the
best service to customers, at the lowest sustainable cost and in a
responsible manner. In doing so the group is exposed to a range
of internal and external risks of varying types which can impact
upon these objectives. We therefore maintain a risk management
framework to continually identify, assess and manage risks.
All parts of the group use the same risk management
framework ensuring consistency of approach and supporting
risk management and monitoring. The framework includes: an
embedded governance and reporting process (see figure 1);
an assessment and management process which is aligned to
ISO 31000: 2009 (see figure 2); and a central database, tools
and guidance to further support consistency, embedment and
continuous improvement.
Leaders within the group’s individual business areas and functions
are responsible for the assessment and management of risk
including the identification and escalation of new/emerging
circumstances and the monitoring and reporting on risk and control
effectiveness. All event types (strategic, financial, operational,
compliance and hazard) are considered in the context of their
potential impact on the delivery of our business objectives. The
assessment is based on the likelihood of an event occurring and
the financial and reputational impact should the event occur. The
assessment takes into account a gross position (without controls or
assuming that all controls fail), a current position benefitting from
existing controls and a targeted position where further mitigation is
required to meet objectives or obligations.
The resulting risk profile is reported to the group board twice a
year. The report covers four areas: the 10 highest ranked risks
(based on likelihood x impact); a further five risks included due
to the potential severity of their impact; risks that fall outside
these categories but are included due to potential reputational
impact or new/emerging circumstances; and a summary of all of
the event-based risks within the profile relative to 10 principal
risks (see pages 48 and 49) that could seriously affect the
performance, future prospects or reputation of the business.
This approach is in line with the principles of the UK Corporate
Governance Code and involves reporting to the group board for each
full and half year statutory accounting period allowing the board to:
– determine the nature and extent of the principal risks it is
willing to take in achieving its strategic objectives;
– oversee the management of those risks and provide challenge to
executive management where appropriate;
– express an informed opinion on the long-term viability of the
company (see page 71); and
– monitor risk management and internal control systems and
review their effectiveness.
46
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Figure 2: United Utilities’ risk management
process (adapted from ISO 31000: 2009)
Identify &
Assess
Monitor &
Review
Consult &
Communicate
Manage &
Mitigate
Record &
Update
I
t
c
a
p
m
Our risk profile currently
consists of around 200
event-based risks. By
their nature, these will
include all combinations
of high to low likelihood
and high to low impact.
Heat maps (see figure
3) are typically used in
various managerial and
group reports either as
a method to collectively
evaluate the extent of
multiple risks within a
certain profile or to evaluate
the effectiveness of mitigation
for a single risk relative to the
initial gross position.
Likelihood
Figure 3: Indicative
heat maps are used to
evaluate and report
risk
Key features and developments
Regulatory, operational, compliance and delivery risks remain key
features of the group’s risk profile. The introduction of outcome
delivery incentives by Ofwat after PR14 creates a regime of
potential penalties and rewards based on meeting targets for the
delivery of operational and capital programmes. In the context of
customer service and operational performance, the Lancashire
water quality incident in the summer of 2015 reinforced the
requirement to consistently deliver clean, safe drinking water
and to further mitigate risks to a continuous service through
implementing greater resilience in the asset base.
Market Reform and the introduction of non-household retail
competition in April 2017 requires significant preparation so that
the group’s retail and wholesale functions are in a position to
compete successfully while continuing to operate compliantly and
in accordance with the ‘level playing field’.
Looking further ahead, the expected introduction of competition
in sludge and water resource activities and the further
promotion of the existing inset regime and the UK Government’s
consideration (announced November 2015) of legislation to
enable household retail activities to become competitive at some
future date all place risk on the group.
Climate change is also recognised as one of the sector’s biggest
challenges with significant and permanent implications on
the water cycle and the long-term sustainability of the water
and wastewater service including: water abstraction; supply
and treatment capability; drainage and sewer capacity; and
wastewater treatment and discharge efficiency and effectiveness.
Principal risks
The principal risks (aggregated clusters of event-based risks),
which have been set out in the table on pages 48 and 49 reflect
the categories of risks that define business activity or contributing
factors where value can be lost or gained and could have a
material impact on the business model, future performance,
solvency or liquidity of the group. In each case the magnitude
of the potential effect is highlighted together with the extent of
management/mitigation. To ensure relevance with the current
environment, issues or areas of uncertainty are also illustrated.
There continue to be two ongoing pieces of material litigation
worthy of note, as outlined below. However, based on the facts
currently known to us and the provisions in our statement of
financial position, our directors remain of the opinion that the
likelihood of these having a material adverse impact on the
group’s financial position is remote.
–
–
In February 2009, United Utilities International Limited
(UUIL) was served with notice of a multiparty ‘class action’ in
Argentina related to the issuance and payment default of a
US$230 million bond by Inversora Eléctrica de Buenos Aires
S.A. (IEBA), an Argentine project company set up to purchase
one of the Argentine electricity distribution networks which
was privatised in 1997. UUIL had a 45 per cent shareholding
in IEBA which it sold in 2005. The claim is for a non-quantified
amount of unspecified damages and purports to be pursued
on behalf of unidentified consumer bondholders in IEBA. UUIL
has filed a defence to the action and will vigorously resist the
proceedings given the robust defences that UUIL has been
advised that it has on procedural and substantive grounds.
In March 2010, Manchester Ship Canal Company (MSCC)
issued proceedings seeking, amongst other relief, damages
alleging trespass against United Utilities Water Limited (UUW)
in respect of UUW’s discharges of water and treated effluent
into the canal. Whilst the matter has not reached a final
conclusion, the Supreme Court has found substantively in
UUW’s favour on a significant element of the claim and the
High Court has upheld UU’s position on the remainder of the
proceedings. We await to see whether MSCC pursue a further
claim to introduce additional matters for determination.
47
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
Principal risks and uncertainties
Risk description
Regulatory environment and
framework
The potential change in the regulatory
environment and/or frameworks
Corporate governance and legal
compliance
The failure to meet all legal and regulatory
obligations and responsibilities
Water service
The inability to provide a secure and
resilient supply of clean, safe drinking water
Wastewater service
The inability to remove, treat and return
wastewater to the environment in an effective,
resilient and compliant manner
Security
The inability to protect people, information
and assets from malicious or accidental
activity
Main business
objective
Lowest
sustainable
cost
Responsible
manner
Best service
to customers
Best service
to customers
Potential impact
Changes to regulation and the regulatory regime (either through political or regulatory events) may
increase costs of administration, reduce income and margin and lead to greater variability of returns.
Non-compliance with existing or future laws/regulations (principally relating to the regulated business,
but also including non-regulated activity/commitment) can result in additional workload, financial
penalties, additional capital/operating expenditure (from enforcement orders or legal defence) and
compensation following litigation. In more remote but extreme circumstances, penalties of up to 10
per cent of relevant turnover and ultimately revocation of our licence or the appointment of a special
administrator are possible.
Operational performance problems or service or asset failures can lead to additional operating
or capital expenditure and/or increased regulatory scrutiny and regulatory penalties. In more
extreme situations the group could also be fined for breaches of statutory obligations, be subject to
enforcement action, be held liable to third parties and sustain reputational damage.
Best service
to customers
Our resources, assets and infrastructure are exposed to various threats (malicious or accidental) which
could impact the provision of vital services and/or harm people or commercial businesses.
Human, technological and
physical resource
The inability to support/deliver effective
and efficient business activity
Responsible
manner
Financial risk
The inability to appropriately finance the
business due to capital, credit, market,
funding, liquidity or tax-related risk
Lowest
sustainable
cost
Programme delivery
The ineffective or inefficient delivery
of capital, operational and change
programmes
Lowest
sustainable
cost
The capacity or capability associated with human, technological and physical resource (including
information, operational technology, skill sets, systems and telephony) can impact the efficiency
and effectiveness of business activity, the ability to make appropriate decisions and ultimately
meet targets. This can also affect the ability to recruit and retain knowledge/expertise or to recover
effectively following an incident. In remote but extreme circumstances there is also the potential for
higher levels of regulatory scrutiny, financial penalties, reputational damage and missed commercial
opportunities.
The failure of financial counterparties could result in additional financing cost, an adverse impact on
the income statement and potential reputational damage. Variability in inflation (as measured by
the UK Retail Prices Index) and changes in interest rates, funding costs and other market risks could
adversely impact the economic return on the regulatory capital value (RCV) and affect our pension
schemes with a requirement for the group to make additional contributions. In extreme but remote
cases adverse market conditions could affect our access to debt capital markets and subsequently
available liquidity and credit ratings.
Failure to deliver capital or change programmes against relevant time, cost or quality measures could
result in a failure to secure competitive advantage or operating performance efficiency and cost
benefits. There is also the risk of increased delivery costs or a failure to meet our obligations and
customer outcomes which, depending on the nature and extent of failure, could result in an impact
at future price reviews, regulatory or statutory penalties and negative reputational impact with
customers and regulators.
Revenues
The inability to maintain revenues and
margin due to customer service provision
Lowest
sustainable
cost
Poor service to customers can result in financial penalties issued by the regulator through components
of the service incentive mechanism for household customers and loss of revenue associated with
commercial churn for non-household customers using five megalitres and above per annum. The
proposed opening of the market for retail services to all non-household customers in England from
2017 generates both opportunities and risk associated with market share, scale and margin erosion.
There is also much uncertainty surrounding the form of upstream reform which is now anticipated to
materialise after 2019.
Health, safety and environmental
The potential harm to employees,
contractors, the public or the environment
Responsible
manner
Working with and around water, sewage, construction and excavation sites, plant and equipment
exposes people and the environment to various man-made and naturally occurring hazards. The
nature and extent of exposure could result in harm to people, wildlife and natural habitats. Depending
on the circumstances, the group could be fined for breaches of statutory obligations, be held liable to
third parties and sustain reputational damage.
48
Current key risks, issues or areas of uncertainty
Risk
include:
exposure
Management and mitigation
– Market reform including non-household and upstream
We engage in relevant government and regulatory consultations which may affect policy and
competition and, further ahead, the potential for the
regulation in the sectors where we operate. We also consult with customers to understand
introduction of household competition
their requirements and proactively consider all the opportunities and threats associated with
– A possible change from using the retail prices index to the
any potential change, exploiting opportunities and mitigating risks where appropriate.
consumer prices index for regulatory indexation
–
Competition law and regulatory compliance whilst
Legislative and regulatory developments are continually monitored. Risk-based training
preparing for and operating within a changing competitive
of employees is undertaken and we participate in consultations to influence legislative
market
–
Current material litigation
and regulatory developments. Funding for any material additional compliance costs in
the regulated business is sought as part of the price determination process. The group
– New higher fine levels for environmental offences
also robustly defends litigation where appropriate and seeks to minimise its exposure by
Stability of financial institutions and the world economy
Refinancing is long-term with staggered maturity dates to minimise the effect of short-term
Financial market conditions, interest rates and funding
of the asset base of the individual counterparty. The group also employs hedging strategies
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Population growth
Climate change
– Meeting infrastructure investment requirements
Expected change to the abstraction licensing regime
Catchment management
Raw water quality
– Drinking water safety and security
Cybercrime
Terrorism
– Other criminality relating to assets or operations
– Delivering required employee engagement
Personal development and talent management
Technological innovation
– Asset management
Economic uncertainty
Inflation/deflation
costs
Brexit
–
Security of supply
– Delivery of solutions
– Quality and innovation
– New contract delivery partnerships for the 2015–2020
period with a new approach to construction and design
–
Price volatility
Socio-economic deprivation in the North West
– Welfare reform and the impact on domestic bad debt
Competition in the water and wastewater market and
competitor positioning
Brexit
equally
Excavation, tunnelling and construction work
– Working with water and wastewater
Chemicals
– All weather conditions
– Driving, vehicle movement
establishing provisions and seeking recovery wherever possible.
Mitigation is provided through core business processes, including forecasting, quality
assurance procedures, risk assessments and rigorous sampling/testing regimes. Ongoing
system and network integration improves service provision and measures of success have
been developed to monitor performance. Following the Lancashire water quality incident in
2015 we are further enhancing our approach to operational risk and resilience.
Physical and technological security measures combined with strong governance and
inspection regimes aim to protect infrastructure, assets and operational capability. Recent
initiatives include awareness training across the business relating to seven key areas of
security and the implementation of a security governance model to oversee all aspects of
security and security strategy. Ongoing system and network integration improves operational
resilience and we maintain robust incident response, business continuity and disaster
recovery procedures. We also maintain insurance cover for loss and liability and the licence
of the regulated business also contains a ‘shipwreck’ clause that, if applicable, may offer a
degree of recourse to Ofwat/customers in the event of a catastrophic incident.
Developing our people with the right skills and knowledge, combined with delivering
effective technology are important enablers to support the business to meet its objectives.
Employees are kept informed regarding business strategy and progress through various
communication channels. Training and personal development programmes exist for all
employees in addition to talent management programmes and apprentice and graduate
schemes. We focus on change programmes and innovative ways of working to deliver better,
faster and more cost-effective operations.
downturns. Counterparty credit, exposure and settlement limits exist to reduce any potential
future impacts. These are based on a number of factors, including the credit rating and the size
to stabilise market fluctuation for inflation, interest rates and commodities (notably energy
prices). Sensitivity analysis is carried out as part of the business planning process, influencing
the various financial limits employed. Continuous monitoring of the markets takes place
including movements in credit default swap prices and movements in equity levels.
We have a developed and clear view of our investment priorities which are built into our
programmes, projects and integrated business and asset plans. We have created better
alignment and integration between our capital delivery partners and engineering service
provider including alignment with our operating model. Our programme and project
management capabilities are well established with strong governance and embedded
processes to support delivery, manage risks and achieve business benefits. We utilise a time,
cost and quality index (TCQi) as a key performance indicator and enhance our performance
through a dedicated programme change office to deliver change in a structured and consistent
way. Supply chain management is utilised to deliver end-to-end contract management which
includes contract strategy and tendering, category management, security of supply, price and
price volatility and financial and operational service level performance.
For Domestic Retail there is a transformation plan in place covering a wide range of initiatives
and activities to improve customer service, with a number of controls in place to monitor
achievement against the plan. Similarly, within Business Retail we look to retain existing and
acquire new commercial customers by striving to meet their needs more effectively. We
monitor competitor activity and target a reduction in operating costs. Within our wholesale
market participants and the central market operator are being prepared. The new market
requirements will require all market participants to treat other participants equally (‘on a level
playing field’) whilst maintaining compliance with existing regulations.
We have developed a strong health, safety and environmental culture where ‘nothing we
do at United Utilities is worth getting hurt for’. This is supported by strong governance and
management systems which include policies and procedures which are certified to OHSAS
18001 and ISO 14001.
– Market Reform and the ability to treat other participants
department processes, systems, data and organisational capacity and capability to deal with
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Risk description
objective
Potential impact
Regulatory environment and
framework
The potential change in the regulatory
environment and/or frameworks
Corporate governance and legal
compliance
The failure to meet all legal and regulatory
obligations and responsibilities
Main business
Lowest
sustainable
cost
Responsible
manner
Changes to regulation and the regulatory regime (either through political or regulatory events) may
increase costs of administration, reduce income and margin and lead to greater variability of returns.
Non-compliance with existing or future laws/regulations (principally relating to the regulated business,
but also including non-regulated activity/commitment) can result in additional workload, financial
penalties, additional capital/operating expenditure (from enforcement orders or legal defence) and
compensation following litigation. In more remote but extreme circumstances, penalties of up to 10
per cent of relevant turnover and ultimately revocation of our licence or the appointment of a special
administrator are possible.
Operational performance problems or service or asset failures can lead to additional operating
or capital expenditure and/or increased regulatory scrutiny and regulatory penalties. In more
extreme situations the group could also be fined for breaches of statutory obligations, be subject to
enforcement action, be held liable to third parties and sustain reputational damage.
Water service
The inability to provide a secure and
resilient supply of clean, safe drinking water
Wastewater service
The inability to remove, treat and return
wastewater to the environment in an effective,
resilient and compliant manner
Security
activity
The inability to protect people, information
and assets from malicious or accidental
Best service
to customers
Best service
to customers
Best service
to customers
Our resources, assets and infrastructure are exposed to various threats (malicious or accidental) which
could impact the provision of vital services and/or harm people or commercial businesses.
Human, technological and
physical resource
The inability to support/deliver effective
and efficient business activity
Responsible
manner
Financial risk
The inability to appropriately finance the
business due to capital, credit, market,
funding, liquidity or tax-related risk
Lowest
sustainable
cost
The capacity or capability associated with human, technological and physical resource (including
information, operational technology, skill sets, systems and telephony) can impact the efficiency
and effectiveness of business activity, the ability to make appropriate decisions and ultimately
meet targets. This can also affect the ability to recruit and retain knowledge/expertise or to recover
effectively following an incident. In remote but extreme circumstances there is also the potential for
higher levels of regulatory scrutiny, financial penalties, reputational damage and missed commercial
opportunities.
The failure of financial counterparties could result in additional financing cost, an adverse impact on
the income statement and potential reputational damage. Variability in inflation (as measured by
the UK Retail Prices Index) and changes in interest rates, funding costs and other market risks could
adversely impact the economic return on the regulatory capital value (RCV) and affect our pension
schemes with a requirement for the group to make additional contributions. In extreme but remote
cases adverse market conditions could affect our access to debt capital markets and subsequently
available liquidity and credit ratings.
Programme delivery
The ineffective or inefficient delivery
of capital, operational and change
programmes
Lowest
sustainable
cost
Failure to deliver capital or change programmes against relevant time, cost or quality measures could
result in a failure to secure competitive advantage or operating performance efficiency and cost
benefits. There is also the risk of increased delivery costs or a failure to meet our obligations and
customer outcomes which, depending on the nature and extent of failure, could result in an impact
at future price reviews, regulatory or statutory penalties and negative reputational impact with
customers and regulators.
Revenues
The inability to maintain revenues and
margin due to customer service provision
Lowest
sustainable
cost
Poor service to customers can result in financial penalties issued by the regulator through components
of the service incentive mechanism for household customers and loss of revenue associated with
commercial churn for non-household customers using five megalitres and above per annum. The
proposed opening of the market for retail services to all non-household customers in England from
2017 generates both opportunities and risk associated with market share, scale and margin erosion.
There is also much uncertainty surrounding the form of upstream reform which is now anticipated to
materialise after 2019.
Health, safety and environmental
The potential harm to employees,
contractors, the public or the environment
Responsible
manner
Working with and around water, sewage, construction and excavation sites, plant and equipment
exposes people and the environment to various man-made and naturally occurring hazards. The
nature and extent of exposure could result in harm to people, wildlife and natural habitats. Depending
on the circumstances, the group could be fined for breaches of statutory obligations, be held liable to
third parties and sustain reputational damage.
Risk exposure
An indication of each category’s current exposure relative to the previous
year is shown by the arrow in the risk exposure column.
reducing
stable
increasing
Current key risks, issues or areas of uncertainty
include:
Risk
exposure
Management and mitigation
–
–
–
–
–
–
–
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Market reform including non-household and upstream
competition and, further ahead, the potential for the
introduction of household competition
A possible change from using the retail prices index to the
consumer prices index for regulatory indexation
Competition law and regulatory compliance whilst
preparing for and operating within a changing competitive
market
Current material litigation
New higher fine levels for environmental offences
Population growth
Climate change
Meeting infrastructure investment requirements
Expected change to the abstraction licensing regime
Catchment management
Raw water quality
Drinking water safety and security
Cybercrime
Terrorism
Other criminality relating to assets or operations
Delivering required employee engagement
Personal development and talent management
Technological innovation
Asset management
Stability of financial institutions and the world economy
Economic uncertainty
Inflation/deflation
Financial market conditions, interest rates and funding
costs
Brexit
Security of supply
Delivery of solutions
Quality and innovation
New contract delivery partnerships for the 2015–2020
period with a new approach to construction and design
Price volatility
Socio-economic deprivation in the North West
Welfare reform and the impact on domestic bad debt
Competition in the water and wastewater market and
competitor positioning
Brexit
Market Reform and the ability to treat other participants
equally
Excavation, tunnelling and construction work
Working with water and wastewater
Chemicals
All weather conditions
Driving, vehicle movement
We engage in relevant government and regulatory consultations which may affect policy and
regulation in the sectors where we operate. We also consult with customers to understand
their requirements and proactively consider all the opportunities and threats associated with
any potential change, exploiting opportunities and mitigating risks where appropriate.
Legislative and regulatory developments are continually monitored. Risk-based training
of employees is undertaken and we participate in consultations to influence legislative
and regulatory developments. Funding for any material additional compliance costs in
the regulated business is sought as part of the price determination process. The group
also robustly defends litigation where appropriate and seeks to minimise its exposure by
establishing provisions and seeking recovery wherever possible.
Mitigation is provided through core business processes, including forecasting, quality
assurance procedures, risk assessments and rigorous sampling/testing regimes. Ongoing
system and network integration improves service provision and measures of success have
been developed to monitor performance. Following the Lancashire water quality incident in
2015 we are further enhancing our approach to operational risk and resilience.
Physical and technological security measures combined with strong governance and
inspection regimes aim to protect infrastructure, assets and operational capability. Recent
initiatives include awareness training across the business relating to seven key areas of
security and the implementation of a security governance model to oversee all aspects of
security and security strategy. Ongoing system and network integration improves operational
resilience and we maintain robust incident response, business continuity and disaster
recovery procedures. We also maintain insurance cover for loss and liability and the licence
of the regulated business also contains a ‘shipwreck’ clause that, if applicable, may offer a
degree of recourse to Ofwat/customers in the event of a catastrophic incident.
Developing our people with the right skills and knowledge, combined with delivering
effective technology are important enablers to support the business to meet its objectives.
Employees are kept informed regarding business strategy and progress through various
communication channels. Training and personal development programmes exist for all
employees in addition to talent management programmes and apprentice and graduate
schemes. We focus on change programmes and innovative ways of working to deliver better,
faster and more cost-effective operations.
Refinancing is long-term with staggered maturity dates to minimise the effect of short-term
downturns. Counterparty credit, exposure and settlement limits exist to reduce any potential
future impacts. These are based on a number of factors, including the credit rating and the size
of the asset base of the individual counterparty. The group also employs hedging strategies
to stabilise market fluctuation for inflation, interest rates and commodities (notably energy
prices). Sensitivity analysis is carried out as part of the business planning process, influencing
the various financial limits employed. Continuous monitoring of the markets takes place
including movements in credit default swap prices and movements in equity levels.
We have a developed and clear view of our investment priorities which are built into our
programmes, projects and integrated business and asset plans. We have created better
alignment and integration between our capital delivery partners and engineering service
provider including alignment with our operating model. Our programme and project
management capabilities are well established with strong governance and embedded
processes to support delivery, manage risks and achieve business benefits. We utilise a time,
cost and quality index (TCQi) as a key performance indicator and enhance our performance
through a dedicated programme change office to deliver change in a structured and consistent
way. Supply chain management is utilised to deliver end-to-end contract management which
includes contract strategy and tendering, category management, security of supply, price and
price volatility and financial and operational service level performance.
For Domestic Retail there is a transformation plan in place covering a wide range of initiatives
and activities to improve customer service, with a number of controls in place to monitor
achievement against the plan. Similarly, within Business Retail we look to retain existing and
acquire new commercial customers by striving to meet their needs more effectively. We
monitor competitor activity and target a reduction in operating costs. Within our wholesale
department processes, systems, data and organisational capacity and capability to deal with
market participants and the central market operator are being prepared. The new market
requirements will require all market participants to treat other participants equally (‘on a level
playing field’) whilst maintaining compliance with existing regulations.
We have developed a strong health, safety and environmental culture where ‘nothing we
do at United Utilities is worth getting hurt for’. This is supported by strong governance and
management systems which include policies and procedures which are certified to OHSAS
18001 and ISO 14001.
49
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORT
Ensuring the
long-term success
of the company
and the group
The corporate governance report presents information
on the board of United Utilities and its activities and
those of the various committees, and sets out how the
board demonstrates leadership, effectiveness and its
accountability to the company’s stakeholders and its
approach to the remuneration of the directors.
Pictured: Thirlmere reservoir, Cumbria.
50
slugline
Governance
Corporate governance report
Board of directors
Letter from the Chairman
Nomination committee report
Audit committee report
Corporate responsibility committee report
Remuneration committee report
Tax policies and objectives
Directors’ report
Statement of directors’ responsibilities
52
54
64
72
80
82
102
103
109
51
slugline Corporate governance report
Board of directors
Dr John McAdam (68)
Chairman
Steve Mogford (59)
Chief Executive Officer (CEO)
Responsibilities: Responsible for the leadership of the board, setting its agenda
and ensuring its effectiveness on all aspects of its role.
Qualifications: BSc (Hons) Chemical Physics, Diploma Advanced Studies in
Science, PhD.
Appointment to the board: Appointed as a non-executive director in February
2008 and as Chairman in July 2008.
Committee membership: Nomination (chair).
Skills and experience: With over 17 years’ service as a board director in a
wide range of companies, and as a current non-executive director serving on a
number of other boards, John has a wealth of experience on which to draw in
his role as Chairman and leader of the board.
Career experience: Appointed to the board of ICI plc in 1999 and became chief
executive in 2003, a position held until ICI’s takeover by Akzo Nobel.
Current directorships/business interests: Chairman of Rentokil Initial plc,
senior independent director of J Sainsbury plc (stepping down at the AGM to
be held on 6 July 2016) and a non-executive director of Rolls-Royce Holdings
plc. He is also Chairman of United Utilities Water Limited.
Independence: John met the Code’s independence criteria at the time of his
initial appointment as Chairman.
Responsibilities: To manage the group’s business and to implement the
strategy and policies approved by the board.
Qualifications: BSc (Hons) Astrophysics/Maths/Physics.
Appointment to the board: January 2011.
Committee membership: Corporate responsibility.
Skills and experience: Steve’s experience of the highly competitive defence
market and complex design, manufacturing and support programmes has
brought renewed focus to customer service and operational performance at
United Utilities, and his perspective of the construction and infrastructure
sector provides valuable experience relating to United Utilities’ capital
investment programme.
Career experience: Previously chief executive of SELEX Galileo, the defence
electronics company owned by Italian aerospace and defence organisation
Finmeccanica, and chief operating officer at BAE Systems PLC and a member of
its PLC board, he spent his earlier career with British Aerospace PLC. He stepped
down as senior independent director at Carillion PLC in September 2015 and
from the board in December 2015.
Current directorships/business interests: Appointed as senior independent director
of G4S PLC in May 2016. He is also chief executive officer of United Utilities Water
Limited.
Russ Houlden (57)
Chief Financial Officer (CFO)
Dr Catherine Bell (65)
Independent
non-executive director
Responsibilities: To manage the group’s financial affairs and to contribute to
the management of the group’s business.
Qualifications: BSc (Hons) Management Sciences, Fellow of the Chartered
Institute of Management Accountants, Chartered Global Management
Accountant and a Fellow of the Association of Corporate Treasurers.
Appointment to the board: October 2010.
Committee membership: Treasury.
Skills and experience: Russ’s skills and experience in accounting, treasury, tax,
M&A and investor relations in other commercial and regulated companies,
along with his extensive experience of driving performance improvement
and managing large capital investment programmes, provides the group with
valuable expertise with regard to its drive for improvements in customer
service, business development, operations, capital investment and financing.
Career experience: Chief financial officer at Telecom New Zealand. Previously
finance director of Lovells, BT Wholesale, BT Networks and Information
Services, ICI Polyurethanes and ICI Japan.
Current directorships/business interests: Member of the supervisory board
and chairman of the audit committee of Orange Polska SA, the largest
listed telecommunications company in Poland. He is a member of the main
committee and chairman of the financial reporting committee of the 100
Group. He is also chief financial officer of United Utilities Water Limited.
Responsibilities: To challenge constructively the executive directors and monitor
the delivery of the strategy within the risk and control framework set by the board
and to lead the board’s agenda on acting responsibly as a business.
Qualifications: MA Geography, PhD Economic History.
Appointment to the board: March 2007.
Committee membership: Nomination, audit, remuneration and corporate
responsibility (chair).
Skills and experience: Catherine’s civil service background and understanding
of the operation of government departments and utility regulation are
particularly valued given the regulated framework within which the business
operates.
Career experience: Formerly a non-executive director of the Civil Aviation
Authority and prior to that a former civil servant and acting permanent
secretary at the Department for Trade and Industry. Previously a non-executive
director of Ensus Limited and Swiss Re GB Plc.
Current directorships/business interests: Non-executive director and executive
board member of the Department of Health and a non-executive director of
National Grid Gas plc and National Grid Electricity Transmission plc. She is also
an independent non-executive director of United Utilities Water Limited.
Catherine is not seeking reappointment at the 2016 AGM.
52
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Stephen Carter (52)
Independent
non-executive director
Mark Clare (58)
Senior independent
non-executive director
Responsibilities: To challenge constructively the executive directors and monitor
the delivery of the strategy within the risk and control framework set by the board.
Qualifications: Bachelor of Law.
Appointment to the board: September 2014.
Committee membership: Nomination, audit and corporate responsibility.
Skills and experience: As the CEO of a FTSE listed company, Stephen brings
current operational experience to the board. His time spent in public service
provides additional insights to the board regarding regulation and government
relations, and his experience in the media and technology industries provides a
new perspective for the board’s discussions.
Career experience: Prior to his appointment as group chief executive at Informa plc
on 1 January 2014, he was appointed CEO designate on 1 September 2013, having
previously served on its board as an independent non-executive director and
member of the audit committee. He has also held non-executive director positions
at Travis Perkins plc and Royal Mail Holdings plc. Previous roles include president/
managing director, Europe, Middle East & Africa, and a member of the executive
management board at Alcatel Lucent Inc. Stephen has also held a number of public
service roles, serving a term as the founding chief executive of Ofcom. He was
formerly chairman of the board at Ashridge Business School. He is a Life Peer.
Current directorships/business interests: Group chief executive at Informa plc
and a governor of the Royal Shakespeare Company. He is also an independent
non-executive director of United Utilities Water Limited.
Responsibilities: Is responsible, in addition to his role as an independent non-
executive director, for discussing any concerns with shareholders that cannot
be resolved through the normal channels of communication with the Chairman
or Chief Executive Officer.
Qualifications: Chartered Management Accountant (FCMA).
Appointment to the board: November 2013.
Committee membership: Nomination, remuneration.
Skills and experience: As a former CEO of a FTSE100 company Mark brings
recent current operational experience to the board. His time at British Gas and
BAA means he has a strong background operating in a regulated environment
and his extensive knowledge of customer-facing businesses is particularly
valuable as the industry prepares for increased competition and pursues its
continuous drive to improve customer service.
Career experience: Mark retired from his position as group chief executive
at Barratt Developments plc in July 2015, a role he had held for nine years.
He is a former trustee of the Building Research Establishment and the UK
Green Building Council. Prior to joining Barratt, he was an executive director
of Centrica plc and held a number of senior roles within both Centrica plc
and British Gas. Mark has also been a non-executive director of BAA plc, the
airports operator.
Current directorships/business interests: He is also an independent non-
executive director of United Utilities Water Limited.
Brian May (52)
Independent
non-executive director
Sara Weller (54)
Independent
non-executive director
Responsibilities: To challenge constructively the executive directors and monitor
the delivery of the strategy within the risk and control framework set by the board
and to lead the audit committee.
Qualifications: BSc (Hons) Actuarial Science, Chartered Accountant FCA.
Appointment to the board: September 2012.
Committee membership: Nomination, audit (chair), treasury (chair).
Skills and experience: Brian joined Bunzl plc in 1993 as head of internal
audit before becoming group treasurer, then finance director (Europe and
Australasia), and is currently finance director. Brian’s background and the
various finance roles that he has held are major assets to the board in chairing
both the audit and the treasury committees.
Career experience: Brian has been finance director at Bunzl plc since 2006 and
prior to that held a number of senior finance roles within the company. Prior to
joining Bunzl, Brian qualified as a chartered accountant with KPMG.
Current directorships/business interests: Finance director at Bunzl plc. He is
also an independent non-executive director of United Utilities Water Limited.
Responsibilities: To challenge constructively the executive directors and monitor
the delivery of the strategy within the risk and control framework set by the board
and to lead the board’s activities concerning directors’ remuneration.
Qualifications: MA Chemistry.
Appointment to the board: March 2012.
Committee membership: Nomination and remuneration (chair).
Skills and experience: Sara’s experience of customer-facing businesses,
together with her knowledge of operating within a regulated environment, is a
major asset to the board as the water industry prepares for the opening up of
the sector to more competition and in improving customer service.
Career experience: Sara has wide-ranging business experience having worked
for Mars, Abbey National and J Sainsbury plc and latterly as managing director
of Argos from 2004 to 2011. She served as the senior independent director at
Mitchells and Butlers plc from 2003 to 2006 and also chaired its remuneration
committee from 2003 to 2010.
Current directorships/business interests: Non-executive director of Lloyds
Banking Group plc and former lead non-executive director for the Department
for Communities and Local Government. Sara is chair of the Planning
Inspectorate (an executive agency of the Department of Communities and
Local Government), a board member at the Higher Education Funding Council
for England and a council member at Cambridge University. She is also an
independent non-executive director of United Utilities Water Limited.
53
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSSTRATEGIC REPORTOUR GOVERNANCE
Corporate governance report
Letter from the Chairman
Dr John McAdam, Chairman
Quick
facts
–
–
–
–
The Chairman met the independence criteria as set
out in the 2014 UK Corporate Code (the Code) when
he was appointed as Chairman
The Code requires that at least half of the board is
made up of independent non-executive directors (the
test excludes the Chairman). At United Utilities, five
out of the remaining seven directors (excluding the
Chairman) are independent non-executive directors
The company secretary attends all board and
committee meetings and advises the Chairman on
governance matters. The company secretariat team
provides administrative support
All directors are subject to annual election at the AGM
held in July. Following the completion of the annual
evaluation process all the non-executive directors
were considered by the board to be independent
and making a valuable and effective contribution to
the board. As a result, the board recommends that
shareholders vote in favour of those standing for a
further term at the forthcoming AGM
Quick
links
The details of the matters that the board has reserved
for its own decision are set out in the ‘Schedule of
matters reserved for the board’. A copy can be found at
corporate.unitedutilities.com/corporate-governance
A copy of the FRC 2014 UK Corporate Governance Code
can be found at frc.org.uk/Our-Work/Publications/
Corporate-Governance/UK-Corporate-Governance-
Code-2014.pdf
54
The board asked Mark Clare,
our senior independent
director, to undertake our
own investigation in order
that lessons could be learnt
and appropriate actions
taken.
Dear Shareholder
Our year
2015/16 has been a challenging year for the group. Key areas of
focus for the board have included ensuring that the programme
of building water and wastewater assets for the new AMP is well
under way, with around £800 million of the total £3.5 billion
having been spent in the first year. Secondly, we announced
on 1 March 2016 that we would enter into a joint venture with
Severn Trent, combining the two companies’ non-household
water and wastewater retail businesses subject to obtaining
clearance from the Competition and Markets Authority (CMA).
Clearance was announced by the CMA on 3 May 2016. The
board’s view was that the synergies created through combining
the two businesses would provide an efficient and cost-effective
operation focused on improved customer service, increased
efficiency and enhanced value for shareholders. Thirdly, we have
had some major operational challenges during the year that
have impacted a large number of our customers in Lancashire
and Cumbria, which will have tested to the full their faith in
our commitment to customer service. The board was kept fully
informed of the progress of these incidents and held a number of
board teleconference calls to discuss the approach being taken by
management to restore normal service to customers. The board
was extremely disappointed that these incidents occurred and
for the inconvenience caused to our customers. In addition to
the investigation of the Lancashire water quality incident by the
Drinking Water Inspectorate, the board asked Mark Clare, our
senior independent director, to undertake our own investigation in
order that lessons could be learnt and appropriate actions taken.
Our approach
As individual directors we are cognisant of our statutory duties.
Our role as the board is to set the strategy of the group and
ensure that management operates the business in accordance
with the strategy in order to safeguard both its long-term success
and customers’ interests, and to create shareholder value. As a
board we have a strong sense of common purpose: our intention
is to hand over the business to our successors in a better and
more sustainable position for the future. Information on our
vision and strategy and the way in which we create value is
included in the strategic report on pages 4 to 49.
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Our governance structure
We held eight scheduled board meetings during the year; in
addition, there were also a number of board meetings held which
directors attended either in person or via telephone conferencing
facilities, a number of which related to the board’s involvement
in the Lancashire water quality incident. A diagram showing the
inter-relationships of the various board committees can be found
on page 58, and reports from each of the committee chairs about
their work can be found on the following pages. The diagram also
describes some of the group’s principal management committees.
Our people
Catherine Bell will be stepping down from the board at the AGM
on 22 July 2016. Catherine has chaired the corporate responsibility
committee and been a key component in driving forward the board’s
corporate responsibility agenda. As a result, during the year, the
nomination committee undertook the process of recruiting a new
independent non-executive director. We announced on 5 May 2016
that Alison Goligher will join the board as a non-executive director
with effect from 1 August 2016 (see page 66).
We have maintained our target of at least 25 per cent of our board
comprising women. In terms of diversity of experience, skills and
personal attributes, I believe we have great diversity around our
board; the directors have many years of experience gained across
a variety of industries, with regulatory backgrounds. Good board
dynamics are vital to the proper interaction and working of a board
of directors. Board directors need to work together effectively
for the good of the company and, in short, they need to get on
with each other; clashes of personality are to be avoided as they
do not facilitate constructive debate and challenge or effective
communication. I believe we have individuals who will apply their
skills and experience to the benefit of our business and speak up if
they disagree but, equally, listen to the views of others.
Although there are time constraints for non-executive directors
who also have an executive role, these individuals bring valuable
current market experience to our board table. Similarly, we
encourage our executive directors to serve as non-executive
directors elsewhere to help broaden their experience, although
this is restricted to one other directorship in a company which
does not conflict with United Utilities’ business.
At the time this report was approved, 40 per cent of our executive
team is made up of women. We are keen to develop our female
senior managers so that, over time, they can be considered for
executive board appointments or as potential candidates for
non-executive directorships in other companies. We believe a
non-executive appointment provides an excellent opportunity for
both personal and career development and it is a way of gaining
valuable experience that may be applied at United Utilities so
long as no conflicts of interest occur.
Our culture and values
Our aim is to act as a responsible business, and our business
principles can be found on our website (see page 63). Our core
values of acting with integrity and focusing on our customers
provides the framework of our business culture and for our
employees in the way in which they go about their daily work.
The board’s role is to set the strategic objectives and ensure that
management takes responsibility for implementation. Should our
employees have concerns about wrongdoing or potential breaches
of our business principles then they can raise their concerns
anonymously via a confidential whistleblowing telephone service.
Any concerns reported would then be investigated.
Notwithstanding the challenges of the water quality incident in
Lancashire, what shone through for the board was the behaviour of
our employees. The ‘tone from the top’ was demonstrated by Steve
Mogford’s personal leadership of the incident, and our staff worked
tirelessly to restore water quality as quickly as possible. On behalf of
the board, I wish to extend our gratitude to them; this provides but
one example of the dedicated approach our employees have to serving
our customers and their importance as an asset of our business.
In accordance with our aim of acting as a responsible business,
the company has complied fully with the 2014 UK Corporate
Governance Code with which we are required to comply by the
FCA’s Listing Rules for the year ended 31 March 2016.
Our approach to risk
Our attitude toward risk is very much aligned with our culture. We
are an organisation that provides a vital service to its customers
and we recognise the responsibilities of this, and our intention
is to act responsibly towards our stakeholders, in particular our
customers, in the provision of our services to them. As a board, on
behalf of our business we must take long-term decisions in order
that our successors are able to operate the business efficiently for
customers in the future and we need to build our assets to meet
future demand and circumstances. All things being equal, we are a
commercial organisation operating within a regulated framework,
and accepting some level of risk is a normal consequence of
doing business. It is the board and the executive team’s role to
understand the risks associated with each activity of the business
and ensure that actions are taken to mitigate these risks.
Our investors
We are in regular contact with our large investors through a regular
scheduled programme of meetings attended by either our CEO
or CFO or both of them; the programme is also supported by the
activities of our investor relations team. Ensuring that executive
directors’ remuneration packages align the directors’ and senior
managers’ interests with the long-term interests of the company
and its shareholders is always a key area of interest for investors. The
executive remuneration policy was approved by shareholders at the
2014 AGM, and is intended to apply until the 2017 AGM. At the time
of the introduction of the new policy, the remuneration committee
under Sara Weller’s leadership went to considerable effort to consult
on the changes with a number of the company’s large investors and
their feedback was taken into account. Although only advisory, at
both the AGMs in 2014 and 2015 over 99 per cent of the votes were
cast in favour of the directors’ remuneration report. We welcome
any feedback you may have on this annual report – please email any
comments you may have to secretariat@uuplc.co.uk
Finally, I would like to wish Catherine every success for the future
and thank her for her extensive contribution to the board and United
Utilities.
Dr John McAdam
Chairman
55
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSSTRATEGIC REPORTOUR GOVERNANCE
Overview of the board’s responsibilities
– The board sets the strategy of the group, ensuring the long
term success of the group for customers, investors and wider
stakeholders, and in creating shareholder value
– The board is responsible for challenging and encouraging
the executive team in its interpretation and implementation
of how it manages the business, and that it is doing so in
accordance with the strategic goals the board has set
– The board has responsibility for ensuring the company’s
internal control systems (including financial, operational and
compliance) and processes are sound and fit for purpose.
See the ‘accountability’ section of this report on page 70 for
more detail
– The board must ensure that the company has the necessary
financial resources and people with the necessary skills to
achieve its objectives. It also reviews managerial performance
annually
– The UUG board has oversight of capital expenditure projects
within UUW which exceed £50 million, and any project which
materially increases the group’s risk profile or is not in the
ordinary course of the group’s business
– Full details of the matters that the board has reserved for its
own decision-making, due to their importance to the business
or the working of the board, can be found on our website at
corporate.unitedutilities.com/corporate-governance
Corporate governance report
Code principles
Leadership
Read more on pages 56 to 60
Effectiveness
Read more on pages 60 to 68
Relations with shareholders
Read more on pages 69 to 70
Accountability
Read more on pages 70 to 79
Remuneration
Read more on pages 82 to 101
Code principle – Leadership
Introduction by Dr John McAdam
“ As the board of directors we are collectively responsible
for the long-term success of the company, although there
is a clear division of responsibility between the non-
executive directors whose role is to challenge and advise
and the executive directors who have responsibility
for running and operating the business. The executive
directors provide the board with its window into the
business and the relationships within the board need to
be built on trust. Board colleagues are always extremely
supportive of the need to supplement the scheduled
board calendar with conference calls and are generous
with their advice and input.”
56
Pictured right: Rooden reservoir, Piethorne Valley,
Greater Manchester.
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Governance structure for our board
and our committees
In line with the Code, the board delegates certain roles and
responsibilities to its principal board committees, as shown
in the diagram on page 58. Whilst the board retains overall
responsibility, a sub-committee structure allows these
committees to probe the subject matter more deeply and gain
a greater understanding of the detail, and then report back
to the board on the matters discussed, decisions taken, and
where appropriate make recommendations to the board on
matters requiring its approval. The reports of the principal
board committees required by the Code can be found on the
subsequent pages. Minutes of the board and principal committee
meetings (with the exception of the remuneration committee)
are tabled at board meetings and the chairs of each of the board
committees report verbally to the board on their activities. The
Chairman chairs the nomination committee; all other principal
board committees are chaired by independent non-executive
directors who have particular skills or interests in the activities of
those committees.
The executive team is chaired by the CEO, and its members are
the senior managers who have a direct reporting line to the
CEO. The executive team meets monthly; it is responsible for
operational matters and implementing the strategies that the
board has set, and the day-to-day running of the business. Short
biographies of the executive team can be found on our website at
corporate.unitedutilities.com/united-utilities-executive-team
The structure chart shown on page 58 also shows the principal
management committees and a brief description of their roles.
These committees enable senior management to understand and,
if necessary, challenge the business in its interpretation of the
implementation of the strategies the board has set. The board
received reports from the CEO and CFO at every scheduled board
meeting, providing the board with an updated overview of the
business and its financial position.
57
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Corporate governance report
Governance structure of the board and its principal committees and the principal management committees.
Group Board
Chair: Dr John McAdam
Chief Executive Officer
Steve Mogford
Principal board committees
Principal management committees
Audit committee
Chair: Brian May
Read more on
pages 72 to 79
Remuneration committee
Chair: Sara Weller
Read more on
pages 82 to 101
Nomination committee
Chair: Dr John McAdam
Read more on
pages 64 to 68
Corporate responsibility
committee
Chair: Dr Catherine Bell
Read more on
pages 80 to 81
Treasury committee
Chair: Brian May
The committee considers and approves borrowing, leasing,
bonding and other banking facilities within limits set
by the board. The CFO and treasurer are also members.
Some powers are sub-delegated, within certain limits,
to the CFO and treasurer.
Executive team
Chair: Steve Mogford, CEO
This forum is responsible for implementing the board’s
strategy and the day-to-day operation of running the
business and the CEO will cascade decisions made by
the board to the business via this forum.
Group audit and risk board
Chair: Steve Mogford, CEO
Read more on
page 79
Security governance board
Chair: Sally Cabrini, business services director
This forum is responsible for setting and ensuring
the implementation of the security goals of the
business, encompassing all elements of security,
i.e. IT and systems security, physical security, fraud,
business continuity and resilience and any emerging
security issues.
Quarterly business review
Chair: Steve Mogford, CEO
This forum is responsible for the quarterly review
of operational and financial performance.
Political and regulatory
steering group
Chair: Gaynor Kenyon, corporate affairs director
This forum is responsible for discussing political
and regulatory issues affecting the company,
where any ‘horizon scanning’ issues are raised and
business responses to consultations are agreed.
Key:
Best service to customers
Lowest sustainable cost
Responsible manner
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sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Board activity in 2015/16
Leadership and employees
– Reviewed and discussed the health and safety of employees
Link to
strategic
objectives
Cross reference
See page 38
– Considered board succession planning and the appointment of a new non-executive director
See page 65
– Reviewed and discussed executive succession plans and the needs of the business and received See page 67
an update on the activities to develop talented employees and the people plan
– Discussed the results of the annual employee engagement survey
See page 37
Strategy
– Debated and discussed non-household water and wastewater retail businesses and the joint
See page 8
venture with Severn Trent
– Approved the group’s updated corporate responsibility framework and business principles
See page 63
– Held a strategy session debating and discussing the future direction of the Wholesale business
and the opportunities for growth outside the regulated boundaries of the business
Governance
– Reviewed and debated the risk profile of the group and in particular the principal risks
See page 48
– Approved designated authority levels for the group’s non-regulated activities
– Reviewed and discussed updates on cyber security and information management strategies
See page 48
– Reviewed the terms of reference for the audit, remuneration, treasury and corporate
responsibility committees and received post-meeting reports from the chairs of each committee
summarising discussions and actions
– Reviewed biannual updates on changes and developments in corporate governance and the
implementation of any changes required
– Reviewed and discussed the evaluation of the board, its committees and individual directors and See page 60
conflicts of interest
– Reviewed the performance of the external auditor and recommendation for reappointment
See page 75
– Reviewed the effectiveness of the risk management and internal control systems
See page 70
Regulation (UUW business)
– Reviewed the group’s response and management of the Lancashire water quality incident and
See page 32
independent reviewers’ reports and lessons learnt
– Monitored progress of the implementation of the customer experience programme
See page 25
Non-regulated business
– Reviewed progress on the group’s renewable energy generation and opportunities for expansion
See page 37
Shareholder relations
– Received and discussed a presentation by Makinson Cowell on investors’ views and perceptions See page 69
– Received and discussed feedback from roadshows/presentations to investors by the CEO
See page 69
and/or the CFO
Financial
– Reviewed and approved the 2015-20 dividend policy
– Reviewed and approved the half and full-year results and associated announcements
– Reviewed and approved the company’s tax strategy
– Reviewed and approved the company’s treasury policy and insurance arrangements
See page 6
See page 39
– Reviewed progress with material cases of litigation involving the group
See page 47
– Reviewed and discussed pensions and proposals in relation to the UU defined benefit pension scheme
See page 43
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Corporate governance report
The boardroom table
Chairman
Executive director
Senior independent non-executive director
Independent non-executive director
Company secretary
Board composition
Executive 25%
Non-executive 75%
Male 75%
Female 25%
Attendance at board and committee meetings
Eight scheduled board meetings were planned and held during
the year (2015: eight). A number of other board meetings
and telephone conferences were also held during the year, as
the need arose. The table below shows the actual number of
scheduled meetings attended and the maximum number of
scheduled meetings which the directors could have attended.
Only in exceptional circumstances would directors not attend
board and committee meetings. Similarly, every effort is made
to attend ad hoc meetings either in person or via the use of
video or telephone conferencing facilities if needs be. None of
our non-executive directors have raised concerns over the time
commitment required of them to fulfil their duties.
On the evening before most scheduled board meetings all the
non-executive directors meet together with the CEO; this time
is usefully spent enabling board colleagues to share views and
consider issues impacting the company. Time together also helps
to build relationships on a personal level, which contributes to
better relationships and decision-making around the board table.
Dr John McAdam
Steve Mogford
Russ Houlden
Dr Catherine Bell
Stephen Carter
Mark Clare
Brian May
Sara Weller
Board
meetings
8/8
8/8
8/8
8/8
8/8
8/8
8/8
8/8
Audit
committee
–
–
–
4/4
4/4
–
4/4
–
Remuneration
committee
–
–
–
4/4
–
4/4
–
4/4
Nomination
committee
3/3
–
–
3/3
3/3
3/3
3/3
3/3
Corporate
responsibility
committee
–
2/2
–
2/2
2/2
–
–
–
Treasury
committee
–
–
4/4
–
–
–
4/4
–
Actual number of meetings attended
Maximum number of scheduled meetings which the directors could have attended
Code principle – Effectiveness
Introduction by Dr John McAdam
“ Board colleagues have approached the evaluation
process with renewed vigour this year, underpinned
by the forthcoming challenges of competition and the
Lancashire water quality incident. There is a clear
message that there is more to do.”
Board evaluation
Our board evaluation was conducted internally this year building
on last year’s external evaluation conducted by Lintstock
consultants.
The internal evaluation process was facilitated by the company
secretary and his team. It was based on the completion of
questionnaires by board members assessing both the performance
of the board and of each of its principal committees, and that of
the Chairman and each of the individual non-executive directors.
60
In addition to board members, other members of the executive
team who regularly attend and support the various committee
meetings were asked to complete the same questionnaires where
applicable.
The anonymity of all respondents was ensured throughout the
process in order to encourage an open and frank exchange of
views. The results, once reviewed by the company secretary, were
then discussed with the Chairman and the chair of the relevant
committee; tabled at a meeting of the relevant committee;
and then presented to the board. The Chairman reviewed the
performance of the individual directors. Mark Clare, as the senior
independent director, in discussion with the other non-executive
directors, led the review of the Chairman’s performance.
A summary of the analysis of the 2015/16 evaluation is as follows:
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
2015/16 Areas of assessment
Board composition and
expertise
Board agenda
Board support
Commentary and actions
Board members’ skills and expertise were felt to be appropriate, and in particular the board
members’ knowledge and understanding of the regulatory environment the company operates
within, along with their understanding of the views of regulators, customers and investors.
Additional skills/experience from an engineering/industrial background would strengthen the board.
Given the seriousness of the Lancashire water quality incident it was felt that the considerable board
time spent on the issue was appropriate. Going forward, the board should allow time to consider the
customer experience, along with the key strategic issues of market reform and competition in the
sector.
Presentations to the board and the timeliness of board documentation were appropriate;
improvements had been made to the content, format and length of papers, although this was an
area where focus should be kept under review to ensure continued improvement. The support and
training needs of board members continued to be addressed.
Wider strategic oversight
The involvement of the board in the development of the strategic direction of the group was
considered to be appropriate and the format and content of the board strategy away day held during
the year was felt to have improved, but more time should be allowed for key strategic topics.
Risk management and internal
control
The board’s approach to the management of risk was considered to be appropriate, with suggestions
being made to refine the visibility and oversight of the management of operational and reputational
risk in light of the Lancashire water quality incident.
Succession planning and
human resource management
Committees
Individual directors
Board members felt that the senior management structure and succession planning for executive
and key management positions supported the strategic objectives. The development of a board
succession planning matrix for the board would provide clarity on timescales (see page 65). The
visibility of potential internal candidates for succession amongst the executive team should be
maintained and enhanced, as should the development of executives and candidates suitable to fulfil
critical posts to support the talent pipeline.
The composition and performance of the audit, remuneration, nomination, corporate responsibility
and treasury committees were considered to be appropriate, and the feedback from committee
meetings by committee chairs was full and transparent and meetings chaired effectively. Specific
actions identified were as follows:
Nomination committee: develop a board succession planning matrix and gain an understanding of
the granularity of timescales for succession planning;
Remuneration committee: ensure that succession planning activities and remuneration activities
were aligned;
Audit committee: review the effectiveness of the assurance of risk management systems particularly
in relation to the oversight of the management of operational and reputational risk; and
Corporate responsibility committee: review the analysis of reputational risk to ensure alignment with
the audit committee.
The individual performance of the directors was assessed, all of which were considered to be
independent and effective, and all directors demonstrated the expected level of commitment to
the role. The review of the Chairman’s performance (led by the senior independent director) and
that of Catherine Bell concluded that both continued to demonstrate an effective and independent
approach, fulfil the expected commitment to the role and make an enthusiastic contribution
to discussions in meetings. With the exception of Catherine Bell, all directors would be offering
themselves for reappointment at the 2016 AGM.
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Corporate governance report
2014/15 evaluation recommendations
On completion of the board’s involvement in the PR14 process, More board time has been devoted to market reform and
allow more time to address market reform and competition.
Actions taken during 2015/16
competition.
Continued refinement of content and format of board papers.
Consider improvements to the board strategy day.
CEO and CFO monthly board updates and performance reports
have been revised and well received.
Format and content of the strategy away day had improved,
but still it was felt more time would be preferable. Action to be
carried forward.
Maintain and enhance the visibility and engagement by the
board with potential candidates for succession and maintain the
focus on succession planning for executives and those in critical
posts in the talent pipeline.
A number of members of the executive team have given
presentations to the board on a number of topics. There were a
number of events held during the year where the board has the
opportunity to meet with executives and other senior managers.
Training
Directors regularly receive updates to improve their understanding and knowledge about the business and the regulatory environment.
Specific training has been provided during the year on a number of areas and topics including regulatory matters and changes in reporting
and governance requirements, particularly in relation to the new requirements of the Market Abuse Regulations due to come into force in
July 2016.
Culture and values
Our culture is expressed through our core values which support and facilitate the achievement of our strategic objectives. We
have made significant progress in improving the customer experience and embedding a customer service orientated culture in recent
years. Customer complaints reduced by approximately 75 per cent across the 2010–15 period, and this was recognised in Ofwat’s final
determination in December 2014. On page 29 of the strategic report, details of the KPIs used to monitor customer service can be found. Our
employee surveys (see page 37 of the strategic report) show employee engagement at 75 per cent. Improving customer service and carrying
out our activities with integrity and fairness, for all our stakeholders, are interrelated values. The management team are working hard to
The best service for customers
At the lowest sustainable cost
In a responsible manner
Core value:
Customer
focus
Core value:
Integrity
Core value:
Innovation
Everything we do will be
about our customers and
not us.
We will make promises
knowingly and keep them.
We will innovate to make
our services better, safer
and faster.
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embed these values in our business. A customer nomination system
has been introduced, enabling customers to nominate employees
for ‘WOW! Awards’ as recognition for a job well done. We have
received tremendous feedback, demonstrating the ‘extra mile’ our
employees go to in serving our customers. Furthermore, with the
implementation of our ‘systems thinking’ approach and improving
the technology deployed across our asset base during the current
regulatory period, we would expect to see further improvements in
the standard and efficiency of our service to our customers.
Our business principles can be found on our website at corporate.
unitedutilities.com/united-utilities-business-principles.aspx
Once published, the board will review the observations of the
Financial Reporting Council and its suggestions to boards in
promoting good practice in corporate culture.
WOW!
Awards
Since we introduced The WOW! Awards scheme in 2012,
our employees have been nominated over 10,300 times (as
at 31 March 2016), and our employees’ efforts have earned
United Utilities the most nominations of all the companies
involved in the scheme. So far, we have eight employees
who have each been nominated 100 times and joined the
100 Club! At the annual awards ceremony in November
2015, Lee Jones, one of our network customer inspectors
based at Wilmslow water treatment works, whose tally
at the time was 140 nominations, won the award for ‘the
most inspiring front liner’. Tremendous recognition for Lee,
who explains his approach: “I just do what I’m trained to
do – it’s my job. When you get a WOW! nomination it really
brightens up the day and I really appreciate it. It’s a great
feeling to know a customer is happy with the services we’ve
provided.”
At the same ceremony, United Utilities also won two awards:
‘Putting Customers First’ and ‘Empowering Your People’.
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Corporate governance report
Nomination committee
Dr John McAdam, chair of the nomination committee
Quick
facts
–
–
–
–
–
The Code requires that a ‘majority of members of
the nomination committee should be independent
non-executive directors’
The role of the committee is to make
recommendations to the board on its composition,
balance and membership and on refreshing the
membership of the board committees
The company secretary attends all meetings of the
committee
The business services director, who has
responsibility for human resources, regularly attends
meetings and is responsible for engaging with
executive search recruitment advisors
The CEO is not a member of the committee, but
from time to time is invited to attend. Neither the
Chairman nor the CEO would participate in the
recruitment of their own successor
Quick
links
Terms of reference – corporate.unitedutilities.com/
corporate-governance
Nomination committee members
Dr John McAdam (chair)
Dr Catherine Bell
Stephen Carter
Mark Clare
Brian May
Sara Weller
Read the board of directors’ biographies
on pages 52 and 53
64
To ensure that board
members and senior
management have the
appropriate balance of
skills and experience to
support the group’s strategic
objectives.
Dear Shareholder
As highlighted by the Financial Reporting Council’s (FRC) recently
issued discussion paper on UK Board Succession Planning, we
have tried to provide a more informative explanation of our
succession planning activities. In many ways, given the nature
of the subject matter, it is a difficult topic to report publicly, and
on a human level, people’s lives and circumstances can change,
sometimes at short notice.
As a board that is relatively small in size, succession planning
to ensure that board members and senior management have
the appropriate balance of skills and experience to support the
group’s strategic objectives is a matter that the board as a whole
considers. In accordance with our annual board calendar, we have
two related reviews. First, in June when we review the specifics of
executive succession planning, and secondly in October as part of
the organisational capability review and people plan. All the non-
executive directors are members of the nomination committee
and are involved in the detailed process of recruitment and
consideration of candidates, for both executive and non-executive
board appointments. The nomination committee is supported
in the recruitment process by Sally Cabrini, business services
director, as part of her human resources responsibilities.
Historically, independent non-executive directors at United
Utilities have served a term of between seven and nine years,
a pattern which has facilitated the refreshing of the board, and
also provided a high degree of continuity, and is the pattern that
our succession plan for our independent non-executive directors
works to. Notwithstanding this, the specifics of each of the
non-executive directors’ time of departure has been driven by
their own personal circumstances. Serving beyond a nine-year
term is identified in the Code as being one of the reasons which
could affect a non-executive director’s independence. The Code
excludes board chairmen from the nine-year rule.
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Catherine Bell indicated to the board her intention to retire at
the AGM in July 2016 and so for the fifth successive year we have
undertaken the recruitment process for a new non-executive
director, which culminated in the recruitment of Alison Goligher
who will join the board with effect from 1 August 2016. The
board gender diversity policy is taken into account during every
candidate selection process. Ultimately, we do strive to appoint
the person we believe is best matched to the role in terms of
what they have to offer the company and to make a positive
contribution to the board conversation and board dynamics.
Diversity of outlook and interest is essential to ensuring we have
a different variety of views to contribute to discussions.
In our succession planning we aim to ensure both our board
directors and our senior managers are well equipped with the
right skills and experience to address the challenges of our
business and in pursuing our strategy and be in tune with the
culture of the company. We are mindful of the need to develop
our talent pipeline, at all levels throughout the business, so that
our employees have the skills and experience to support the long
term needs of our business. We will review the recommendations
of the FRC’s report on UK Board Succession Planning when
available with a view to improving our processes.
Dr John McAdam
Chair of the nomination committee
Main responsibilities of the committee
– Lead the process for board appointments and make
recommendations to the board about filling vacancies on the
board, including the company secretary
– Consider the request from executive directors for election to
the boards of other companies and make a recommendation
to the board
– Consider the succession planning of directors and members of
– Consider requests from non-executive directors for the
the executive team
– Make recommendations to the board on refreshing the
membership of the board’s principal committees
– Review directors’ conflict authorisations
Directors’ tenure as at 31 March 2016
Dr John McAdam
Steve Mogford
Russ Houlden
Dr Catherine Bell
Stephen Carter
Mark Clare
Brian May
Sara Weller
8yrs 2m
5yrs 3m
5yrs 6m
9yrs 1m
1yr 7m
2yrs 5m
3yrs 7m
4yrs 1m
7
0
0
2
h
c
r
a
M
1
3
8
0
0
2
h
c
r
a
M
1
3
9
0
0
2
h
c
r
a
M
1
3
0
1
0
2
h
c
r
a
M
1
3
1
1
0
2
h
c
r
a
M
1
3
2
1
0
2
h
c
r
a
M
1
3
3
1
0
2
h
c
r
a
M
1
3
4
1
0
2
h
c
r
a
M
1
3
5
1
0
2
h
c
r
a
M
1
3
6
1
0
2
h
c
r
a
M
1
3
Age profile
50–55
37.5%
61–65
12.5%
56–60
37.5%
66–70
12.5%
election to the boards of other companies; this role has been
delegated to the Chairman (other than in respect of his own
position)
What has been on the committee’s agenda
during the year
1. Board succession
The committee:
– reviewed a draft written succession planning matrix
(incorporating the skills matrix) for the board directors as a
useful guiding tool to support the long-term planning process
for board appointments. The succession planning matrix
highlights the Code governance requirements; existing directors’
terms of appointment; the projected strategic needs of the
business and the resulting preferred experience of any potential
new board member and potential successors to a role (where
identified) and those who could act as an interim should the
need arise;
– with reference to the succession planning matrix, drafted and
approved a brief, setting out the attributes and experience of a
preferred candidate in light of the needs of the business at this
point in the regulatory cycle and to reflect the changes to the
business in terms of the increasing competition and the need
to strengthen the engineering and industrial capabilities of the
board. The brief was issued to a number of executive search
consultants to begin the process of the recruitment of a non-
executive director. A number of executive search consultants
were invited to present their understanding of the brief and
their knowledge of the company;
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Corporate governance report
Nomination committee
Skills matrix of board directors
Finance/
accounting
✓
✓
✓
Utilities
✓
✓
✓
✓
✓
✓
Dr John McAdam
Steve Mogford
Russ Houlden
Dr Catherine Bell
Stephen Carter
Mark Clare
Brian May
Sara Weller
Regulation Government
Construction/
engineering
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Industrial
✓
✓
✓
Customer
facing
✓
✓
✓
FTSE
companies
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
– concluded that JCA, who had demonstrated the best
– considered and reviewed the long list of candidates and
understanding of the role, should be appointed to conduct the
search. (JCA is a signatory to the voluntary code of conduct
on gender diversity for executive search firms; it has no other
connection with the group other than being used from time to
time for executive search purposes);
Alison Goligher
Alison was appointed in October 2014 as a non-
executive director of Meggitt PLC, the engineering
group specialising in extreme environment components
and smart sub-systems for the aerospace, defence
and energy markets. She is a member of the audit,
remuneration and nomination committees at Meggitt.
From 2006 to 2015 she worked for Royal Dutch Shell,
with her most recent executive role as Executive Vice
President Upstream International Unconventionals.
Prior to that she spent 17 years of her early career with
Schlumberger, an international supplier of technology,
integrated project management and information
solutions to the oil and gas industry.
She holds a BSc (Hons) Maths and Physics and a MEng
in Petroleum Engineering.
identified those to be shortlisted for interview initially with the
Chairman, CEO and the business services director. A number
of candidates were then invited to meet with the other non-
executive directors and the CFO; and
– discussed the candidates, following feedback from the
interview process, and the ‘best fit’ with the succession
planning matrix and the skills matrix (as shown above); took
into account the board diversity policy (set out below) and
the brief as provided to the executive search consultants;
and duly made a recommendation to the board to appoint
Alison Goligher as a new non-executive director with effect
from 1 August 2016. Alison brings additional industrial and
engineering experience to the board, areas of expertise which
the board felt could be strengthened (see panel left).
2. Refreshing the membership of the principal
committees
Catherine Bell’s departure from the board will leave a vacancy
on each of the board’s principal committees and as chair of the
corporate responsibility committee. Stephen Carter will succeed
Catherine as chair of the committee. On her appointment on
1 August 2016, Alison Goligher will join the audit, nomination,
remuneration and corporate responsibility committees.
3. Board diversity
The board diversity policy is to ‘ensure the selection process
for board candidates provides access to a range of candidates,
although any appointments will be made on the basis of equal
merit but with due regard for the benefits of diversity on the board,
including gender diversity’. The identification and recruitment of
board members is treated with the utmost importance, meetings
are chaired by the Chairman, and all non-executive directors are
members of the committee and participate both in meetings and
in the recruitment process. As stated by the policy, they are looking
for new directors to bring something different to the board table,
be it in terms of experience, skills, perspective or interests.
We have retained the 25 per cent gender diversity ratio on our
board, in accordance with our board diversity policy.
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We are keen to develop our female senior managers so that, over
time, they can be considered for executive board appointments
or as potential candidates for non-executive directorships in other
companies and we have a number of initiatives in place supporting
women in the workplace. We encourage our senior managers
to take on a non-executive directorship role but recognise that
the responsibilities of such a role are very much a personal
commitment. During the year, Sally Cabrini, business services
director, was appointed as a non-executive director of Lookers plc.
4. Conflicts of interest
The company’s articles of association contain provisions which
permit unconflicted directors to authorise conflict situations.
Each director is required to notify the Chairman of any potential
conflict, and the board reviews the position of each director
annually. No changes were recorded which would impact the
independence of any of the directors.
5. Induction of new non-executive directors
An induction programme is devised for each new non-executive
director. It would include one-to-one meetings with the Chairman
and each of the existing non-executive directors. They will have
one-to-one meetings with the CEO, CFO, managing director of the
wholesale business and the company secretary along with other
members of the executive team. They will also meet members of
the operational teams and visit some of the key operational sites
and capital projects to ensure they get a first-hand understanding
of the water and wastewater business.
New directors receive a briefing on the key duties of being a
director of a regulated water company including the role of
the regulated company’s holding company, and they will also
meet with the director of regulation. They will also meet with
representatives of Ofwat.
6. Wider succession and talent management
For a number of years we have had a written succession plan for
our executive directors and other members of the executive team,
in particular the CEO, CFO, and managing director of wholesale. This
plan identifies an interim internal successor to fill the role in the
short term should the need arise, and the longer term development
needs of potential successors to be able to fulfil the role on a more
permanent basis. As with all our board appointments, we would
always aim to appoint the best person to fulfil the role. It would be
common, when recruiting for a senior role, for an external search to
be conducted alongside an internal candidate recruitment process.
Any changes that are required to the profile of the management
team to reflect the changing needs of the business are considered
by the board in the executive succession plan. Succession and
development initiatives for senior executives include executive
mentoring and international business school training.
During the year, Gary Dixon, customer services director, informed the
CEO of his intention to retire at the end of 2016. This has enabled
a timely recruitment process to be conducted, culminating in the
appointment of an internal candidate, Louise Beardmore, to the role.
As part of the handover, Louise initially worked alongside Gary until
1 April 2016 when she took over the full responsibility for customer
services. Gary will stay with the business, supporting Louise in this
important role until he retires.
Louise Beardmore’s promotion to customer services director from
1 April 2016 demonstrates how we have been able to develop our
own talent in the organisation. Louise joined the company over
20 years ago and in that time has progressed her career through a
variety of roles in operations, customer services and HR. In her last
role as head of business transformation, she led all aspects of change
and transformation across the company to drive improvements
in service and efficiency through people, process and technology
changes. At the time of the approval of this report, there were 10
members of the executive team (2015: nine) including the CEO and
CFO, with a ratio of six males to four females.
During the year, board directors have a number of opportunities to
meet with members of the executive team and those employees at
all levels identified as potential talent within the business.
Summary of board diversity policy
– Ensure the selection process for board candidates provides
access to a range of candidates, although any appointments
will be made on the basis of equal merit but with due regard
for the benefits of diversity on the board, including gender
diversity
– Ensure that the policies adopted by the group will, over time,
promote gender diversity among senior managers who will in
turn aspire to a board position
–
In selecting candidates for board positions, only use the
services of executive search firms who have signed up to
the voluntary code of conduct for executive search firms as
recommended by Lord Davies
– Adopt measurable objectives from time to time for achieving
gender diversity at board level – which is currently to maintain
at least 25 per cent female representation
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Corporate governance report
Nomination committee
Louise Beardmore, customer services director
Working for the United Utilities group for over 20 years,
Louise has held a number of senior positions at North
West Water, Norweb, Vertex and United Utilities, leading
teams in water operations, customer services and HR.
Prior to her new role, Louise was head of business change
and organisational development, supporting all aspects of
transformational change across the group driving people,
process and technology changes to improve service and
drive efficiency.
What have we done in 2015/16?
Improving diversity across the talent pool
In our executive team of 10 (including the CEO and CFO),
four are women, namely Sue Amies-King (business retail
director), Louise Beardmore (who was appointed customer
services director on 1 April 2016), Sally Cabrini (business
services director) and Gaynor Kenyon (corporate affairs
director). We are actively working with these individuals on
their personal development plans, which include building
their external portfolio.
Women hold 21 per cent of senior leadership positions. For
this group, we actively support their individual personal
development plans, which includes encouraging them to
broaden their external network. Last year our employees
set up a self-managed ‘Women in UU’ network. Monthly
meetings are held and internal and external speakers are
invited to address the group. Membership has trebled
during the year. The company will continue to actively
support the network over the coming year and provide
senior support as required.
Our graduate scheme continues to be successful in
attracting female applicants; 26 per cent of applicants were
female, and 44 per cent of those appointed were female,
while the overall number of female graduates on the
scheme is 39 per cent.
In 2015, 30 per cent of our intake of apprentices were
female, an increase of five per cent from 2014. Research
from the Sector Skills Council for Science, Engineering and
Manufacturing Technologies shows the average number
of women in apprenticeships is between five and seven
per cent. All of our apprentices are supported by a senior
manager as part of their career development with us.
We are members of Race for Opportunity, part of Business
in the Community and the leading organisation for ethnic
diversity and inclusion. In 2015 we participated in the
annual benchmarking survey and achieved a bronze award.
Our employee-run lesbian, gay, bisexual and transgender
network has organised a number of employee events during
the year. Most notable was our presence at the Manchester
Gay Pride March in August 2015, where employees were
taking part in the parade wearing our company branded
clothing and driving a United Utilities branded vehicle.
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sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com Code principle – Relations with shareholders
Introduction by Dr John McAdam
“ As Chairman, over the course of the year I receive a
number of items of correspondence from investment and
fund managers and institutional voting agencies. These
communications provide useful insight and can act as
a stimulus for review and change. They are very much
welcomed.”
The board as a whole accepts its responsibility for engaging with
shareholders and is kept fully informed about information in the
marketplace including:
– Makinson Cowell produces an annual survey of investors’
views and perceptions about United Utilities, the results of
which are presented and discussed by the board;
Institutional investors
We are always keen to hear the views of, and engage with,
our shareholders and investors and we have an active investor
relations programme. The activities of the programme include:
– a regular schedule of meetings between the CEO and CFO
and representatives from our major shareholders. This is also
supplemented with meetings hosted by our investor relations
team. During the year, the programme covered over 100
institutions based in the UK, Europe, North America and Asia
Pacific region;
– presentations by the CEO and CFO to groups of institutional
shareholders and investors, both on an ad hoc basis and linked
to our half and full year results announcements;
– regular feedback is provided to the board on the views of our
institutional investors following on from the CEO and CFO’s
meetings;
– close contact is also maintained between the investor relations
team and a range of City analysts that research United
Utilities; and
–
in total, we met or offered to meet with 38 per cent by value
of the overall shareholder base, which represents 69 per
cent of the targetable institutional shareholder base (when
adjusting for shareholders who do not typically meet with
companies, such as indexed funds).
– the board receives regular updates and feedback on activities
within investor relations and reports from sector analysts
to ensure that the board maintains an understanding of
investors’ priorities; and
– the executive and non-executive directors are available to
meet with major shareholders and institutional investors; in
fact, this is one of the specific roles of the senior independent
director.
In meetings with investors, frequent areas of common interest
include operational and environmental performance, customer
service, capital investment, efficiency initiatives and regulatory
outperformance. Investors are always keen to observe financial
stability, and investors are interested in the level of gearing
versus regulatory assumptions, cost of finance, debt portfolio and
maturity profile, future financing requirements and dividends.
The outcome of the price review, covering the 2015–20 period,
was also a key area of interest for them. Looking ahead, investors
will be keen to understand how the company is performing
relative to the price review allowances and targets, along with the
potential implications of regulatory change and political risk.
Retail shareholders
Despite the privatisation process being over 25 years ago, we have
retained a large number of individual shareholders with registered
addresses in the North West of England – in fact around 41 per
cent. We have historically always held our AGM in our region in
Manchester, which enables our more local shareholders, many
of whom are also our customers, to attend the meeting. We
endeavour to hold the meeting at a venue which is both centrally
located in the city (to enable shareholders to use public transport
should they so wish) whilst being mindful of the costs.
There is a considerable amount of information on our website,
including our online report which provides information on our
key social and environmental impacts and performance during
the year. Together with the annual and half-yearly results
announcements, our annual report and financial statements are
available on our website; these are the principal ways in which
we communicate with our shareholders. Our company secretariat
and investor relations teams, along with our registrar, Equiniti,
are also on hand to help our retail shareholders with any queries.
Information for shareholders can also be found on the inside
back cover of this document, with a number of useful website
addresses.
69
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Relations with other providers of capital
Running a water and wastewater business, by its very nature,
requires a long-term outlook. Our regulatory cycle is based on
five-year periods, and we raise associated funding in order to build
and improve our water and wastewater treatment works and
associated network of pipes for each five-year cycle. We are heavily
reliant on successfully acquiring long-term funding from banks and
debt capital markets to fund our capital investment programme.
This requires a long-term support from our credit investors who
invest in the company by making term funding available in return
for receiving interest on their investment. We arrange term debt
finance in the bond markets (with maturities typically ranging
from seven years to up to 50 years at issue). Debt finance is
raised via the group’s London listed multi-issuer Euro Medium
Term Note Programme, which gives us access to the sterling and
euro public bond markets and privately arranged note issues.
Committed credit facilities are arranged with our relationship
banks on a bilateral basis. Additionally, the European Investment
Bank (EIB), which is the financing arm of the European Union, is
our single biggest lender, currently providing over £2 billion of
debt and undrawn facilities to support our capital investment
programmes (past and present). The group currently has gross
borrowings of £6,978 million.
Given the importance of debt funding to our group, we have
an active credit investor programme coordinated by our group
treasury team, which provides a first point of contact for credit
investors’ queries and maintains a dedicated area of the company’s
website. One-to-one meetings are held with credit investors
through a programme aimed at the major European fund managers
known to invest in corporate bonds that may be existing holders of
the group’s debt or potential holders. Regular mailings of company
information are sent in order to keep credit investors informed of
significant events. The treasury team has regular dialogue with the
group’s relationship banks and the EIB. More information can be
found on our website at corporate.unitedutilities.com/93.aspx
Code principle – Accountability
Introduction by Dr John McAdam
“ We engaged the services of a risk management
consultancy following the Lancashire water quality
incident, as part of the internal investigation into the
incident to assess whether our existing risk management
framework was fit for purpose in identifying and
assessing risk and whether the risk management
framework was being used effectively.”
Board’s approach to risk management and
internal control
The board is responsible for determining the nature and extent
of the risks that it is willing to take to achieve its strategic
objectives. The board is also responsible for ensuring that the
company’s risk management and internal control systems are
effectively managed across the business and that they receive
an appropriate level of scrutiny and board time. The group’s
70
risks predominantly reflect those of all regulated water and
wastewater companies. One of the most significant risks is that
of failing to achieve our regulatory performance targets or failing
to fulfil our obligations in any five-year planning cycle, leading
potentially to the imposition of fines and penalties. 2015/16 has
been the first year of our current five-year planning cycle, and in
terms of our capital programme we have had a smooth start.
During the year, the board engaged an independent review of the
effectiveness of the risk management framework as part of the
internal investigation led by the Senior Independent Director of
the Lancashire water quality incident. The independent review
concluded that the risk management framework was robust and
reflected best practice and there was active engagement with risk
management by senior management, the executive team and the
board but could be strengthened. The recommendations of this
internal investigation included: the need for centralisation of the
drinking water safety plans within wholesale to aid consistency;
improved application of the risk management process; further
embedding existing risk management processes within wholesale
and improving system integration; and increasing the focus on
reputational and operational risks.
The board, following the review by the audit committee,
concluded that it was appropriate to adopt the going concern
basis of accounting (see page 122). Similarly, in accordance with
the principles of the Code, the board concluded, following a
recommendation from the audit committee, that it was appropriate
to provide a long-term viability statement (see page 71). Assurance
supporting these statements was provided by the review of: the
group’s key financial measures; the key credit financial ratios; the
group’s liquidity and UUW’s ongoing ability to meet its financial
covenants; and the contingent liabilities of the group.
As part of the assurance process, the board also took into account
the principal risks and uncertainties facing the company, and
the actions taken to mitigate those risks. These principal risks
and uncertainties are detailed on pages 48 and 49, as are the
risk management processes and structures used to monitor and
manage them. Biannually, the board receives a report detailing
management’s assessment of the most significant risks facing the
company. The report gives an indication of the level of exposure,
subject to the mitigating controls in place, for the risk profile of
the group. The board also receives information during the year
from the treasury committee (to which the board has delegated
matters of a treasury nature – see the structure diagram on page
58) including such matters as liquidity policy, the group’s capital
funding requirements and interest rate management.
Review of the effectiveness of the risk
management and internal control systems
Taking into account the information on principal risks and
uncertainties provided on pages 48 and 49, and the ongoing work
of the audit committee in monitoring the risk management and
internal control systems on behalf of the board (and for whom
the committee provides regular updates, see pages 78 and 79),
the board:
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
set by Ofwat, provides a high degree of certainty of cash flows
during the current price control period (which runs to March
2020), while between price control periods there exists additional
protection afforded by Ofwat’s primary legal duty to ensure
that water and wastewater companies are able to finance their
functions. For these reasons the board considers it appropriate to
provide a medium-term viability statement of five years.
The directors have assessed the group’s viability considering
the principal risks as set out on pages 48 to 49, and its ability to
absorb a number of severe but reasonable scenarios, taking into
account those event-based risks assessed to have the highest
possibility of occurrence and the most severe impact. These
include political and regulatory risks, as well as the potential for
a restriction to the availability of financing resulting from a global
capital markets crisis. The viability assessment has considered
the potential impacts of these risks on the group’s business
model, future performance, solvency and liquidity over the
period. As well as the protections which exist from the regulatory
environment within which it operates, a number of mitigating
actions are available in the extreme scenarios considered,
including the restriction of dividend payments. These actions
provide the group with significant scope to improve its liquidity
and capital position to further absorb such threats.
The directors also considered it appropriate to prepare the
financial statements on the going concern basis, as explained in
the basis of preparation paragraph on page 122.
Code principle – Remuneration
Introduction by Dr John McAdam
“ Our remuneration policy has been designed in order
to promote the long-term success of the company and
delivery of the business strategy, with a significant
proportion of senior executives’ pay being performance
related.”
Read the Remuneration committee report
on pages 82 to 101
–
is satisfied that it has carried out a robust assessment of the
principal risks facing the company, including those that would
threaten its business model, future performance, solvency or
liquidity; and
– has reviewed the effectiveness of the risk management
and internal control systems including all material financial,
operational and compliance controls (including those relating
to the financial reporting process) and no significant failings
or weaknesses were identified. After review, it was concluded
that through a combination of the work of the board, the audit
committee and the UUW board (with specific responsibility
for operational and compliance controls), the company’s risk
management and internal controls were indeed effectively
monitored throughout the year.
In the review of the effectiveness of risk management and
internal controls systems the board also took into account the:
– biannual review of significant risks;
– oversight of treasury matters;
– reviewing and assessing the activities of internal audit;
– reviewing management’s internal control self-assessment;
– reviewing reports from the group audit and risk board;
– reviewing the outcome of annual business unit risk assessment
process; and
– reviewing the business risk management framework
supported by the work of the independent reviewer.
Long-term viability statement
The directors have assessed the viability of the group, taking
account of the group’s current position, the potential impact
of the principal risks facing the business in severe but reasonable
scenarios, and the effectiveness of any mitigating actions. Based
on this assessment, the directors have a reasonable expectation
that the group will be able to continue in operation and
meet its liabilities as they fall due over the five-year period
to March 2021.
Read our Principal risks and uncertainties
on pages 46 to 49
This statement has been based upon the group’s strategic
planning process, which is aligned to the price control period
and the group’s robust capital solvency position with a debt to
RCV ratio of around 60 per cent, providing considerable capital
headroom and supporting any increase in medium-term liquidity
if required. The group has a proven track record of being able
to raise new forms of finance in most market conditions, and
expects to continue to do so into the future. In addition, the
board has considered the protections which exists from the
regulatory and economic environment within which it operates.
From an economic perspective, given the nature of water and
wastewater services, threats to the group’s viability from risks
such as reduced market share, substitution of services and
reduced demand are low compared to those faced by many other
industries. From a regulatory perspective the group benefits from
a rolling 25-year licence which, coupled with the price control
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Corporate governance report
Audit committee
Brian May, chair of the audit committee
Quick
facts
–
–
Brian May has chaired the committee since July
2013. He is a serving finance director of a FTSE
100 company and chartered accountant and is
considered by the board to have recent and relevant
financial experience
Other regular attendees at meetings include the
Chairman, the CEO, the CFO, the company secretary,
the head of audit and risk, the group controller, and
representatives from the external auditor KPMG LLP
(KPMG)
–
KPMG and the head of audit and risk both have time
with the committee to raise freely any concerns they
may have without management being present
–
The committee is authorised to seek independent
advice as it sees fit, but has not done so during the year
Quick
links
Terms of reference – corporate.unitedutilities.com/
corporate-governance
FRC Audit Quality Inspection Report 2015 – frc.org.uk/
Our-Work/Publications/Audit-Quality-Review/Audit
-
Quality-Inspections-Annual-Report-2014-15.pdf
Audit committee members
Brian May (chair)
Dr Catherine Bell
Stephen Carter
Read the board of directors’ biographies
on pages 52 and 53
72
Much of the work of the
committee is necessarily
targeted at the regulated
activities of UUW, which
represent over 98 per cent of
group revenues.
Dear Shareholder
This year we are reporting fully against the 2014 Code, and
the terms of reference of the committee have been amended
accordingly. Both the Code and the Competition and Market
Authority’s Statutory Audit Services Order (the Order)* cites the
responsibility for the process and implementation of auditor
appointment to rest with the audit committee and that FTSE 350
companies should put the external audit contract out to tender at
least every 10 years.
Notwithstanding the mandatory 10 year rule, the Order requires
that a company, that has not competitively tendered its audit
services contract in the previous five years, should explain in
the fifth (and subsequent years) why this is in the best interests
of the company’s shareholders. A tender process for statutory
audit services was last conducted in 2011, resulting in a change
of auditor. KPMG commenced their appointment as auditor
and presented their first report to shareholders for the year
ended 31 March 2012. The committee has reviewed the auditor
appointment, as the 2016 year end audit has been KPMG’s fifth
consecutive year in office as statutory auditor. The committee
concluded that it was in the best interests of shareholders not
to competitively tender the statutory audit at this time given
the satisfactory performance of KPMG throughout their current
tenure, and the need for the auditor to be familiar with the
business throughout the period leading up to the next price
review in 2019. Furthermore, given 2015/16 is KPMG’s fifth year
as auditor, the lead audit partner will rotate for the year ended
31 March 2017. In accordance with the Order, the matter will
be kept under review and reported upon annually, but it is
the current intention that a competitive tender would next be
conducted for the financial year ended 31 March 2022. United
Utilities has complied fully with the provisions of the Order for
the year ended 31 March 2016. Further information can be found
on page 76.
Although audit committees have specific responsibilities rooted
in reviewing the group’s financial statements and reviewing the
internal assurance work and external audit of those financial
statements, the committee also reviews the internal control
and risk management processes, leaving the review of the
significant risks to be undertaken by the board. During the year,
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
the board engaged an independent review of the business risk
management framework which was considered to be satisfactory
but recommended a number of actions to enhance the process
(see page 70). A long-term viability statement was first published
in our 2015 annual report; the processes of assurance supporting
our 2016 statement have been considered and enhanced (see
page 71).
Much of the work of the committee is necessarily targeted
at the regulated activities of UUW, which represent over
98 per cent of group revenues and is a reflection of our
commitment to safeguarding the interests of our customers.
We express our thanks to Catherine Bell, who is stepping down
from the board and the committee at the AGM, for her valuable
contribution, and look forward to working with Alison Goligher
when she takes up her appointment and joins the committee.
We have again worked to enhance this report and make it more
informative for the reader and we continue to be committed to
providing meaningful disclosure of the committee’s activities. As
chair of the audit committee, I am committed to ensuring that
the committee’s agenda is kept under review and keeps abreast
of relevant developments.
The following report was approved by the committee at its
meeting held on 18 May 2016.
Brian May
Chair of the audit committee
* The Statutory Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014.
Main responsibilities of the committee
– Make a recommendation to the board for the appointment or
reappointment of the auditor, and to be responsible for the
tender of the audit from time to time and to agree the fees
paid to the auditor
– Establish policies for the provision of any non-audit services by
the auditor
– Review the scope and the results of the annual audit and
report to the board on the effectiveness of the audit process
and how the independence and objectivity of the auditor has
been safeguarded
reporting to the board on the significant issues considered by
the committee in relation to the financial statements and how
these were addressed
– Review the scope, remit and effectiveness of the internal audit
function and the group’s internal control and risk management
systems
– Review the group’s procedures for whistleblowing, reporting
fraud and other inappropriate behaviour and to receive
reports relating thereto
– Report to the board on how it has discharged its
– Review the half-year and annual financial statements and any
announcements relating to financial performance, including
responsibilities
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–
reviewing the committee’s terms of reference and the
conclusions of the committee’s annual evaluation. The
internally facilitated evaluation was undertaken as part of the
overall board evaluation (see page 61). The review explored:
time management and the composition of the committee; the
committee’s processes and support; and the agenda and work
of the committee. It was concluded that the committee was
effective.
How we assessed whether ‘the annual report
and accounts, taken as a whole, is fair,
balanced and understandable and provides
the information necessary for shareholders
to assess the company’s position and
performance, business model and strategy’
The committee, further to the board’s request, has reviewed
the annual report and financial statements with the intention
of providing advice to the board on whether, as required by the
Code, ‘the annual report and accounts, taken as a whole, is fair,
balanced and understandable and provides the information
necessary for shareholders to assess the company’s position and
performance, business model and strategy’.
To make this assessment, all members of the committee received
copies of the annual report and financial statements to review
during the drafting process to ensure that the key messages being
followed in the annual report were aligned with the company’s
position, performance and strategy being pursued; and that the
narrative sections of the annual report were consistent with the
financial statements. The significant issues considered by the
committee in relation to the financial statements were consistent
with those identified by the external auditor in their report on
pages 112 to 115.
The visual presentation of the company’s business model (on
page 12) has been reformatted to make it more understandable
for the reader and there are clear linkages to the company’s
strategic objectives throughout the document.
The committee concluded that the key performance indicators
(KPIs) included in the strategic report (see pages 28 and 29) were,
amongst others, those used by management and reflected the
measures to be monitored by Ofwat during the 2015–20 period.
In addition, the committee was satisfied that all the key events
and issues which had been reported to the board in the CEO’s
monthly report during the year, both good and bad, had been
adequately referenced or reflected within the annual report.
Corporate governance report
Audit committee
What has been on the committee’s agenda
during the year
The committee has an extensive agenda of items of business
which it deals with in conjunction with senior management, the
auditor, the internal audit function and the financial reporting
team. There were four scheduled meetings of the committee
during the year. Items of business considered by the committee
during the year included:
–
–
–
–
–
–
–
–
–
–
–
–
considering the issues and findings brought to the committee’s
attention by the internal audit team and satisfying itself that
management has resolved or is in the process of resolving any
outstanding issues or concerns;
reviewing the assurance work undertaken by internal audit
relating to: the content of the regulatory business plan and
the processes supporting the preparation of the plan; and the
annual regulatory reports;
reviewing the reports from the financial reporting team on the
financial statements, including the UUW financial statements
and other regulatory reports, and considering matters such as
the accounting judgements and policies being applied;
reviewing the proposed audit strategy for the 2015/16
statutory audit, including the level of materiality applied by
KPMG, audit reports from KPMG on the financial statements
and tasking management to resolve any issues relating to
internal controls and risk management systems;
reviewing the going concern and longer term viability assessments
prior to making its recommendations to the board and the
assurance provided in undertaking the viability assessment;
an annual review and approval of the policy on non-audit
services provided by the auditor including the continued use
during 2015/16 of Makinson Cowell (a subsidiary of KPMG)
and the services provided by other accounting firms to the
group during the year;
reviewing the need for, and timing of, the tender for statutory
audit services;
monitoring incidents of whistleblowing and fraud reporting;
biannual oversight and monitoring of the group’s compliance
with the Bribery Act which the board reviews annually;
overseeing and approving the strategic internal audit planning
approach and reviewing reports on the work of the internal
audit function from the head of audit and risk. A new system
of grading for internal audit reports was introduced during
the year;
an externally facilitated review of the business risk
management framework was commissioned by the board in
response to the Lancashire water quality incident;
reviewing the requirements and implications for United
Utilities of the European Union Audit Directive and Audit
Regulation as published in May 2014 and due to come into
force in the UK from 17 June 2016;
–
reviewing the quality and effectiveness of internal audit; and
74
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How we assessed the effectiveness of the
external audit process
The committee, on behalf of the board, is responsible for the
relationship with the external auditor, and part of that role is to
examine the effectiveness of the audit process.
Audit quality is a key requirement. Prior to the statutory audit, at
the half-year, KPMG presented the strategy and scope of the audit
for the financial year, highlighting any areas requiring special
consideration. KPMG then reported against this audit scope at
subsequent committee meetings.
On completion of the audit at the full-year, all members of the
committee, as well as key members of the senior management
team and those who regularly provide input into the audit
committee or have regular contact with the auditor, were
required to complete a questionnaire seeking their views on
how well KPMG performed the year-end audit. Views of the
respondents were sought in respect of: the robustness of the
audit process; the quality of the delivery of the audit; the
expertise of the audit team conducting the audit and that the
degree of professional scepticism applied by the auditor was
appropriate; the appropriateness of the communication between
the committee and the auditor in terms of technical issues; the
quality of the service they gave; and their views on the quality of
the interaction between the audit partners, audit manager and
the company. The feedback was collated and presented to the
committee’s meeting in November 2015, at which the conclusions
were discussed and any opportunities for improvement brought
to the attention of the external auditor.
Private meetings are held at each committee meeting between
the audit committee and the representatives of the external
auditor without management being present in order to encourage
open and transparent feedback by both parties.
The committee concluded that the overall external audit process
and services provided by KPMG were satisfactory and effective.
How we assessed the independence of our
external auditor
There are two aspects to auditor independence that the
committee monitors.
First, in accordance with the Auditing Practices Board Ethical
Standards, KPMG has to implement rules and requirements such
that none of its employees working on our audit can hold any
shares in United Utilities Group PLC. KPMG is also required to tell
us about any significant facts and matters that may reasonably be
thought to bear on its independence or on the objectivity of the
lead partner and the audit team. The lead partner must change
every five years and the quality review partner, who reviews the
judgements of the audit team actually doing the audit, rotates
every seven years along with the key audit partner.
Secondly, the committee considers and approves all the fees
that it pays for audit, audit-related and non-audit services from
KPMG. KPMG is prohibited from providing certain services to
the group, such as operational consulting, internal audit services
and strategic planning support, as it is felt that these types
of services could impede their independence. Furthermore,
auditor independence is also safeguarded by limiting the value
of non-audit services performed by the external auditor, which
should not ordinarily exceed 100 per cent of the audit fee.
The committee has discretion in exceptional circumstances or
where a compelling commercial justification can be provided for
this cap on non-audit fees to be exceeded. The CFO can pre-
approve expenditure in respect of non-audit services, such as
tax compliance work, of up to £100,000. Thereafter, any fees for
non-audit services up to 100 per cent of the audit fee cap can be
approved by the committee chair. Any such fees are reported to
the committee for review.
For a number of years, the group has engaged the consultancy
firm Makinson Cowell to provide it with investment research
and advice. As reported in the 31 March 2014 annual report,
Makinson Cowell was acquired by KPMG in June 2013; therefore,
the fees paid to Makinson Cowell are included in the total of
‘other non-audit services’ paid to KPMG (see the bar chart on
page 76). As part of the annual review by the committee of the
non-audit services policy the engagement of Makinson Cowell
was considered. The committee took into account the board’s
satisfaction with the services provided by Makinson Cowell and
concluded that it was appropriate for their services to be retained
for the year ended 31 March 2016. The committee will review
its policy and the content of the company’s list of non-audit
services that the statutory auditor is not able to provide when the
outcome of the FRC’s consultation on the implementation of the
EU Audit Directive and Audit Regulation becomes available, which
applies to financial years starting on or after 17 June 2016.
As part of UUW’s licence conditions it is required to prepare
audited regulatory accounts, which are derived from the statutory
financial statements. Given the audit of the statutory financial
statements is already undertaken by KPMG, there are efficiencies
and cost savings if KPMG also audits the regulatory accounts.
Fees paid to KPMG also include audit-related services in relation
to UUW regulatory assurance work as shown in the bar chart on
page 76.
Taking into account our findings in relation to the effectiveness
of the audit process and in relation to the independence of
KPMG, the committee was satisfied that KPMG continues to be
independent, and free from any conflicting interest with the
group. As a result, the committee recommended to the board
that KPMG be proposed for reappointment at the forthcoming
AGM in July 2016. There are no contractual obligations that
restrict the committee’s choice of external auditor and no auditor
liability agreement has been entered into.
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Audit committee
Fees paid to KPMG (£’000)
300
250
200
150
100
50
0
2
9
1
1
2
5
0
2
2
3
9
2
3
8
2
1
6
2
0
3
4
5
4
3
3
9
3
0
2014
3
0
3
0
2015
Statutory audit - group and company
Audit-related services
Statutory audit - subsidiaries
Other non-audit services
Regulatory reporting and assurance
7
0
3
4
5
4
5
0
5
2016
Notes:
(1) The fees paid to KPMG for statutory audit services were higher in 2015 than the prior year reflecting the additional work required due to the restatement of UUW’s prior
year financial statements on adoption of IFRS during 2014/15.
(2) The fees paid to KPMG for other non-audit services were higher in 2015 than the prior year reflecting the additional work that KPMG undertook relating to the price
review submission. KPMG Consulting was identified as one of the few firms with the capability to undertake the work required within the extremely tight timescales
required.
(3) The fees paid to KPMG for statutory audit-group and company fees were higher in 2016 than the prior year due to the additional work relating to the joint venture with
Severn Trent.
(4) The fees paid to KPMG for regulatory reporting and assurance were higher in 2016 than the prior year reflecting the new regulatory reporting requirements of the
2015–20 period.
(5) The fees paid to KPMG for audit-related services in 2016 were higher than the prior year to reflect agreed upon procedures on the new Ofwat performance report.
of other FTSE 100 utility companies. Furthermore, the committee
agreed that the fee charged for auditing services was competitive
and represented value for money, and that it would not be
efficient use of the committee’s time, nor associated cost to
the company, to conduct a tender process for the audit services
contract.
The committee concluded that it is the current intention that a
competitive tender would next be conducted for the financial
year ended 31 March 2022.
Audit tender
The Order (see page 72) promotes audit tendering every five
years through a ‘comply or explain’ requirement with mandatory
tendering after 10 years. It is the responsibility of the committee
to undertake such a review.
As part of its audit tender review, the committee took into
consideration, amongst other things, audit quality, auditor
independence, the cost of the audit and the likely cost and time
involved in a tender process. It also reviewed when the most
appropriate point in the regulatory cycle would be to conduct an
audit tender, given the benefits of having an experienced audit
team in place in the run-up to the next price determination.
The committee’s view was that the quality of the audit received
from KPMG was satisfactory. This view was informed by the
review of the effectiveness of the external audit process (see
page 75) and by reference to the FRC’s May 2015 Audit Quality
Inspection report of KPMG and its peers (see website address
on page 72). It was concluded that KPMG demonstrated an
independent approach and operated in accordance with the
Ethical Standards of the Auditing Practices Board (‘APB ethical
standards’, see page 75). In accordance with APB ethical
standards, the lead audit partner must change every five years. As
a result, the lead audit partner will be replaced for the 2016/17
financial statements with a partner with relevant audit experience
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Significant issues considered by the committee
in relation to the financial statements and how
these were addressed
In relation to the group’s financial statements, the committee
reviewed the following principal areas of judgement (as noted in
the accounting policies):
Capitalisation of fixed assets
Fixed assets represent a subjective area, particularly in relation to
costs permitted for capitalisation and depreciation policy.
–
The committee reviewed the recovery of the capital overhead
rate which management has applied during the year and
which the committee had approved in the previous year for
the next five-year regulatory period. The capital overhead rate
historically has been established at the commencement of
each five-year regulatory period and is applied as a percentage
of capital expenditure to charge certain capital overhead
costs to capital projects. Management reported the forecast
recovery across the five-year period based upon budgeted
capital expenditure and demonstrated that the rate still
remained appropriate.
Revenue recognition and allowance for
doubtful receivables
Due to the nature of the group’s business, the extent to which
revenue is recognised and doubtful customer debts are provided
against is an area of considerable judgement and estimation.
–
The committee reviewed the current levels of doubtful debt
and credit note provisioning (see note 14 for more detail).
The committee challenged management over the adequacy
of the overall levels of provisioning following these reviews
and was satisfied that the resulting net debtor balance was
appropriate.
Provisions and contingencies
The group makes provisions for contractual and legal claims
which by their nature are subjective and require management to
arrive at a best estimate as to the probable outcomes and costs
associated with each individual case.
–
–
The committee received regular updates on new and existing
claims being made against the group and the extent to which
these have been provided for (see note 20 for details). The
committee focused its attention on the more significant items
and discussed the judgements made by management in
arriving at appropriate provisions in relation to these matters.
Based upon the facts behind each provision and taking
account of any relevant legal advice that may have been
received as well as the past experience of management in
making such provisions and challenging where necessary
the views taken by management and through the assurance
provided by KPMG who cover these as part of their audit, the
committee concluded that the provisions management had
made were appropriate.
Retirement benefits
The group’s defined benefit retirement schemes are an area of
considerable judgement and the performance and position of
which is sensitive to the assumptions made.
–
–
The committee reviewed the methodology and assumptions
used in calculating the defined benefit scheme surplus (see
note A5 for more details). The group employs the services of an
external actuary to perform these calculations and determine
the appropriate assumptions to make. KPMG presented a report
showing how the assumptions applied compared to their client
base. After considering the above, the committee concluded that
the approach taken and assumptions made were appropriate and
fairly balanced in determining the net retirement benefit surplus.
The committee sought from management an understanding
as to the factors which led to the significant increase in the IAS
19 net retirement benefit surplus during the period and noted
that the scheme specific funding basis had not been impacted
by this volatility. Management presented an explanatory note
(see page 151) in order to communicate most effectively what
is a complex area for the benefit of the group’s stakeholders.
The committee was satisfied with the explanations provided
by management.
Derivative financial instruments
The group has a significant value of swap instruments, the
valuation of which is based upon models which require certain
judgements and assumptions to be made. Management performs
periodic checks to ensure that the model derived valuations agree
back to third party valuations and KPMG checks a sample against
its own valuation models. It was confirmed to the committee that
such testing had been undertaken during the year and there were
no significant issues identified.
Taxation
The committee considered the tax risks that the group faces and
the key judgements made by management underpinning the
provisions for potential tax liabilities and deferred tax assets. In
addition, the committee took account of KPMG’s assessment
of these provisions. Based upon the above, the committee was
satisfied with the judgements made by management.
Underlying operating profit adjustments
During the year the committee considered and challenged
management’s treatment of items as adjustments to underlying
operating profit which resulted in management enhancing and
further clarifying its existing policy in this area. The committee
approved management’s revised policy on underlying operating
profit adjustments and satisfied itself that those items being
reported as adjustments met the requirements of the revised policy.
A summarised version of the policy is shown on page 28.
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Corporate governance report
Audit committee
The main features of the group’s internal
controls and risk management systems are
summarised below:
a. Internal audit function
The internal audit function is a key element of the group’s corporate
governance framework. Its role is to provide independent and
objective assurance, advice and insight on governance, risk
management and internal control to the audit committee, the board
and to senior management. It supports the organisation’s vision
and objectives by evaluating and assessing the effectiveness of risk
management systems, business processes and key internal controls.
In addition to reviewing the effectiveness of these areas and
reporting on aspects of the group’s compliance with them, internal
audit makes recommendations to address any key issues and
improve processes. Once any recommendations are agreed with
management, it monitors their implementation and reports to the
committee on progress made at every meeting.
A five-year strategic audit planning approach has been developed
and adopted during the previous year. This now facilitates a
more efficient deployment of internal audit resource in providing
assurance coverage over time across the whole business, as well
as greater variation in the nature, depth and breadth of audit
activities. Following approval by the audit committee, this strategic
approach supports the annual audit plan, which is then endorsed
by management, and which the committee also approves. The
plan focuses the team’s work on those areas of greatest risk to
the business. Building on the strategic planning approach, the
development of the plan considers risk assessments, issues
raised by management, prior audit findings and a cyclical review
programme. The in-house team is expanded as and when required
with additional resource and skills sourced from external providers
– primarily PwC at present. The committee keeps the relationship
with PwC under review to ensure the independence of the internal
audit function is maintained. In the course of its work, the internal
audit function also liaises with the statutory auditor, discussing
relevant aspects of their respective activities which ultimately
supports the assurance provided to the audit committee and board.
The effectiveness of the internal audit function’s work is continually
monitored using a variety of inputs including the ongoing audit
reports received, the audit committee’s interaction with the head
of audit and risk, an annual review of the department’s internal
quality assurance report, annual stakeholder surveys in which
committee members also participate as well as any other periodic
quality reporting requested. In addition, during 2015, the quality
and effectiveness of the internal audit function was externally
assessed. Following this assessment, the committee concluded that
the internal audit function was effective and appropriate resources
were available as required.
Internal audit, led by the head of audit and risk, covers the whole of
the group’s activities and reports to the committee and functionally
to the CFO. The head of audit and risk attends all scheduled
meetings of the audit committee, and has the opportunity to raise
any matters with the members of the committee at these meetings
without the presence of management. He is also in regular contact
with the chair of the committee outside of the committee meetings.
b. Risk management systems
The committee receives updates and reports from the head
of audit and risk on activities relating to the company’s risk
management systems and processes at every meeting. These are
then reported to the board, as appropriate. The group designs
its risk management activities in order to manage rather than
eliminate the risk of failure to achieve its strategic objectives.
The CFO has executive responsibility for risk management and is
supported in this role by the head of audit and risk and the corporate
risk manager and his team. The group audit and risk board (GARB) is
a sub-committee of the executive team. The GARB meets quarterly
and reviews the governance processes and the effectiveness and
performance of these processes along with the identification of
emerging trends and themes within and across the business. The
work of the GARB then feeds into the information and assurance
processes of the audit committee and into the board’s assessment of
risk exposures and the strategies to manage these risks.
Supplementing the more detailed ongoing risk management
activities within each business area, the annual business unit
risk assessment process (BURA) seeks to identify how well risk
management is embedded across the different teams in the
business. The BURA involves a high level review of the effectiveness
of the controls that each business unit has in place to mitigate
risks relating to activities in their business area, to encourage the
identification of new and emerging risks and generally to facilitate
improvements in the way risks are managed. The outcome of the
BURA process is communicated to the executive team and the board.
This then forms the basis of the determination of the most significant
risks that the company faces which are then reviewed by the board.
During the previous year, new risk management software was
developed and has now been implemented across the business to
further enhance the company’s risk management process.
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In addition, during 2015/16, the quality and effectiveness of the
risk management process was externally assessed. The external
assurance was sought as part of the internal investigation of the
Lancashire water quality incident. The scope of the assessment
examined whether the existing risk management framework was
effective in identifying and assessing risk; whether employees
(as appropriate) have the necessary capabilities, knowledge and
resource to use the risk management processes effectively; and
whether the mitigation and management of risk at a strategic and
tactical level were effective.
The independent review concluded that the risk management
framework was robust and reflected best practice and there was
active engagement with risk management by senior management,
the executive team and the board but could be strengthened.
Following this assessment, the board will be responsible for ensuring
that the recommendations are implemented including: the need for
centralisation of the drinking water safety plans within wholesale
to aid consistency; improved application of the risk management
process; further embedding existing risk management processes
within wholesale and improving system integration; and
increasing the focus on reputational and operational risks.
c. Internal controls
The committee reviews the group’s internal control systems and
receives updates on the findings of internal audit’s investigations
at every meeting, prior to reporting any significant matters to the
board. Internal control systems are part of our ‘business as usual’
activities and are documented in the company’s internal control
manual which covers financial, operational and compliance controls
and processes. Internal control systems are the responsibility of the
CFO, with the support of the GARB, the financial control team and
the internal audit team, although the head of audit and risk and his
team are directly accountable to the audit committee.
Confirmation that the controls and processes are being adhered
to throughout the business is the responsibility of managers, but
is continually tested by the work of the internal audit team as
part of its annual plan of work which the committee approves
each year as well as aspects being tested by other internal
assurance providers. Compliance with the internal control system
is confirmed annually by the completion of a self-assessment
checklist by senior managers in consultation with their teams. The
results are then reviewed and audited on a sample basis by the
internal audit team and reported to the committee.
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Corporate governance report
Corporate responsibility committee
Dear Shareholder
I am pleased to report on the corporate responsibility committee’s
(CRC) key areas of focus over the past 12 months.
For some time, the CRC has been taking a close look at the critical
factors in building trust and confidence with customers and other
stakeholders over the long-term. This was brought into sharp focus
following the Lancashire water quality incident in summer 2015 (see
case study, page 32) and the December 2015 winter floods in Cumbria,
Lancashire and Greater Manchester (see case study, page 35).
The committee closely examined the independent research and other
views gathered about the water quality incident and how it was handled.
The CRC considered how the company had understood customer views
and factored these into its response. The committee was pleased to note
specific actions in relation to those customers considered as vulnerable,
or with additional needs, as well as support for Lancashire community
groups. At the time of writing, with the DWI report yet to be published, it
remains the case that longer-term customer views are contingent on the
outcome of the ongoing investigation.
Following the winter floods, the CRC examined how the company
responds to flooding and resilience risks. The committee will return to
this regularly given the pending government and regulators’ reviews
of resilience, and importance of setting the right framework for
investment decisions.
More broadly, the committee continued to monitor the company’s
progress in delivering its objectives to provide the best service to
customers, at the lowest sustainable cost, in a responsible manner.
I can report that over 75 per cent of the stretching targets, tracked
by the committee to measure the company’s CR performance, were
achieved by the end of the 2010–2015 investment period.
As delivery of the 2015–2020 plan gathers momentum, the committee
discussed how the CR agenda and United Utilities’ strategic intentions
for the next five years should be aligned. The CRC approved a new,
challenging corporate responsibility scorecard for 2015–2020,
recognising the importance of setting targets for the long term and
providing transparency to employees and external stakeholders on the
company’s responsible business performance. Progress will be reported
on the company’s website.
In reviewing progress, the CRC considered a wide range of topics.
These included cross-cutting themes such as governance, reputation,
communication, stakeholder engagement and performance reporting
through to specific topics such as diversity and inclusion, priority
customers, carbon mitigation and community investment.
The CRC encourages the company’s use of independently and externally
assessed national and international benchmarks to measure its responsible
business performance. The committee is again delighted that the company
has retained ‘World Class’ status in the Dow Jones Sustainability index for
the eighth consecutive year and, for the second consecutive year, leads the
multi-utility and water sector. The company also performed strongly in the
Carbon Disclosure Project, scoring over 97 per cent.
I have found it a real privilege to oversee the company’s responsible
business agenda for the past seven years. As I prepare to hand
over chairmanship of the CRC to Stephen Carter, I know that he will
ensure it continues to champion this topic on behalf of the board.
Acting responsibly helps United Utilities to be a successful long-term
business for both shareholders and customers. I wish Stephen, and
the company, every success.
Dr Catherine Bell
Chair of the corporate responsibility committee
Dr Catherine Bell, chair of the corporate responsibility committee
Quick
facts
–
–
–
–
The committee comprises three directors appointed
by the board, two of whom are independent non-
executive directors
The company secretary attends all meetings of the
committee
The corporate affairs director, who has responsibility
for company reputation, and the business services
director, who has responsibility for human
resources, regularly attend meetings
Senior operational managers attend the committee
to report on the environmental and social impact of
major investment programmes and projects
–
The corporate responsibility committee has existed
for over seven years
Quick
links
Terms of reference – corporate.unitedutilities.com/
corporate-governance
Corporate responsibility members
Catherine Bell (chair)
Stephen Carter
Steve Mogford
Read the board of directors’ biographies
on pages 52 and 53
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Main responsibilities of the committee
The board approved a modified set of terms of reference for the
CRC in April 2016. The main duties are to:
– Consider and recommend to the board the broad corporate
responsibility (CR) policy taking into account the company’s
desired CR positioning
– Keep under review the group’s approach to CR and ensure it is
in alignment with the group strategy
– Review CR issues and objectives material to the group’s
stakeholders and identify and monitor the extent to which
they are reflected in group strategies, plans and policies
– Monitor and review the status of the company’s reputation and
examine the contribution the group’s corporate responsibility
activities make towards protecting and enhancing this
What has been on the committee’s agenda
during the year
In carrying out its duties, in the past 12 months the CRC has paid
particular attention to:
– governance – the committee and board agreed to amend its terms
of reference to acknowledge how the CRC has increasingly focused
on the close relationship between the CR agenda and reputation, a
theme also noted in the committee’s annual evaluation;
– trust and reputation – how the company addressed the
challenges of trust and transparency, especially after a year
in which major events took place, notably the water quality
incident and the winter floods. The committee conducted a
deep dive into evidence gathered on customer views and also
reviewed the key reputational risks facing the company;
– communicating responsible business – how strong external
communication of the company’s corporate responsibility
achievements will be a central part of building positive
relationships with its broad range of stakeholders; and
– measuring and reporting CR performance – the CRC reviewed
the company’s CR scorecard for 2014/15, noting strengthening
performance on the majority of measures. The continued use
of such metrics to demonstrate tangible delivery of responsible
business performance was agreed and a scorecard for 2015 to 2020
was approved.
Specific topics included:
– resilience to climate change – in light of the December 2015
floods, the CRC examined the company’s approach. The
committee encouraged close scrutiny of the opportunities and
risks for the company and the wider sector, consequent upon
government and regulators’ reviews of resilience;
– carbon strategy and targets – the committee approved a new more
ambitious carbon target, recognising that, as for all companies, the
outcome could be affected by government decisions on the UK
energy mix and energy-related taxation and incentives;
– diversity and inclusion – progress made by the company to improve
the diversity of its workforce was examined, in particular, how the
focus on women has had a positive impact. The CRC noted limited
progress with black and minority ethnic employees, a challenge
– Monitor and review compliance with the board’s CR policy and
scrutinise the effectiveness of the delivery of the CR policy
requirements
– Develop and recommend to the board CR targets and key
performance indicators and receive and review reports on
progress towards the achievement of such targets and indicators
– Review all approved specific giving where the aggregate
financial contribution exceeds £100,000 over the period of
the proposed funding and to review all community giving
expenditure annually
– Review the profile of the charitable donations directed by the
United Utilities Trust Fund
given the company’s main areas of activity are not located in
ethnically diverse locations. The appointment of a senior director
as diversity champion was acknowledged, as was the company’s
attainment of a Bronze Award in Race for Opportunity;
– priority customers – the CRC noted with approval a
comprehensive new policy for engagement with vulnerable
customers, launched as a new service proposition in May 2016
called ‘Priority Services’. The committee supported the provision
of a holistic service to customers with needs categorised as:
physical, mental health, financial, language and life events; and
– community strategy and spend – the committee discussed an
updated framework for community investment and supported
the intention that it would help prioritise investment
objectives, emphasising the need for a flexible approach to
accommodate changing circumstances.
Looking to the next year, the CRC will:
– review progress in delivering responsible business targets set
out to 2020;
– continue its focus on the interaction between CR, communications
and reputation, including a regular look at key reputational risks
and the company’s approach to stakeholder engagement;
– review progress in delivering a number of CR strategies
including:
– natural environment strategy and the company’s approach
to natural capital;
– resilience and climate change;
– sustainable supply chain;
– waste and resource efficiency;
– debt and affordability;
– priority customers;
– talent and young people;
– diversity and inclusion; and
– the company’s approach to community investment.
– consider other matters such as integrated reporting in the
2016/17 annual report and the nature of environmental and
social training for board members.
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Corporate governance report
Annual statement from the remuneration committee chair
The committee is fully
committed to continuing
to align executive pay with
the company’s strategy of
delivering value by providing
the best service to customers,
at the lowest sustainable cost
and in a responsible manner.
Dear Shareholder
I am pleased to introduce the directors’ remuneration report
for the year ended 31 March 2016, which includes my statement,
a summary of the directors’ remuneration policy which took
effect from the date of our 2014 AGM, and the annual report
on remuneration for the year ended 31 March 2016.
Alignment to strategy
The committee is fully committed to continuing to align executive
pay with the company’s strategy of delivering value by providing
the best service to customers, at the lowest sustainable cost
and in a responsible manner. We seek to achieve this by strongly
linking pay with performance, both at an individual and company
level, and by encouraging a significant investment in company
shares. We also recognise that a long-term focus is essential
to creating value and therefore require executives to defer a
significant portion of their incentives.
Implementation of policy in 2015/16
Annual bonus
In 2014/15 the committee reviewed the annual bonus measures
to ensure that they fully incentivise delivery of our business
strategy and annual plan, and reflect the importance and
challenge of regulatory commitments for the period 2015–20.
These bonus measures apply not only to the executive directors,
but also to managers and employees through the company, to
ensure alignment to the business plan at all levels.
As set out in detail in the annual report on remuneration, in this
first year of the new regulatory period underlying financial and
operational performance was good with underlying operating
profit of £604 million, effective delivery of our accelerated
capital programme targets, positive performance against Ofwat’s
outcome delivery incentives (ODIs) and retention of ‘World Class’
status in the Dow Jones Sustainability index.
Sara Weller, chair of the remuneration committee
Quick
facts
–
–
–
The Code requires that ‘the board should establish
a remuneration committee of at least three
independent non-executive directors’
The role of the committee is to set remuneration
terms for all executive directors, other senior
executives and the Chairman
By invitation of the committee, meetings are also
attended by the Chairman, the CEO, the company
secretary, the business services director, the head of
reward and the external advisor to the committee
Quick
links
Terms of reference – corporate.unitedutilities.com/
corporate-governance
Directors’ remuneration policy – annualreport2014.
unitedutilities.com/site-essentials/downloads/annual-
report-2014
Index
At a glance summary
Aligning remuneration to business strategy
Directors’ remuneration policy (abridged)
Annual report on remuneration
Page number
83
84
86
91
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Bonuses were lower than in 2014/15 reflecting the significant
operational challenges which occurred during the year, including the
prolonged water quality incident in Lancashire. Levels of customer
service as measured by Ofwat’s service incentive mechanism (SIM)
fell during this incident and there was a net penalty in respect
of the ODIs for water supply. Reflecting the impact on profit for
shareholders and the inconvenience to customers caused by the
water quality incident, the committee also used its discretion to
reduce the underlying operating profit figure used for assessing
bonus outcome for the executive directors by deducting the £25
million costs related to the incident.
position versus comparator water companies). The awards for
executive directors will vest following an additional two-year
holding period.
During the year both executive directors reached their respective
fifth anniversaries of joining the company. Matching shares,
which had been awarded under one-off Matching Share Incentive
Schemes as part of their terms of appointment, vested in full.
Shareholders benefitted from a total shareholder return of
around 100 per cent over these five-year periods.
Shareholding requirements
Overall, the company’s performance resulted in annual bonus
out-turns for the executive directors of around 54 per cent of
maximum (lower than the 2014/15 outcome of 77 per cent of
maximum) and a company-wide bonus pool totalling £13 million
(down from £15 million in the prior year).
To provide further alignment with shareholder interests, the
board agreed in May 2015 to increase the shareholding guideline
for executive directors from 100 per cent to 200 per cent of base
salary. Both executive directors have a shareholding in excess of
this level.
Long-term incentives
The Long Term Plan awards which were granted in 2013,
and whose performance is measured over the three years to
31 March 2016, are expected to vest at 34 per cent. Despite
strong total shareholder return over the period of around 50 per
cent, the sustainable dividend measure achieved only threshold
performance (following dividend growth for the 2015/16 financial
year of RPI and the achievement of an underlying dividend cover
underpin) and the customer service excellence measure
is expected to out-turn below threshold level (set at median
Agenda for 2016/17
During 2016/17 the committee will be reviewing the directors’
remuneration policy ahead of seeking approval from shareholders
for a revised policy at the 2017 AGM. We will be seeking feedback
from shareholders as part of this review.
I hope we will receive your support for the resolution relating to
remuneration at the 2016 AGM.
Sara Weller
Chair of the remuneration committee
At a glance summary: Executive directors’ remuneration
Key element
Base salary
Implementation of policy
– Salary increase of 2.0 per cent from 1 September 2015 in line with the wider workforce
Benefits and pension – Market competitive benefits package
– Cash pension allowance of 22 per cent of base salary
Annual bonus
– Maximum opportunity of 130 per cent of base salary
– Annual bonus measures changed for 2015/16 to align with new regulatory period 2015–20
– 2015/16 annual bonus outcome of around 54 per cent of maximum
– 50 per cent of 2015/16 annual bonus deferred in shares for three years
– Malus and clawback provisions apply
Long Term Plan
– Maximum opportunity of 130 per cent of base salary
– Estimated long-term incentive vesting of 34 per cent for the performance period 1 April 2013 to
31 March 2016, supported by a total shareholder return of around 50 per cent over the same period.
These awards will vest after an additional two-year holding period
– Malus provisions apply
One-off recruitment
awards
Shareholding
guidelines
– Both executive directors received shares in relation to the vesting of their one-off Matched Share
Investment Schemes which were awarded to them as part of their recruitment terms
– Personal shareholdings remain significantly above the 200 per cent of salary minimum guideline
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Corporate governance report
Aligning remuneration to business strategy
Our remuneration policy has been designed in order to promote the long-term success of the company.
The following table provides a summary of how our incentive framework aligns with our business strategy and the results that it
delivers. Many of the performance measures are key performance indicators (KPIs) for the regulatory period 2015–20 (see pages 28
and 29).
Link to
strategic
objectives
A long-term
approach to
creating value
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Alignment to strategy
Annual bonus
Underlying operating profit Key measure of shareholder value.
Customer service in year
– Service incentive
Delivering the best service to customers is a strategic objective.
mechanism – qualitative
– Service incentive
mechanism –
quantitative
Maintaining and enhancing
services for customers
– Wholesale outcome
delivery incentive (ODI)
composite
– Time, cost and quality of
the capital programme
(TCQi)
Corporate responsibility
Ofwat can apply financial incentives or penalties depending on our
customer service performance.
Delivering the best service to customers is a strategic objective.
There is a direct financial impact on the company of Ofwat incentives
and penalties for delivery/non-delivery of customer promises.
Keeping tight control of our capital programmes ensures we can provide
a reliable service to our customers at the lowest sustainable cost.
– Dow Jones Sustainability
Ensures that we manage our business in a responsible manner.
Index
Personal
Compulsory deferral of
bonus
Long Term Plan (LTP)
Relative total shareholder
return (TSR)
Sustainable dividends
Customer service
excellence
Additional two-year holding
period
Shareholding guidelines
Deferral of part of bonus into shares aligns the interests of executive
directors and shareholders.
Direct measure of delivery of shareholder returns, rewarding
management for the outperformance of a comparator group of
companies.
Direct measure of return to shareholders through dividend payments, whilst
focusing on the creation of strong earnings that ensure the sustainability of
dividends.
This is fundamental to delivering our vision of becoming the best
UK water and wastewater company, providing great service to our
customers. This measure has a direct financial impact on the company
as Ofwat can apply financial incentives or penalties depending on our
customer service performance.
Ensures continued alignment with shareholder interests and provides an
additional period over which malus can be applied.
It is important that a significant investment is made by each executive
director in the shares of the company to provide alignment with
shareholder interests.
Key:
Best service to customers
Lowest sustainable cost
Responsible manner
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A significant proportion of executive directors’ pay is performance-linked, long-term and remains ‘at risk’ (i.e. subject to clawback and
malus provisions for a period over which the committee can recover sums paid or withhold vesting):
Fixed vs performance-linked (%)(1)
Short-term vs long term (%)(1)
-
Fixed
33%
Performancelinked 67%
Shortterm
Longterm
50%
50%
(1) Based on maximum payout scenario for executive directors. Fixed consists of base salary, benefits and pension. Performance-linked consists of the Long Term Plan (LTP)
and annual bonus. Short-term consists of fixed remuneration plus annual bonus paid as cash. Long-term consists of LTP plus annual bonus deferred into shares under the
Deferred Bonus Plan (DBP).
Pay at risk
Year 1
Bonus
performance
assessed
Year 2
Cash bonus
paid
Year 3
LTP awards
performance
assessed
Year 4
Deferred
bonus vests
Year 5
LTP awards
vest
Annual bonus –
cash
Performance
period
Annual bonus –
shares
Performance
period
Long Term
Plan (LTP)
Performance
period
Subject to reduction provisions (clawback)
Subject to withholding provisions (malus)
Further details on what triggers clawback or malus are set out on pages 87 and 88.
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Corporate governance report
Directors’ remuneration policy (abridged)
This part of the directors’ remuneration report sets out an abridged version of the remuneration policy which was approved by
shareholders at the AGM on 25 July 2014. The policy took formal effect from the date of approval and is intended to apply until the
2017 AGM.
In the interests of clarity, the report includes some minor annotations to additionally show, where appropriate, how the policy will be
implemented in 2016/17. A full version of the shareholder approved policy can be found in the Annual Report and Financial Statements
for the year ended 31 March 2014 annualreport2014.unitedutilities.com/site-essentials/downloads/annual-report-2014
Overview of remuneration policy
The company’s remuneration arrangements are designed so that the overall level of remuneration (including salary and benefits,
together with the short and long-term incentive opportunities) is sufficient to attract, retain and motivate executives of the quality
required to run the company successfully. The company does not pay more than is necessary for this purpose. The committee
recognises that the company operates in the North West of England in a regulated environment and therefore needs to ensure that
the structure of executive remuneration reflects both the practices of the markets in which its executives operate, and stakeholder
expectations of how the company should be run.
A significant proportion of senior executives’ remuneration is performance related. Senior executives are incentivised to achieve
stretching results which are delivered with an acceptable level of risk. There is a strong direct link between incentives and the
company’s strategy and if the strategy is delivered, senior executives will be rewarded through the annual bonus and long-term
incentives. If it is not delivered, then a significant part of their potential remuneration will not be paid.
Policy table for directors
Base salary
Read more about Base salary on page 91
Purpose and link to strategy: To attract and retain executives of the experience and quality required to deliver the company’s strategy.
Operation
Reviewed annually, effective 1 September.
Maximum opportunity
Current salary levels are shown in the annual report on
remuneration.
Significant increases in salary should only take place infrequently,
for example where there has been a material increase in:
– the size of the individual’s role;
– the size of the company (through mergers and acquisitions); or
– the pay market for directly comparable companies (for example,
companies of a similar size and complexity).
On recruitment or promotion to executive director, the committee
will take into account previous remuneration and pay levels for
comparable companies when setting salary levels. This may lead
to salary being set at a lower or higher level than for the previous Performance measures
incumbent.
None.
Executive directors will normally receive a salary increase broadly
in line with the increase awarded to the general workforce, unless
one or more of the conditions outlined under ‘operation’ is met.
Where the committee has set the salary of a new hire at a
discount to the market level initially, a series of planned increases
can be implemented over the following few years to bring the
salary to the appropriate market position, subject to individual
performance.
Benefits
Read more about Benefits on page 91
Purpose and link to strategy: To provide market competitive benefits to help recruit and retain high calibre executives.
Operation
Provision of benefits such as:
Maximum opportunity
As it is not possible to calculate in advance the cost of all benefits,
a maximum is not pre-determined.
Performance measures
None.
– health benefits;
– car or car allowance;
– relocation assistance;
–
– group income protection;
– all employee share schemes (e.g. opportunity to join
life assurance;
the ShareBuy scheme);
– travel; and
– communication costs.
Additional benefits might be provided from time to time if the
committee decides payment of such benefits is appropriate and in
line with emerging market practice.
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Policy table for directors continued
Pension
Read more about Pension on page 96
Purpose and link to strategy: To provide a broadly mid-market level of retirement benefits.
Maximum opportunity
Operation
– 25 per cent of salary into a defined contribution scheme; or
Executive directors are offered the choice of:
– a cash allowance of 22 per cent of base salary; or
– a combination of both such that the cost to the company is
– a company contribution into a defined contribution pension
scheme; or
– a cash allowance in lieu of pension; or
– a combination of a company contribution into a defined
contribution pension scheme and a cash allowance.
External hires will not be eligible to join a defined benefit pension
scheme.
Internal promotees who are active members of a United Utilities
defined benefit scheme will be offered the choice of staying in that
scheme or of choosing one of the above options.(1)
broadly the same.
Under the defined benefit schemes, a maximum future accrual of
1/80th pension plus 3/80ths lump sum of final pensionable salary
for each year of service.(1)
Performance measures
None.
Annual bonus
Read more about Annual bonus on pages 92 and 93
Purpose and link to strategy: To incentivise performance against personal objectives and selected financial and operational KPIs
which are directly linked to business strategy. Deferral of part of bonus into shares aligns the interests of executive directors and
shareholders.
Operation
50 per cent paid as cash.
Maximum opportunity
Maximum 130 per cent of salary bonus potential, for the
achievement of stretching performance objectives.
50 per cent deferred into company shares under the Deferred
Bonus Plan (DBP) for three years.
DBP shares accrue dividend equivalents.
Not pensionable.
Bonuses are subject to clawback or malus in the event of a material
overstatement in the financial statements of the company because
of fraud or error.
Deferred shares under the DBP are subject to malus in such
negative circumstances as the committee considers is appropriate.
For example: material misstatement of audited financial results,
serious failure of risk management or serious reputational damage.
Performance measures
Payments predominantly based on financial and operational
performance, with a minority based on achievement of personal
objectives.
Targets set by reference to the company’s financial and operating
plans.
Target bonus of 50 per cent of maximum bonus potential and
bonus of 25 per cent of maximum for threshold performance.
(1)
In 2010 the company made a number of changes to defined benefit pension provision including a restriction on salary increases which count for pension purposes. Since
that time salary increases above inflation (RPI), including those relating to any promotions, are no longer pensionable.
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Corporate governance report
Directors’ remuneration policy (abridged)
Policy table for directors continued
Long Term Plan (LTP)
Read more about Long Term Plan on pages 94 to 96
Purpose and link to strategy: To incentivise long-term value creation and alignment with longer-term returns to shareholders.
Operation
Awards under the Long Term Plan are rights to receive company
shares, subject to certain performance conditions.
Maximum opportunity
130 per cent of salary per annum.
Each award is measured over a three-year performance period starting
at the beginning of the financial year in which awards are granted.
An additional two-year holding period applies after the
end of the three-year performance period.
Vested shares accrue dividend equivalents.
Shares under the LTP are subject to malus in such negative
circumstances as the committee considers are appropriate. For
example: material misstatement of audited financial results,
serious failure of risk management or serious reputational damage.
In exceptional circumstances the committee retains the discretion
to grant awards up to plan limits of 200 per cent of salary.
Performance measures
One-third of awards vest based on relative total shareholder return
(TSR), one-third based on customer service excellence and one-third
based on a sustainable dividends performance condition.
Any vesting is also subject to the committee being satisfied that
the company’s performance on these measures is consistent with
underlying business performance.
100 per cent of awards vest for stretch performance, 25 per cent
of an award vests for threshold performance and no awards vest
for below threshold performance.
Non-executive directors’ fees and benefits
Read more about Non-executive directors’ fees and benefits on page 99
Purpose and link to strategy: To attract non-executive directors with a broad range of experience and skills to oversee the
development and implementation of our strategy.
Operation
The remuneration policy for the non-executive directors (with
the exception of the Chairman) is set by a separate committee
of the board. The policy for the Chairman is determined by the
remuneration committee (of which the Chairman is not a member).
Maximum opportunity
Current fee levels are shown in the annual report on
remuneration.
The value of benefits may vary from year to year according to the
cost to the company.
Performance measures
Non-executive directors are not eligible to participate in any
performance-related arrangements.
Fees are reviewed annually taking into account the levels of fees
paid by companies of a similar size and complexity. Any changes
are effective from 1 September.
Additional fees are paid to the chairs of certain board sub
committees and for the senior independent non-executive director.
No eligibility for bonuses, long-term incentive plans, pension
schemes, healthcare arrangements or employee share schemes.
The company repays any reasonable expenses that a non-executive
director incurs in carrying out their duties as a director. In addition,
travel, hospitality-related and other modest benefits will be
payable on occasion.
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Notes to the policy table
Selection of performance measures and targets
Performance measures for the annual bonus are selected
annually to align with the company’s key strategic goals for the
year and reflect financial, operational and personal objectives.
‘Target’ performance is typically set in line with the business plan
for the year, following rigorous debate and approval of the plan
by the board. Threshold to stretch targets are then set based
on a sliding scale on the basis of relevant commercial factors.
Only modest rewards are available for delivering threshold
performance levels, with rewards at stretch requiring substantial
outperformance of the business plan. Details of the measures
used for the annual bonus are given in the annual report on
remuneration.
Scenarios for total remuneration
LTP targets are set taking into account a number of factors,
including reference to market practice, the company business
plan and analysts’ forecasts where relevant. The LTP will only vest
in full if stretching business performance is achieved.
Annual bonus and long-term incentives – flexibility,
discretion and judgement
The committee will operate the company’s incentive plans
according to their respective rules and consistent with normal
market practice, the Listing Rules and HMRC rules where relevant,
including flexibility in a number of regards.
Any discretion exercised (and the rationale) will be disclosed in
the annual remuneration report.
The charts below show the payout under the remuneration policy for each executive director under three different scenarios. Please
note that the charts have been updated from those in the policy approved at the AGM on 25 July 2014 to reflect updated fixed pay
figures.
Steve Mogford CEO
£’000s
Russ Houlden CFO
£’000s
Fixed
100%
896
Fixed
100%
572
Target
49%
25%
25%
1,823
Target
49%
25%
25%
1,157
Maximum
33%
34%
34%
2,750
Maximum
33%
34%
34%
1,742
0
500
1,000
1,500
2,000
2,500
3,000
0
500
1,000
1,500
2,000
Fixed
Annual Bonus
Long Term Plan
Fixed
Annual Bonus
Long Term Plan
Notes on the scenario methodology:
– Fixed pay is latest known salary plus cash allowance in lieu of pension of 22 per cent of salary and the value of benefits as shown in
the single total figure of remuneration table for 2015/16.
– Target performance is the level of performance required for the bonus and Long Term Plan to pay out at 50 per cent of maximum.
– Maximum performance would result in 100 per cent vesting of the bonus and Long Term Plan.
– Annual bonus includes amounts compulsorily deferred into shares.
– Long Term Plan is measured at face value i.e. no assumption for dividends or changes in share price.
– Amounts relating to all-employee share schemes have, for simplicity, been excluded from the charts.
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Corporate governance report
Directors’ remuneration policy (abridged)
Service contracts and letters of appointment
Executive directors’ service contracts are subject to up to one year’s notice period when terminated by the company and at least six
months’ notice when terminated by the director. A company notice period longer than one year may be provided if necessary for
recruitment, but reducing to a rolling one-year period after the initial period has expired.
The policy on payments for loss of office is set out in the next section.
The Chairman and other non-executive directors have letters of appointment rather than service contracts. Their appointments may be
terminated without compensation at any time. All non-executive directors are subject to re-election at the AGM.
Copies of executive directors’ service contracts and non-executive directors’ letters of appointment are available for inspection at the
company’s registered office during normal hours of business and will be available at the company’s AGM. Copies of non-executive
directors’ letters of appointment can also be viewed on the company’s website.
Shareholding guidelines
The committee believes that it is important for a significant investment to be made by each executive director in the shares of the company
to provide alignment with shareholder interests. Executive directors are encouraged to build up and retain a targeted shareholding of at least
100 per cent of base salary, normally within five years of appointment. There is an expectation that executive directors will continue to build a
shareholding throughout their period of employment with the company, after the target shareholding is reached.
Implementation 2015/16: Minimum shareholding guideline has increased to 200 per cent of salary.
Approach to recruitment remuneration
The remuneration package for a new executive director would be set in accordance with the terms of the company’s approved
remuneration policy in force at the time of appointment.
Buy-out awards
In addition, the committee may offer additional cash and/or share-based elements (on a one-time basis or ongoing) when it considers
these to be in the best interests of the company (and therefore shareholders). Any such payments would be limited to a reasonable
estimate of value of remuneration lost when leaving the former employer and would reflect the delivery mechanism (i.e. cash and/or
share-based), time horizons and whether performance requirements are attached to that remuneration. Shareholders will be informed
of any such payments at the time of appointment.
Maximum level of variable pay
The maximum initial level of long-term incentives which may be awarded to a new executive director will be limited to the maximum
Long Term Plan limit of 200 per cent of salary. Therefore, the maximum initial level of overall variable pay that may be offered will be
330 per cent of salary (i.e. 130 per cent annual bonus plus 200 per cent Long Term Plan). These limits are in addition to the value of any
buy-out arrangements which are governed by the policy above.
In the case of an internal appointment, any variable pay element awarded in respect of the prior role would be allowed to pay
out according to its terms, adjusted as relevant to take into account the appointment. In addition, any other previously awarded
entitlements would continue and be disclosed in the next annual report on remuneration.
Base salary and relocation expenses
The committee has the flexibility to set the salary of a new appointment at a discount to the market level initially, with a series
of planned increases implemented over the following few years to bring the salary to the appropriate market position, subject to
individual performance in the role.
For external and internal appointments, the committee may agree that the company will meet certain relocation expenses as appropriate.
Appointment of non-executive directors
For the appointment of a new Chairman or non-executive director, the fee arrangement would be set in accordance with the approved
remuneration policy in force at that time. Non-executive directors’ fees are set by a separate committee of the board; the Chairman’s
fees are set by the remuneration committee.
Payment for loss of office
The circumstances of the termination (taking into account the individual’s performance) and an individual’s duty and opportunity
to mitigate losses are taken into account in every case. Our policy is to stop or reduce compensatory payments to former executive
directors to the extent that they receive remuneration from other employment during the compensation period. A robust line on
reducing compensation is applied and payments to departing employees may be phased in order to mitigate loss. A full version
of the policy can be found in the Annual Report and Financial Statements for the year ended 31 March 2014 annualreport2014.
unitedutilities.com/site-essentials/downloads/annual-report-2014
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Corporate governance report
Annual report on remuneration
Executive directors’ remuneration for the year ended 31 March 2016
Single total figure of remuneration for executive directors (audited information)
Base salary
£’000
Benefits
£’000
Annual bonus
£’000
Long-term
incentives
£’000
Pension
£’000
Other(2)
£’000
Total
£’000
Year ended
31 March
Steve Mogford
Russ Houlden
2016
707
446
2015
692
437
2016
26
23
2015
26
23
2016
501
313
2016(1)
2015
2015
696 1,440 1,287
688
804
440
2016
156
98
2015
152
96
2016
0
0
2015
2016
2015
31 2,830 2,884
23 1,568 1,823
(1) The long-term incentive amount is in respect of the Long Term Plan award which was granted in July 2013 (and which will vest based on performance over the three-year
period 1 April 2013 to 31 March 2016) and the executive directors’ one-off Matched Share Investment Scheme awards which were granted as part of their terms of
appointment and vested during the year. The Long Term Plan amount is estimated as the vesting percentage for the one-third relating to customer service excellence will
not be known until later in 2016 and the award will not vest until the end of an additional two-year holding period. The table below shows the breakdown of the amount
in the single total figure of remuneration table. See pages 94 and 95 for further detail.
Scheme
2013 Long Term Plan
Matched Share Investment Scheme
Total (shown in the single total figure of remuneration table)
Executive director
Steve Mogford
Russ Houlden
412
1,028
1,440
261
427
688
(2) The figures in this column represent the value of matching shares under the ShareBuy scheme which vested in the year, valued using the closing share price on the day
they vested (the company offers a one-for-five match on partnership shares bought by employees under ShareBuy which cease to become forfeitable one year after they
are awarded). For the year ending 31 March 2015, the figures also include the value of a discretionary cash payment which was made in lieu of dividends foregone on
vested long-term incentives, due to the extended restrictions which were in place on buying and selling shares.
Base salary
Executive director salaries were increased by 2.0 per cent with effect from 1 September 2015, in line with the headline increase applied
across the wider workforce. The committee felt that the increase was supported by satisfactory individual and business performance.
Executive director
Steve Mogford
Russ Houlden
Base salary
£’000
1 Sept 2015
713.0
450.0
1 Sept 2014
699.0
441.3
Benefits
For executive directors, benefits include a car allowance of £14,000; health, life and income protection insurance; travel costs; and
communication costs.
No changes are expected to benefits during the year commencing 1 April 2016 (see page 86 in the policy report).
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Corporate governance report
Annual report on remuneration
Annual bonus
Annual bonus in respect of financial year ended 31 March 2016 (audited information)
Bonuses are earned by reference to the financial year and paid in June following the end of the financial year. Fifty per cent of any
bonus is deferred into shares for three years under the Deferred Bonus Plan.
The performance measures, targets and outcomes in respect of the executive directors’ annual bonus for the year ended 31 March
2016 are set out below. The table on page 84 summarises how these performance measures are linked to our business strategy.
Measure
Underlying operating profit(1)
Threshold
(25%
vesting)
£737.3m
£747.3m
Customer service in year
Service incentive mechanism – qualitative
4.26
4.27
Service incentive mechanism – quantitative
99
Maintaining and enhancing services for customers
Wholesale outcome delivery incentive
composite
(£15.6m)
Time, cost and quality of capital programme
(TCQi)(2)
73%
Corporate responsibility
Dow Jones Sustainability Index rating
95
£2.5m
Personal objectives
Steve Mogford
Russ Houlden
The committee’s overall
assessment of each executive
director’s performance against
their own challenging personal
objectives
Achieved
Stretch
(100%
vesting)
Payout
as a
% of
maximum
Steve Mogford
weighting
(% of award)
Outcome
Russ Houlden
weighting
(% of award)
Outcome
£787.3m
35%
4.40
29%
89
45%
£15.5m
58%
98%
71%
89.9%
World Class 100%
100%
90%
85%
90%
85%
30.0%
10.5%
12.0%
3.4%
4.0%
1.8%
20.0%
11.6%
20.0%
14.2%
4.0%
4.0%
10.0%
9.0%
30.0%
10.5%
12.0%
3.4%
4.0%
1.8%
20.0%
11.6%
20.0%
14.2%
4.0%
4.0%
10.0%
8.5%
Total:
Actual award (% of maximum)
Maximum award (% of salary)
Actual award (% of salary) (£’000 – shown in single figure table)(3)
54.5%
130%
54.0%
130%
70.8% £501k 70.1% £313k
(1) Underlying operating profit is subject to a number of adjustments, principally in regard to infrastructure renewals expenditure. Reflecting the impact on profit for
shareholders and the inconvenience to customers caused by the water quality incident in Lancashire, the committee used its discretion to reduce the underlying
operating profit figure used for assessing bonus outcome for the executive directors by deducting the £25m costs related to the incident. The figure shown in the table
above is the underlying operating profit after the deduction of these costs.
(2) TCQi is an internal measure which measures the extent to which we deliver our capital projects on time, to budget and to the required standard. It is expressed as a
percentage, with a higher percentage representing better performance.
(3) Under the Deferred Bonus Plan, 50 per cent of the annual bonus will be deferred in shares for three years.
Pictured right: Haweswater reservoir,
Cumbria
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sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Annual bonus in respect of financial year commencing 1 April 2016
The maximum bonus opportunity for 2016/17 will remain unchanged at 130 per cent of base salary.
The performance measures and weightings for the executive directors’ annual bonus for the year commencing 1 April 2016 will be
unchanged from those for the year commencing 1 April 2015. The targets for the TCQi and corporate responsibility measure are shown
below. Please note that the other targets are considered commercially sensitive, and consequently these will only be disclosed after
the end of the 2016/17 financial year in the 2016/17 annual report on remuneration.
Measure
Maintaining and enhancing services for customers
Time, cost and quality of capital programme (TCQi)(1)
Corporate responsibility
Dow Jones Sustainability Index rating
Targets
Threshold
(25% vesting)
Stretch (100%
vesting)
Weighting
(% of award)
82.0%
98.0%
20.0%
World Class
4.0%
(1) TCQi is an internal measure which measures the extent to which we deliver our capital projects on time, to budget and to the required standard. It is expressed as a
percentage, with a higher percentage representing better performance.
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Corporate governance report
Annual report on remuneration
Long-term incentives
Performance for vested awards
2013 Long Term Plan (LTP) awards with a performance period ending 31 March 2016 (audited information)
The 2013 LTP awards were granted in July 2013 and performance was measured over the three-year period 1 April 2013 to 31 March
2016. Executive directors’ awards will normally vest in April 2018, following an additional two-year holding period. The unvested shares
will remain subject to malus provisions over this two-year holding period.
Note that the final outcome for the customer service excellence measure (which forms 33 per cent of the award) will not be known
until Ofwat publishes the combined service incentive mechanism scores for the company and its comparator water companies
(expected to be published in late summer 2016). The value of the 2013 LTP awards in the single total figure of remuneration table is
therefore estimated and will be restated in next year’s report once the final outcome is known.
The table below shows how the long-term incentive amount in respect of the 2013 LTP was calculated:
Measure
Relative total shareholder return (TSR)
TSR versus median TSR of FTSE 100 companies
(excluding financial services, oil & gas, and mining
companies)(1)
Measured over the three year performance period
Sustainable dividends
Dividend growth in year ending 31 March 2016
Threshold
(25%
vesting)
Achieved
Intermediate
(80% vesting)
Russ
Houlden
weighting
(% of
award)
vesting) maximum Outcome Outcome
Steve
Mogford
weighting
(% of
award)
Payout
as a % of
Stretch
(100%
Median TSR
Median TSR × 1.15
75.9%
Median TSR x 1.10
Company TSR of 46.7% was between the
threshold TSR of 33.1% and stretch TSR of
53.1%
33.3%
25.3%
33.3%
25.3%
RPI+0%
RPI +0% (2)
RPI+2%
25.0%
33.3%
8.3%
33.3%
8.3%
Underpin 1:
Underpin 2:
✓ Met At least RPI+2% growth in each of the years
ending 31 March 2014 and 31 March 2015
✓ Met Average underlying dividend cover of at least
1.1 over the three year performance period
Customer service excellence
Ranking for the year ended 31 March 2016 versus
18 other water companies using Ofwat’s service
incentive mechanism (SIM) combined score
Overall underpin
Overall vesting is subject to the committee being
satisfied that the company’s performance on these
measures is consistent with underlying business
performance
Estimated vesting (% of award)
Median
rank
Upper quartile
rank
Estimate: Below median
Note that this is an estimate as the final outcome will not
be known until the combined SIM scores are published
later in 2016.
Upper
decile rank
✓ Assumed met.
Note that the committee will make a final assessment
of the company’s performance once the combined SIM
scores are known.
Number of shares granted
Number of dividend equivalent shares
Number of shares before performance conditions applied
Estimated number of shares after performance conditions applied
Three-month average share price at end of performance period(3)
Estimated value at end of performance period (£’000 – shown in single figure table)
0.0%
33.3%
0.0%
33.3%
0.0%
33.6%
33.6%
120,746
12,402
133,148
44,737
£9.23
76,203
7,826
84,029
28,233
£9.23
£412
£261
(1) For the purposes of calculating TSR, the TSR index is averaged over the three months prior to the start and end of the performance period. TSR is independently
calculated by New Bridge Street.
(2) Subject to approval of the final dividend by shareholders at the 2016 AGM.
(3) Average share price over the three-month period 1 January 2016 to 31 March 2016.
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Matched Share Investment Scheme (MSIS) awards which vested in the year ending 31 March 2016 (audited information)
When they joined the company in 2010/11, both executive directors received a one-off MSIS award as part of their terms of appointment.
They acquired shares in the company at their own expense (‘investment shares’) which would be matched under the MSIS on a 1:1
basis (‘matching shares’) provided that they remained employees within the group until the fifth anniversary of their date of joining the
company and did not sell their investment shares. Full details of these awards were disclosed in the 2010/11 annual report.
During the year the executive directors reached their fifth anniversaries of joining and the matching shares vested in full. Since they
bought their investment shares, shareholders have benefitted from a total shareholder return of around 100 per cent.
The table below shows how the long-term incentive amount in respect of the MSIS was calculated:
Date joined the company
Date of grant
Vesting date
Value of investment shares bought (£’000)
Number of matching shares granted
Number of dividend equivalent shares
Number of matching shares vested
Closing share price on date of vesting
Value of matching shares on vesting (£’000 - shown in single figure table)
Performance targets for awards granted in the year
2015 LTP awards with a performance period ending 31 March 2018 (audited information)
Steve Mogford
05.01.11
27.05.11
05.01.16
Russ Houlden
01.10.10
16.12.10
01.10.15
£500
86,742
22,522
109,264
£9.41
£1,028
£210
36,710
9,528
46,238
£9.25
£427
Following the announcement by the board in January 2015 of our dividend policy for the regulatory period 2015–20, the sustainable
dividend measure in the LTP switched focus from dividend growth as the differentiator of performance with dividend cover as an
underpin, to dividend cover being the differentiator with the delivery of our dividend policy as an underpin.
Details about the 2015 LTP performance measures and targets are shown in the following table. Performance is measured over the three-year
period 1 April 2015 to 31 March 2018. The table on page 84 summarises how these performance measures are linked to our business strategy.
Measure
Relative total shareholder return (TSR)
TSR versus median TSR of FTSE 100 companies (excluding
financial services, oil and gas, and mining companies).(1)
Measured over the three year performance period
Sustainable dividends
Average underlying dividend cover over the three-year
performance period
Underpin:
Customer service excellence
Threshold (25%
vesting)
Median TSR
Targets
Intermediate
Stretch (100%
vesting)
–
Median TSR
× 1.15
The targets are considered commercially sensitive and
so are not disclosed in this report. However, actual
targets, performance achieved and awards made will be
published retrospectively so that shareholders can fully
understand the basis for any payouts
Dividend growth of at least RPI in each of the years ending
31 March 2016, 31 March 2017 and 31 March 2018
Weighting
33.3%
33.3%
Ranking for the year ended 31 March 2018 versus 18 other water
companies using Ofwat’s Service Incentive Mechanism (SIM)
combined score
Overall underpin
Overall vesting is subject to the committee being satisfied that the company’s performance on these measures is consistent with
underlying business performance
rank
(80% vesting)
Upper quartile Upper decile rank
Median rank
33.3%
(1) For the purposes of calculating TSR, the TSR index is averaged over the three months prior to the start and end of the performance period. TSR is independently
calculated by New Bridge Street.
Straight-line vesting applies between the threshold, intermediate and stretch targets, with nil vesting below threshold performance.
The committee will have the flexibility to make appropriate adjustments to the performance targets in exceptional circumstances, to
ensure that the award achieves its original purpose.
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Corporate governance report
Annual report on remuneration
Performance targets for future awards
2016 LTP awards with a performance period ending 31 March 2019
The performance targets for the 2016 Long Term Plan (LTP) are expected to be as for the 2015 awards outlined above, with the
exception of the targets for the sustainable dividend performance measure.
Pensions
The executive directors receive a cash allowance of 22 per cent of base salary in lieu of pension. No changes are expected to pensions
during the year commencing 1 April 2016.
External appointments
The company recognises that its executive directors may be invited to become non-executive directors of companies outside the
company and exposure to such non-executive duties can broaden experience and knowledge, which would be of benefit to the
company. Any external appointments are subject to board approval (which would not be given if the proposed appointment was with a
competing company, would lead to a material conflict of interest or could have a detrimental effect on a director’s performance).
Steve Mogford was a non-executive director of Carillion PLC until 31 December 2015 for which he received an annual fee of £60,000.
Russ Houlden is an independent member of the supervisory board, and audit committee chairman, of Orange Polska SA for which he
receives and retains fees estimated annually at around £68,000.
Executive directors’ interests in shares
Executive directors’ shareholding (audited information)
To provide further alignment with shareholder interests, in May 2015 the board agreed to increase the shareholding guidelines
for executive directors from 100 per cent to 200 per cent of base salary. Executive directors are normally expected to reach this
shareholding within five years of appointment. There is also an expectation that they will continue to build a shareholding throughout
their period of employment with the company after the guideline is reached.
Details of beneficial interests in the company’s ordinary shares as at 31 March 2016 held by each of the executive directors and their
connected persons are set out in the table below along with progress against the target shareholding guideline level. The table shows
that both Steve Mogford and Russ Houlden have exceeded the target shareholding.
Shares counting towards shareholding
guidelines at 31 March 2016
Number of
to meet
shareholding
Number of
shares
shares required owned outright
(including
connected
persons)
297,164
73,196
guideline(1)
154,530
97,529
Unvested
shares not
subject to
performance
Total shares
counting
towards
shareholding
Shareholding
as % of base
salary at
31 March
conditions(2)
135,813
85,726
guidelines(3)
369,163
118,649
2016(1)
478%
243%
Shareholding
guideline met
Unvested
shares subject
at 31 March to performance
2016
Yes
Yes
conditions(4)
338,869
213,897
Director
Steve Mogford(5)
Russ Houlden(5)
(1) Share price used is the average share price over the three months from 1 January 2016 to 31 March 2016 (922.8 pence per share).
(2) Unvested shares subject to no further performance conditions such as matching shares under the ‘ShareBuy’ scheme. Includes shares only subject to malus provisions
(3)
(4)
(5)
such as the Deferred Bonus Plan shares in the three-year deferral period and Long Term Plan shares in the two-year holding period.
Includes unvested shares not subject to performance conditions (on a net of tax and national insurance basis), plus the number of shares owned outright.
Includes unvested shares under the Long Term Plan.
In the period 1 April 2016 to 25 May 2016, additional shares were acquired by Steve Mogford (32 ordinary shares) and Russ Houlden (31 ordinary shares) in respect of
their regular monthly contributions to the ‘ShareBuy’ scheme. These will be matched by the company on a one-for-five basis. Under the scheme, matching shares vest
provided the employee remains employed by the company one year after grant.
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Executive directors’ share plan interests 1 April 2015 to 31 March 2016 (audited information)
Steve Mogford
DBP
DBP(2)
DBP(3)
PSP(5)
MSAP(5)
LTP(2)
LTP(2)
LTP
MSIS (2) (8)
ShareBuy matching
shares(10)
TOTAL
Russ Houlden
DBP
DBP(2)
DBP(3)
PSP(5)
MSAP(5)
LTP(2)
LTP(2)
LTP
MSIS(11)
ShareBuy matching
shares(10)
TOTAL
Award date
17.6.13
30.6.14
16.6.15
15.6.12
15.6.12
29.7.13
30.6.14
30.6.15
27.5.11
1.4.15 to
31.3.16
17.6.13
30.6.14
16.6.15
15.6.12
15.6.12
29.7.13
30.6.14
30.6.15
16.12.10
1.4.15 to
31.3.16
Awards
held at
1 April
2015
54,116
39,487
–
76,435
55,044
127,781
101,955
–
106,248
Granted
in year
–
–
36,700
–
–
–
–
98,184
–
Notional
dividends
accrued in
year(1)
Exercised/
vested
in year
Lapsed/
forfeited
in year
2,273
1,658
1,540
–
–
5,367
4,282
1,300
3,016
–
–
–
74,524
53,667
–
–
–
109,264
–
–
–
1,911
1,377
–
–
–
–
Awards
held at
31 March
2016
56,389
41,145
38,240
–
–
133,148
106,237
99,484
–
Face value
Value of
of awards
shares on
granted
in year date vested
(£’000)
(£’000)
–
–
348(4)
–
–
–
–
909(7)
–
–
–
–
748(6)
539(6)
–
–
–
1,028(9)
41
561,107
39
134,923
–
19,436
41
237,496
–
3,288
39
474,682
0
1,257
0
2,315
34,144
24,923
–
48,211
33,931
80,642
64,357
–
44,962
–
–
23,168
–
–
–
–
61,987
–
1,434
1,046
972
–
–
3,387
2,703
821
1,276
–
–
–
47,005
33,082
–
–
–
46,238
–
–
–
1,206
849
–
–
–
–
35,578
25,969
24,140
–
–
84,029
67,060
62,808
–
41
331,211
39
85,194
–
11,639
41
126,366
–
2,055
39
299,623
–
–
220(4)
–
–
–
–
574(7)
–
0
794
–
–
–
472(6)
332(6)
–
–
–
427(12)
0
1,231
(1) Note that these are also subject to performance conditions where applicable.
(2) The awards held at 1 April 2015 have been restated to correct the calculation of cumulative dividend equivalents.
(3) Executive directors were required to defer 50 per cent of their 2014/15 bonus into shares for three years under the DBP. The deferral period will end on 16 June 2018.
There were no service or performance conditions attached; however, deferred bonuses are subject to malus provisions (see page 87 for further information).
(4) The face value of the DBP awards made in 2015 have been calculated using the closing share price on 15 June 2015 (the dealing day prior to date of grant) which was
948.5 pence per share.
(5) 97.5 per cent of the 2012 PSP and MSAP awards vested.
(6) Calculated using the closing share price on date of vesting (19 May 2015) of 1004 pence per share.
(7) The face value of the LTP awards made in 2015 has been calculated using the closing share price on 29 June 2015 (the dealing day prior to date of grant) which was 925.5
pence per share. 25 per cent of the award vests for threshold performance and performance is measured over the period 1 April 2015 to 31 March 2018. Details of the
performance measures and targets are given on page 97.
(8) Matching shares under Steve Mogford’s Matched Share Investment Scheme vested on 5 January 2016. See page 95 for further detail.
(9) Calculated using the closing share price on 5 January 2016 which was 940.5 pence per share.
(10) Under ShareBuy, matching shares vest provided the employee remains employed by the company one year after grant. During the year Steve Mogford purchased 194
partnership shares and was awarded 39 matching shares (at an average share price of 927 pence per share). Russ Houlden purchased 195 partnership shares and was
awarded 39 matching shares (at an average share price of 922 pence per share).
(11) Matching shares under Russ Houlden’s Matched Share Investment Scheme vested on 1 October 2015. See page 95 for further details.
(12) Calculated using the closing share price on 1 October 2015 which was 924.5 pence per share.
Dates of service contracts
Executive directors
Steve Mogford
Russ Houlden
Date of service contract
5.1.11
1.10.10
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Corporate governance report
Annual report on remuneration
Other information
Performance and CEO remuneration comparison
This graph illustrates the company’s performance against the FTSE 100 over the past seven years. The FTSE 100 has been chosen as the
appropriate comparator as the company is a member of the FTSE 100 and it is considered to be the most widely published benchmark for
this purpose. The table below the TSR chart shares the remuneration data for the CEO over the same seven-year period as the TSR chart.
United Utilities Group PLC
FTSE 100 Index
300
250
200
)
£
(
e
u
a
V
l
150
100
100
2009
Year ending 31 March
CEO single figure of
remuneration (£’000)
Annual bonus payment
(% of maximum)
Long term incentive vesting Steve Mogford
(% of maximum)(2)
Steve Mogford
Philip Green
Steve Mogford
Philip Green
265
214
272
203
215
201
189
183
150
123
162
138
164
148
2010
2011
2012
2013
2014
2015
2016
Year ending 31 March
2010
n/a
1,992
n/a
89.2
n/a
2011
377
3,073
90.6
90.8
n/a(3)
2012
1,421
n/a
72.0
n/a
n/a(3)
2013
1,549
n/a
84.4
n/a
n/a(3)
2014
2,378
n/a
78.2
n/a
93.5
2015
2,884
n/a
77.4
n/a
97.5
2016
2,830(1)
n/a
54.5
n/a
33.6(4)
100.0(5)
Philip Green
0(6)
12.5(7)
28.1(8)
100.0(9)
(1) This includes £1.028 million in respect of Steve Mogford’s one-off Matched Share Investment Scheme which ended on 5 January 2016. See page 95 for further details.
(2) For performance period ending on 31 March, unless otherwise stated.
(3) Steve Mogford was not a participant in any long-term incentive plans that had performance periods ending during 2011 to 2013. For those who did participate in those
plans, the vesting as a percentage of maximum was 37.5 per cent for those vesting in 2012 and 35.3 per cent for those vesting in 2013.
(4) The 2013 Long Term Plan amount vesting percentage is estimated (see page 94 for further details).
(5) The retention period applicable to Steve Mogford’s Matched Share Investment Scheme ended on 5 January 2016. See page 95 for further details.
(6) 2007 Performance Share Plan (PSP).
(7) 2007 Matching Share Award Plan (MSAP).
(8) 2008 PSP and MSAP.
(9) The retention period applicable to Philip Green’s Matched Share Investment Scheme ended on 12 February 2011.
Percentage change in CEO’s remuneration versus the wider workforce
The table below shows how the percentage change in the CEO’s salary, benefits and bonus earned in 2014/15 and 2015/16 compares
with the percentage change in the average of each of those components for a group of employees.
Item
Base salary(3) (4)
Taxable benefits
Bonus
Year-on-year
change
CEO
(%)(1)
2.2
0.1
-28.1
Year-on-year
change
employees
(%)(2)
3.2
1.8
-10.3
(1) See single total figure of remuneration table on page 91 for more information.
(2) To aid comparison, the group of employees selected by the committee are those who were employed over the complete two-year period.
(3) On 1 September 2015 Steve Mogford received a base salary increase of 2.0 per cent.
(4)
Includes promotional increases.
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Relative importance of spend on pay
The table below shows the relative importance of spend on pay compared to distributions to shareholders.
Employee costs £m(1)
Dividends paid to shareholders £m
2015/16
268
259
2014/15
260
249
% change
3.1%
4.0%
(1) Employee costs includes wages and salaries, social security costs, and post-employment benefits.
Non-executive directors
Single total figure of remuneration for non-executive directors (audited information)
Salary/fees
£’000
Taxable benefits
£’000
Total
£’000
2016
287
71
62
75
77
n/a
75
2015
281
69
36
69
76
22
72
2016
1
1
0
0
0
n/a
0
2015
1
1
1
1
1
2
0
2016
288
72
62
75
77
n/a
75
2015
282
70
37
70
77
24
72
Dr John McAdam
Dr Catherine Bell
Stephen Carter(1)
Mark Clare
Brian May
Nick Salmon(2)
Sara Weller
(1) Stephen Carter joined the board on 1 September 2014.
(2) Nick Salmon retired from the board on 25 July 2014.
Fees
Non-executive director annual fee rates were reviewed and increased with effect from 1 September 2015 as shown below:
Role
Base fees: Chairman(1)
Base fees: other non-executive directors(2)
Senior independent non-executive director(2)
Chair of audit and treasury committees(2)
Chair of remuneration committee(2)
Chair of corporate responsibility committee(2)
(1) Approved by the remuneration committee.
(2) Approved by a separate committee of the board.
Fees
£’000
1 Sept 2015
290.0
62.60
12.5
15.0
12.5
10.0
1 Sept 2014
284.0
61.35
12.5
15.0
12.5
8.0
Non-executive directors’ shareholding (audited information)
Details of beneficial interests in the company’s ordinary shares as at 31 March 2016 held by each of the non-executive directors and
their connected persons are set out in the table below.
Dr John McAdam
Dr Catherine Bell
Stephen Carter
Mark Clare
Brian May
Sara Weller
(1) From 1 April 2016 to 25 May 2016 there have been no movements in the shareholdings of the non-executive directors.
Number of shares owned
outright (including connected
persons) at 31 March 2016 (1)
1,837
7,000
3,000
7,628
3,000
10,531
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Corporate governance report
Annual report on remuneration
Non-executive directors
Dr John McAdam
Dr Catherine Bell
Stephen Carter
Mark Clare
Brian May
Sara Weller
The remuneration committee
Summary terms of reference
Date first appointed to the
board
4.2.08
19.3.07
1.9.14
1.11.13
1.9.12
1.3.12
The committee’s terms of reference were last reviewed in November 2015 and are available on our website:
corporate.unitedutilities.com/corporate-governance
Composition of the remuneration committee
The committee’s main responsibilities include:
– Making recommendations to the board on the company’s
– Approving the remuneration of the Chairman
framework of executive remuneration and its cost
– Approving the individual employment and remuneration terms
for executive directors and other senior executives, including:
recruitment and severance terms, bonus plans and targets,
and the achievement of performance against targets
– Approving the general employment and remuneration terms
for selected senior employees
– Proposing all new long-term incentive schemes for approval
of the board, and for recommendation by the board to
shareholders
– Assisting the board in reporting to shareholders and
undertaking appropriate discussions as necessary with
institutional investors on aspects of executive remuneration
Member
Sara Weller (chair since 27.7.12)
Dr Catherine Bell
Mark Clare
Member since
1.3.12
1.3.11
1.9.14
Member to
To date
To date
To date
The committee’s members have no personal financial interest in the company other than as shareholders and the fees paid to them as
non-executive directors.
Advisors to the remuneration committee
By invitation of the committee, meetings are also attended by the Chairman of the company (Dr John McAdam), the CEO (Steve
Mogford), the company secretary (Simon Gardiner, who acts as secretary to the committee), the business services director (Sally
Cabrini) and the head of reward (Ruth Henshaw), who are consulted on matters discussed by the committee, unless those matters
relate to their own remuneration. Advice or information is also sought directly from other employees where the committee feels that
such additional contributions will assist the decision-making process.
The committee is authorised to take such internal and external advice as it considers appropriate in connection with carrying out its
duties, including the appointment of its own external remuneration advisors.
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sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
During the year, the committee was assisted in its work by the following external advisor:
Advisor
New Bridge Street
Appointed by
Committee
How appointed
Reappointed following
committee review in 2013 remuneration
Services provided to the
committee in year ended
31 March 2016
General advice on
Fees paid by company for
these services in respect of
year and basis of charge
£86,000
Time/cost basis
matters
Other services provided to the company
– Benchmarking of roles not under the committee’s remit
The independent consultants New Bridge Street (a trading name of Aon Hewitt Limited, an Aon PLC company) are members of the
Remuneration Consultants Group and, as such, voluntarily operate under the Code of Conduct in relation to executive remuneration
consulting in the UK. The committee is satisfied that the advice they received from external advisors is objective and independent.
In addition, during the year the law firms Eversheds and Slaughter and May provided advice on the company’s share schemes to the
company.
Key activities of the remuneration committee over the past year
The committee met four times in the year ended 31 March 2016.
– Reviewed the committee’s performance during the period
Regular activities
– Approved the 2014/15 directors’ remuneration report
– Reviewed the base salaries of executive directors and other
members of the executive team
– Reviewed the base fee for the Chairman
– Reviewed the committee’s terms of reference
– Considered market trends in executive remuneration,
including in the wider utilities sector
Other activities
– Completed a ‘mid-term’ review of policy
– Assessed the achievement of targets for the 2014/15 annual
bonus scheme, reviewed progress against the targets for the
2015/16 annual bonus scheme, and set the targets in principle
for the 2016/17 annual bonus scheme
– Approved the treatment of unvested share awards for
participants impacted by the joint venture agreement with
Severn Trent which combines the two companies’ non-
household water and wastewater retail businesses
– Set the targets for Long Term Plan (LTP) awards made in 2015
– Approved vesting of MSIS award and DSAS awards
– Reviewed and approved awards made under the annual bonus
–
scheme, Deferred Bonus Plan (DBP) and LTP
Increased shareholding guidelines to 200 per cent of salary for
current and new executive directors in May 2015
– Monitored progress against shareholding guidelines for
– Reviewed the treatment of delisted companies in the LTP TSR
executive directors and other members of the executive team
comparator group
2015 AGM: Statement of voting
At the last Annual General Meeting on 24 July 2015, votes on the directors’ remuneration report were cast as follows:
Resolution
Approval of the 2014/15 directors’ remuneration
report (other than the part containing the directors’
remuneration policy)
For
%
Number
99.50 391,311,284
Against
%
0.50
Number
1,958,225
Abstain
Number
3,946,108
The directors’ remuneration report was approved by the board of directors on 25 May 2016 and signed on its behalf by:
Sara Weller
Chair of the remuneration committee
101
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSSTRATEGIC REPORTOUR GOVERNANCE
The group’s principal subsidiary, United Utilities Water Limited
(UUW), operates solely in the UK and its customers are based
here. All of the group’s profits are taxable in the UK (other than
the group’s 35 per cent holding in Tallinn Water which typically
generates around £5 million profit before tax with around £1
million Estonian tax paid).
In addition to corporation tax, the group pays and bears further
annual economic contributions, typically of around £130–140
million per annum, in the form of business rates, employer’s
national insurance contributions, environmental taxes and other
regulatory service fees, such as water abstraction charges.
We expect the above details, which apply for both financial years
ended 31 March 2016 and 31 March 2017, to fully comply with
the new legislative requirements for ‘Publication of Group Tax
Strategies’ for UK groups.
Corporate governance report
Tax policies and objectives
Consistent with our wider business objectives, we are committed
to acting in a responsible manner in relation to our tax affairs.
Our tax policies and objectives, which are approved by the board
on an annual basis, ensure that we:
–
only engage in reasonable tax planning aligned with our
commercial activities and we always comply with what we
believe to be both the letter and the spirit of the law;
–
do not engage in aggressive or abusive tax avoidance;
–
–
are committed to an open, transparent and professional
relationship with HMRC based on mutual trust and
collaborative working; and
maintain a robust governance and risk management
framework to ensure that these policies and objectives are
applied at all levels.
In line with the above, we expect to fully adhere to the new
HMRC framework for co-operative compliance.
Under the regulatory framework the group operates within, the
majority of any benefit from reduced tax payments will typically
not be retained by the group but will pass to customers via
reduced bills.
In any given year, the group’s effective cash tax rate on underlying
profits may fluctuate from the standard UK rate due to the
available tax deductions on capital investment and pension
contributions. These deductions are achieved as a result of
utilising tax incentives, which have been explicitly put in place by
successive governments precisely to encourage such investment.
This reflects responsible corporate behaviour in relation to
taxation.
Consistent with the group’s general risk management framework,
any tax risks are assessed for the likelihood of occurrence and
the negative financial or reputational impact on the group and its
objectives, should the event occur. In any given period, the key
tax risk is likely to be the introduction of unexpected legislative or
tax practice changes which lead to increased cash outflow which
has not been reflected in the current regulatory settlement. The
group is committed to actively engaging with relevant authorities
in order to actively manage any such risk.
102
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Directors’ report:
statutory and other information
Gross carbon emissions for 2015/16
454,857
tonnes CO2 equivalent
22.4 per cent below our 2005/06 baseline
138 GWh
of renewable generation in 2015/16 –
equivalent to 17 per cent of our electricity consumption
Our directors present their management report including the
strategic report on pages 4 to 49 and the audited financial
statements of United Utilities Group PLC (the company) and its
subsidiaries (together referred to as the group) for the year ended
31 March 2016.
Business model
A description of the company’s business model can be found
within the strategic report on pages 10 to 26.
Carbon
We measure our emissions over the financial reporting year
against a footprint covering the operational activities of the
water, wastewater and property services businesses in the UK.
All figures stated are in line with the latest UK Government
carbon reporting guidance. Our reporting is compliant with the
international carbon reporting standard (ISO 14064, Part 1) and
assured by the Certified Emissions Measurement and Reduction
Scheme (CEMARS).
Our performance in 2015/16 was 454,857 tCO2e which is 22.4
per cent below the 2005/06 baseline. The trend in our overall
emissions continues to be downwards even though it has
fluctuated over the past few years – as it can be affected by
weather, operational conditions and the carbon content of the
UK’s electricity supply.
Our carbon footprint over the last 11 years
600,000
550,000
500,000
450,000
400,000
350,000
0506
0607
0708
0809
0910
1011
1112
1213
1314
1415
1516
Gross carbon footprint total (tCO2e)
Historic trend
)
e
2
O
C
t
(
i
l
t
n
e
a
v
i
u
q
e
e
d
i
x
o
d
n
o
b
r
a
c
f
o
s
e
n
n
o
T
We expect the overall trend in our emissions to remain
downwards reflecting our efforts to use less energy and increase
renewable energy generation, alongside projected decreases in
the carbon content of the UK’s energy supply. In 2015/16, the
reduction in the carbon intensity of UK grid electricity offset
the small increase in our consumption of grid electricity, whilst
natural gas consumption saw a small decrease. An improvement
in sludge and process emissions was offset by Defra’s change to
the Global Warming Potential (GWP) factor for methane, which
increased by nearly 20 per cent this year. Exceptional weather
and operational conditions reduced renewable electricity
generation from our CHP fleet by 12 per cent below target, whilst
our investment in wind and solar photovoltaics saw an additional
4.36 GWh of electricity generation.
103
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSSTRATEGIC REPORTOUR GOVERNANCE
Directors’ report:
statutory and other information
CO2
CH4
N2O
SF6
HFCs
PFCs
SCOPE 1
(Direct)
SCOPE 2
(Indirect)
SCOPE 3
(Indirect)
– Process emissions including refrigerants
– Purchased electricity (generation)
– Purchased electricity (transmission
– Fossil fuel use
– Company vehicles
Emissions
2%
1%
4%
6%
17%
2%
and distribution)
– Sludge and process waste disposal
– Public transport and mileage
Outside of boundary:
contractor emissions, supplier emissions, customer emissions
Direct emissions from burning of fossil fuels
Process and emissions from our treatment plants – including refrigerants
Transport: company owned or leased vehicles
Total grid electricity used by company: generation
Total grid electricity used by company: transmission and distribution
Business travel on public transport and private vehicles used for company business
68%
Emissions from sludge/process waste disposal
The boundary of our carbon footprint includes both direct and indirect emissions as a result of our operations.
– Direct emissions include those from our treatment processes, company vehicles and burning of fossil fuels for heating or
incineration of sewage sludge.
–
Indirect emissions include those from the electricity we use to power our treatment plants, emissions from travel on company
business and sludge and treatment waste disposal emissions. Our emissions account for all of the Kyoto Protocol gases – converted
to carbon dioxide equivalents. There are no material omissions.
The following table gives a breakdown of our carbon emissions by scope and source:
Source
Direct emissions from burning of fossil fuels
Process emissions from our treatment plants – including refrigerants
Transport: company owned or leased vehicles
Total grid electricity purchased by the company: generation
Total grid electricity purchased by the company: transmission and
distribution
Business travel on public transport and private vehicles used for
company business
Emissions from sludge and process waste disposal
Gross carbon footprint total
2013/14
(tCO2e)
9,525
82,421
10,046
298,768
2014/15
(tCO2e)
9,575
83,762
10,704
321,185
2015/16
(tCO2e)
12,283
87,004
11,246
302,791
25,546
28,086
25,006
2,860
2,971
2,783
19,875
449,041
17,425
473,708
13,744
454,857
Emission reductions from exported renewable electricity
Net carbon footprint total
Emissions per £million turnover
(6,676)
442,365
263.44
(6,155)
467,553
275.44
(4,209)
450,648
262.92
CHG Scope
Scope 1
emissions
Scope 2
emissions
Scope 3
emissions
104
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Dividends
Directors
Reappointment
Our directors are recommending a final dividend of 25.64 pence per ordinary share for the year ended
31 March 2016, which, together with the interim dividend of 12.81 pence, gives a total dividend for
the year of 38.45 pence per ordinary share (the interim and final dividends we paid in respect of the
2014/15 financial year were 12.56 pence and 25.14 pence per ordinary share respectively). Subject
to approval by our shareholders at our AGM, our final dividend will be paid on 1 August 2016 to
shareholders on the register at the close of business on 24 June 2016.
The biographical details, together with the skills and experience, of our directors who served during the
financial year ended 31 March 2016 can be found on pages 52 and 53.
Our articles of association provide that our directors must retire at the third annual general meeting
following their last election or reappointment by our shareholders. However, our board, being mindful
of the recommendation contained within the UK Corporate Governance Code published in 2014 (‘the
Code’) that all directors should be subject to annual election by shareholders, has decided that all of
our directors will retire at AGMs and offer themselves for election/reappointment, as has happened
at all the AGMs since 2011. Information regarding the appointment of our directors is included in our
corporate governance report on pages 64 to 67. Dr Catherine Bell is not seeking reappointment at the
2016 AGM.
Interests
Details of the interests in the company’s shares held by our directors and persons connected with them
are set out in our directors’ remuneration report on pages 82 to 101 which is hereby incorporated by
reference into this directors’ report.
Corporate governance
statement
Share capital
The corporate governance report on pages 50 to 102 is hereby incorporated by reference into this
directors’ report and includes details of our compliance with the Code. Our statement includes a
description of the main features of our internal control and risk management systems in relation to the
financial reporting process and forms part of this directors’ report. A copy of the Code, as applicable
to the company for the year ended 31 March 2016, can be found at the Financial Reporting Council’s
website frc.org.uk. Copies of the matters reserved for the board and the terms of reference for each of
the main board committees can be found on our website.
Our corporate governance statement also includes the consideration given by our directors to the
factors relevant to the provision of a long-term viability statement. We can confirm that during the
financial year 2015/2016 there have been no breaches of our anti-bribery and competition policies and
no investigations or enforcement activity against us in respect of these matters.
At 31 March 2016, the issued share capital of the company was £499,819,926 divided into 681,888,418
ordinary shares of 5 pence each and 273,956,180 deferred shares of 170 pence each. Details of
our share capital and movements in our issued share capital are shown in note 22 to the financial
statements on page 138. The ordinary shares represented 71.3 per cent and the deferred shares
represented 28.7 per cent respectively of the shares in issue as at 31 March 2016.
All our ordinary shares have the same rights, including the rights to one vote at any of our general
meetings, to an equal proportion of any dividends we declare and pay, and to an equal amount of any
surplus assets which are distributed in the event of a winding-up.
Our deferred shares convey no right to income, no right to vote and no appreciable right to participate
in any surplus capital in the event of a winding-up. The rights attaching to our shares in the company
are provided by our articles of association, which may be amended or replaced by means of a special
resolution of the company in general meeting. The company renews annually its power to issue and buy
back shares at our AGM and such resolutions will be proposed at our 2016 AGM. Our directors’ powers
are conferred on them by UK legislation and by the company’s articles. At the AGM of the company
on 24 July 2015, the directors were authorised to issue relevant securities up to an aggregate nominal
amount of £11,364,806 and were empowered to allot equity securities for cash on a non pre-emptive
basis to an aggregate nominal amount of £1,704,721.
105
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSSTRATEGIC REPORTOUR GOVERNANCE Directors’ report:
statutory and other information
Voting
Transfers
Electronic and paper proxy appointment and voting instructions must be received by our registrars
(Equiniti) not less than 48 hours before a general meeting and when calculating this period, the
directors can decide not to take account of any part of a day that is not a working day.
There are no restrictions on the transfer of our ordinary shares in the company, nor any limitations on
the holding of our shares in the company, save (i) where the company has exercised its right to suspend
their voting rights or to prohibit their transfer following the omission of their holder or any person
interested in them to provide the company with information requested by it in accordance with Part 22
of the Companies Act 2006; or (ii) where their holder is precluded from exercising voting rights by the
Financial Conduct Authority’s Listing Rules or the City Code on Takeovers and Mergers.
There are no agreements known to us between holders of securities that may result in restrictions on
the transfer of securities or on voting rights. All our issued shares are fully paid.
Major shareholdings
At 25 May 2016, our directors had been notified of the following interests in the company’s issued
ordinary share capital in accordance with the Disclosure and Transparency Rules of the Financial
Conduct Authority:
Legal & General Group Plc
BlackRock Inc
Per cent of
issued share
capital
3.02
5.13
Direct or
indirect nature
of holding
direct
indirect
Purchase of own shares
Change of control
At our last AGM held on 24 July 2015, our shareholders authorised the company to purchase, in the
market, up to 68,188,841 of our ordinary shares of 5 pence each. We did not purchase any shares under
this authority during the year. We normally seek such an authority from our shareholders annually.
At our 2016 AGM, we will seek authority from our shareholders to purchase up to 68,188,841 of our
ordinary shares of 5 pence each with such authority expiring at the end of our AGM held in 2017.
As at 31 March 2016, Equiniti Trust (Jersey) Limited was the trustee that administered our executive
share plans and had the ability to exercise voting rights at its discretion which related to shares that it
held under the trust deed constituting the trust. In the event of a takeover offer which could lead to
a change of control of the company, the trustee must consult with the company before accepting the
offer or voting in favour of the offer. Subject to that requirement, the trustee may take into account
a prescribed list of interests and considerations prior to making a decision in relation to the offer,
including the interests of the beneficiaries under the trust.
In the event of a change of control, the participants in our share incentive plan (ShareBuy) would be
able to direct the trustee of the share incentive plan, Equiniti Share Plan Trustees Limited, how to act on
their behalf.
Information required by
UK listing rule 9.8.4
Details of the amount of interest capitalised by the group during the financial year can be found in note
5 to the financial statements on page 127. In line with current UK tax legislation, the amount is fully
deductible against the group’s corporation tax liability resulting in tax relief of £4.3 million.
Directors’ indemnities
and insurance
There are no other disclosures to be made under listing rule 9.8.4.
We have in place contractual entitlements for the directors of the company and of its subsidiaries to
claim indemnification by the company in respect of certain liabilities which might be incurred by them
in the course of their duties as directors. These arrangements, which constitute qualifying third party
indemnity provision and qualifying pension scheme indemnity provision, have been established in
compliance with the relevant provisions of the Companies Act 2006 and have been in force throughout
the financial year. They include provision for the company to fund the costs incurred by directors
in defending certain claims against them in relation to their duties as directors of the company or
its subsidiaries. The company also maintains an appropriate level of directors’ and officers’ liability
insurance.
106
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Political donations
Employees
We do not support any political party and do not make what are commonly regarded as donations to
any political party or other political organisations. However, the wide definition of donations in the
Political Parties, Elections and Referendums Act 2000 covers activities which form part of the necessary
relationship between the group and our political stakeholders. This includes promoting United Utilities’
activities at the main political parties’ annual conferences, and occasional stakeholder engagement in
Westminster.
The group incurred expenditure of £5,360 (2015: £21,600) as part of this process. At the 2015 AGM, an
authority was taken to cover such expenditure. A similar resolution will be put to our shareholders at
the 2016 AGM to authorise the company and its subsidiaries to make such expenditure.
Our policies on employee consultation and on equal opportunities for our disabled employees can be
found in the ‘People’ section on page 14. The company’s business principles make clear how it and all
our employees must seek to act with integrity and fairness and observe legal requirements. Anyone with
serious concerns that the company may not be adhering to these principles is encouraged to speak up via
their line manager or through a confidential telephone line.
Importance is placed on strengthening employees’ engagement, measuring their views annually, then
taking action to improve how they feel about the company and understand its direction. Employees are
provided with regular information to enable them to understand the financial and economic factors
affecting the company’s performance. The board encourages employees to own shares in the company
through the all employee share incentive plan (ShareBuy). For further information on our average
number of employees during the year, go to note 2 on page 125.
Environmental, social
and community matters
Details of our approach to corporate responsibility, relating to the environment and social and
community issues, can be found on pages 80 and 81.
Essential contractual
relationships
Certain suppliers we use contribute key goods or services, the loss of which could cause disruption to
our services. However, none are so vital that their loss would affect our viability as a group as a whole
nor are we overly dependent on any one individual customer.
Approach to technology
development
We are committed to using innovative, cost-effective and practical solutions for providing high
quality services and we recognise the importance of ensuring that we focus our investment on the
development of technology and that we have the right skills to apply technology to achieve sustainable
competitive advantage and also that we continue to be alert to emerging technological opportunities.
Financial instruments
Our risk management objectives and policies in relation to the use of financial instruments can be found
in note A4 to the financial statements.
Events occurring after
the reporting period
Details of events after the reporting period are included in note 25 to the consolidated financial
statements on page 138.
Slavery and Human
Trafficking Statement 2016 trafficking
Our 2016 statement can be found on our website at corporate.unitedutilities.com/slavery-human-
107
sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSSTRATEGIC REPORTOUR GOVERNANCE
Directors’ report:
statutory and other information
Information given to the auditor
Each of the persons who is a director at the date of approval of
this report confirms that:
– so far as he or she is aware, there is no relevant audit
information of which the company’s auditor is unaware; and
– he or she has taken all the steps that he/she ought to have
taken as a director in order to make himself/herself aware
of any relevant audit information and to establish that
the company’s auditor is aware of that information. This
confirmation is given, and should be interpreted, in accordance
with the provisions of s418 of the Companies Act 2006.
Reappointment of the auditor
Our board is proposing that our shareholders reappoint KPMG
LLP as our auditor at the forthcoming AGM and authorises the
audit committee of the board to set the auditor’s remuneration.
Approved by the board on 25 May 2016 and signed on its behalf by:
Simon Gardiner
Company Secretary
Total dividend per share
38.45p
for 2015/16
(2014/15: 37.70p per share)
Annual general meeting
Our 2016 annual general meeting (AGM) will be held on 22 July.
– Full details of the resolutions to be proposed to our
shareholders, and explanatory notes in respect of these
resolutions, can be found in our notice of AGM. A copy can be
found on our website
Read more online at corporate.unitedutilities.com/annual-
general-meeting-2016
At our 2016 AGM, resolutions will be proposed, amongst other
matters:
– to receive the annual report and financial statements; to
approve the directors’ remuneration report; to declare a final
dividend; and to reappoint KPMG LLP as auditor.
– to approve the directors’ general authority to allot shares;
to grant the authority to issue shares without first applying
statutory rights of pre-emption; to authorise the company to
make market purchases of its own shares; to authorise the
making of limited political donations by the company and its
subsidiaries; and to enable the company to continue to hold
general meetings on not less than 14 working days’ notice.
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sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Statement of directors’ responsibilities in respect of the
annual report and the financial statements
The directors are responsible for preparing the annual report
and the group and parent company financial statements in
accordance with applicable laws and regulations.
Responsibility statement of the directors in
respect of the annual financial report
We confirm that to the best of our knowledge:
Company law requires the directors to prepare group and parent
company financial statements for each financial year. Under that
law they are required to prepare the group financial statements
in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union (EU) and applicable
law and have elected to prepare the parent company financial
statements on the same basis.
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the group and parent company and
of their profit or loss for that period. In preparing each of the
group and parent company financial statements, the directors are
required to:
–
–
–
–
–
–
–
select suitable accounting policies and then apply them
consistently;
make judgements and estimates that are reasonable and
prudent;
state whether they have been prepared in accordance with
IFRSs as adopted by the EU; and
prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the group and the
parent company will continue in business.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
company’s transactions and disclose with reasonable accuracy
at any time the financial position of the parent company and
enable them to ensure that its financial statements comply with
the Companies Act 2006. They have general responsibility for
taking such steps as are reasonably open to them to safeguard
the assets of the group and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a strategic report, directors’ report,
directors’ remuneration report and corporate governance
statement that complies with that law and those regulations.
The directors are responsible for the maintenance and
integrity of the corporate and financial information included
on the company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the company and the undertakings included in the
consolidation taken as a whole;
the strategic report (contained on pages 4 to 49) includes a fair
review of the development and performance of the business
and the position of the issuer and the undertakings included in
the consolidation taken as a whole, together with a description
of the principal risks and uncertainties that they face; and
the directors consider the annual report, taken as a whole,
is fair, balanced and understandable and provides the
information necessary for shareholders to assess the group’s
position, performance, business model and strategy.
Approved by the board on 25 May 2016 and signed on its
behalf by:
Dr John McAdam
Chairman
Russ Houlden
Chief Financial Officer
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sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONFINANCIAL STATEMENTSSTRATEGIC REPORTOUR GOVERNANCE
Our financial
statements
In this section you will find our full audited financial results
for the year ended 31 March 2016.
110
Financial
Statements
112
116
117
Independent auditor’s report
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated and company statements of
118
financial position
119
Consolidated statement of changes in equity
120
Company statement of changes in equity
Consolidated and company statements of cash flows 121
122
Accounting policies
124
Notes to the financial statements
111
Independent auditor’s report
to the members of United Utilities Group PLC only
Opinions and conclusions arising from our audit
1. Our opinion on the financial statements is unmodified
We have audited the financial statements of United Utilities Group PLC for the year ended 31 March 2016 set out on pages 116 to 161.
In our opinion:
–
–
–
–
the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 March 2016
and of the group’s profit for the year then ended;
the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU);
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as
applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
group financial statements, Article 4 of the IAS Regulation.
2. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements, the risks of material misstatement that had the greatest effect on
our audit, in decreasing order of audit significance, were as follows (unchanged from 2015):
Revenue recognition £1,730.0 million (2015: £1,720.2 million) and provision for customer debts £94.4 million
(2015: £100.5 million)
Refer to page 77 audit committee report, pages 122 to 123 accounting policies and note 14 financial disclosures.
The risk
Our response
Revenue recognition and provision for customer debts are key
areas of judgement, particularly in relation to:
Our audit procedures included:
–
–
the estimate of the revenue value of water supplied to metered
customers between the last meter reading and the period end;
and
identifying properties where there is little prospect cash will
be received for revenue that has been billed due to either the
occupier not being able to be identified or a past history of non-
payment of bills relating to that property; and
–
assessing the recoverability of trade debtors as a proportion of
customers do not or are unable to pay their bills.
–
–
–
–
–
assessing whether appropriate revenue recognition policies
are applied through comparison with relevant accounting
standards and industry practice, including the policy of not
recognising revenue where it is not probable that cash will be
received;
testing the group’s controls over revenue recognition and
provision for customer debts, including reconciliations
between sales and cash receipts systems and the general
ledger;
assessing the assumptions used to calculate the metered
accrued income by ensuring inputs to the calculation have
been derived appropriately and recalculating the accrued
income with the support of our own modelling specialists;
assessing the appropriateness of the customer debt
provisioning policy based on historical cash collections, credits,
re-bills and write off information; and
assessing the adequacy of the group’s disclosures of its
revenue recognition and customer debt provisioning policies,
including the estimation uncertainty involved in recording
revenue and the bad debt provision.
112
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Capital expenditure £665.8 million (2015: £728.5 million)
Refer to page 77 audit committee report, page 122 accounting policies and note 9 financial disclosures.
The risk
Our response
The group has a substantial capital programme which has been
agreed with the Water Services Regulation Authority (Ofwat)
and therefore incurs significant annual expenditure in relation
to the development and maintenance of both infrastructure and
non-infrastructure assets. Expenditure in relation to increasing
the capacity or enhancing the network is treated as capital
expenditure. Expenditure incurred in maintaining the operating
capability of the network is expensed in the year in which it
is incurred. Capital projects often contain a combination of
enhancement and maintenance activity which are not distinct and
therefore the allocation of costs between capital and operating
expenditure is inherently judgemental. The costs capitalised
include an allocation of overhead costs, relating to the proportion
of time spent by support function staff, which is also inherently
judgemental and could lead to over capitalisation of expenses.
Our audit procedures included:
–
–
–
–
–
assessing the group’s capitalisation policy for compliance with
relevant accounting standards;
testing controls over the application of the policy to spend
incurred in the period including attending capital approval
meetings to observe the judgements made and evaluating the
documented final conclusions;
critically assessing the costs capitalised for a sample of
projects against the capitalisation policy, focusing on those
where actual costs differed significantly to budget;
agreeing overhead costs incurred to supporting
documentation on a sample basis and performed comparative
analysis of overheads absorbed into capital projects by
category;
testing a sample of capital accruals to assess the existence of
the costs being capitalised through review of ageing of specific
project accruals; and
–
assessing the adequacy of the group’s disclosures of its
capitalisation policy and other related disclosures.
Retirement benefit surplus £275.2 million (2015: £79.2 million)
Refer to page 77 audit committee report, page 123 accounting policies and notes 18 and A5 financial disclosures.
The risk
Our response
Significant estimates are made in valuing the group’s retirement
benefit surplus. Small changes in assumptions and estimates used
to value the group’s pension obligation (before deducting scheme
assets) would have a significant effect on the group’s financial
position.
Our audit procedures included:
–
challenging the key assumptions supporting the group’s
retirement benefit obligations valuation with input from our
own actuarial specialists, including comparing the discount
rate, inflation rate, salary, pension increase rates and life
expectancy assumptions used against externally derived data;
and
–
assessing the group’s disclosure in respect of the sensitivity of
the surplus to changes in the key assumptions.
113
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Independent auditor’s report
to the members of United Utilities Group PLC only
Derivative financial instrument valuations £503.9 million (2015: £477.4 million)
Refer to page 77 audit committee report, page 123 accounting policies and note A4 financial disclosures.
The risk
Our response
The group has significant derivative financial instruments, the
valuation of which is determined through the application of
valuation techniques which often involve the exercise of judgement
and the use of assumptions and estimates. Due to the significance
of financial instruments and the related estimation uncertainty,
there is a risk that the related financial assets and liabilities are
misstated.
Our audit procedures included:
–
–
–
–
–
–
assessing controls over the identification, measurement and
management of derivative financial instruments;
evaluating the methodologies, inputs and assumptions used
by the group in determining fair values, with the help of our
own valuation specialist;
challenging the observable inputs into valuation models, such
as quoted prices, by reference to externally available market
data to assess whether appropriate inputs are used in the
valuation;
comparing valuations derived from our internal valuation
model for a sample of instruments to the fair values
determined by the group;
considering the adequacy of the group’s disclosures about the
valuation basis and inputs used in the fair value measurement;
and
assessing whether the financial statement disclosures of fair
value risks and sensitivities appropriately reflect the group’s
exposure to valuation risk.
3. Our application of materiality and an overview of the scope of our audit
Materiality for the group financial statements as a whole was set at £20.0 million (2015: £25.0 million), determined with reference to
a benchmark of group profit before tax, normalised to exclude net fair value losses on debt and derivative instruments (see note 5)
and the adjusting item relating to a one-off water quality incident (see note 3). Materiality represents 4.9 per cent (2015: 5.6 per cent)
of normalised group profit before tax, reflecting industry consensus levels. Specific audit procedures have been performed over items
excluded from the normalised profit before tax.
We report to the audit committee any corrected or uncorrected identified misstatements exceeding £0.5 million (2015: £0.5 million), in
addition to other identified misstatements that warrant reporting on qualitative grounds.
Of the group’s six (2015: five) reporting components, we subjected five (2015: four) to audit, of which the most significant is United
Utilities Water Limited which makes up the vast majority of the assets, liabilities, income and expense of the group. These components
covered 99 per cent of group revenue (2015: 99 per cent), 100 per cent of group profit before tax (2015: 100 per cent) and 100 per
cent of group total assets (2015: 99 per cent). The audit work on these components was performed by the group team. For the
remaining component, we performed an analysis at group level to re-examine our assessment that there were no significant risks of
material misstatements within this.
The component materialities ranged from £1.2 million for the smallest component to £19.0 million for United Utilities Water Limited,
determined having regard to the mix of size and risk profile of the group across the components.
4. Our opinion on the other matter prescribed by the Companies Act 2006 is unmodified
In our opinion:
–
–
–
the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act
2006;
the information given in the strategic report and the directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
information given in the corporate governance statement set out on pages 50 to 102 with respect to internal control and risk
management systems in relation to financial reporting processes and about share capital structures is consistent with the financial
statements.
114
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
5. We have nothing to report on the disclosures of principal risks
Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to:
–
–
the directors’ viability statement on page 71 concerning the principal risks, their management and, based on that, the directors’
assessment and expectations of the group continuing in operation over the five years to 31 March 2021; or
the disclosures on page 122 in the accounting policies’ note to the financial statements concerning the use of the going concern
basis of accounting.
6. We have nothing to report in respect of the matters on which we are required to report by exception
Under International Standards on Auditing (UK and Ireland) (ISAs) we are required to report to you if, based on the knowledge we
acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either
that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
–
we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that
they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides
the information necessary for shareholders to assess the group’s performance, business model and strategy; or
–
the audit committee section of the corporate governance report does not appropriately address matters communicated by us to the
audit committee.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
–
–
–
–
–
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received
from branches not visited by us; or
the parent company financial statements and the part of the directors’ remuneration report to be audited are not in agreement
with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit; or
a corporate governance statement has not been prepared by the company.
Under the Listing Rules we are required to review:
–
–
the directors’ statement, set out on page 71, in relation to going concern; and
the part of the corporate governance statement on pages 50 to 102 relating to the company’s compliance with the 11 provisions of
the 2014 UK Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
Scope of responsibilities
As explained more fully in the directors’ responsibilities statement set out on page 109, the directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an
audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This
report is made solely to the company’s members as a body and is subject to important explanations and disclaimers regarding our
responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this report as if set
out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of
our opinions.
John Luke (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
St Peter’s Square
Manchester
M2 3AE
25 May 2016
115
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Consolidated income statement
for the year ended 31 March
Revenue
Employee benefits expense
Other operating costs
Other income
Depreciation and amortisation expense
Infrastructure renewals expenditure
Total operating expenses
Operating profit
Investment income
Finance expense
Investment income and finance expense
Share of profits of joint ventures
Profit before tax
Current tax charge
Deferred tax charge
Deferred tax credit – change in tax rate
Tax
Profit after tax
Earnings per share
Basic
Diluted
Dividend per ordinary share
All of the results shown above relate to continuing operations.
Note
2016
£m
2015
£m
1
2
3
3
3
4
5
6
6
6
6
7
7
8
1,730.0
(146.9)
(485.8)
3.6
(363.7)
(169.3)
(1,162.1)
567.9
5.0
(224.4)
(219.4)
5.0
353.5
(44.3)
(24.2)
112.5
44.0
397.5
1,720.2
(145.1)
(424.3)
3.3
(352.6)
(148.2)
(1,066.9)
653.3
1.0
(317.8)
(316.8)
5.1
341.6
(47.1)
(23.3)
–
(70.4)
271.2
58.3p
58.2p
39.8p
39.7p
38.45p
37.70p
116
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com Consolidated statement of comprehensive income
for the year ended 31 March
Profit after tax
Other comprehensive income
Remeasurement gains on defined benefit pension schemes
Tax on items taken directly to equity
Foreign exchange adjustments
Total comprehensive income
Note
18
6
2016
£m
397.5
160.1
(26.5)
3.0
534.1
2015
£m
271.2
250.5
(50.1)
(3.1)
468.5
With the exception of foreign exchange adjustments, none of the items in the table above will be prospectively reclassified to profit or
loss.
117
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS Consolidated and company statements of
financial position at 31 March
ASSETS
Non-current assets
Property, plant and equipment
Intangible assets
Interests in joint ventures
Investments
Trade and other receivables
Retirement benefit surplus
Derivative financial instruments
Current assets
Inventories
Trade and other receivables
Cash and short-term deposits
Derivative financial instruments
Assets classified as held for sale
Total assets
LIABILITIES
Non-current liabilities
Trade and other payables
Borrowings
Deferred tax liabilities
Derivative financial instruments
Current liabilities
Trade and other payables
Borrowings
Current tax liabilities
Provisions
Derivative financial instruments
Total liabilities
Total net assets
EQUITY
Capital and reserves attributable to equity holders of
the company
Share capital
Share premium account
Cumulative exchange reserve
Capital redemption reserve
Merger reserve
Retained earnings
Shareholders’ equity
Note
2016
£m
9
10
11
12
14
18
A4
13
14
16
A4
15
21
17
19
A4
21
17
20
A4
22
10,031.4
162.4
35.1
8.7
2.5
275.2
765.5
11,280.8
29.3
367.4
213.6
0.1
15.6
626.0
11,906.8
(530.5)
(6,508.8)
(1,062.0)
(255.8)
(8,357.1)
(341.7)
(469.2)
(12.3)
(15.1)
(5.9)
(844.2)
(9,201.3)
2,705.5
499.8
2.9
(5.7)
–
329.7
1,878.8
2,705.5
Group
2015
£m
9,716.3
144.9
31.7
8.6
2.5
79.2
681.6
10,664.8
40.5
353.3
244.0
1.0
–
638.8
11,303.6
(480.0)
(6,067.3)
(1,123.8)
(196.6)
(7,867.7)
(381.2)
(578.1)
(21.1)
(12.5)
(8.6)
(1,001.5)
(8,869.2)
2,434.4
499.8
2.9
(8.7)
–
329.7
1,610.7
2,434.4
2016
£m
Company
2015
£m
–
–
–
6,326.8
–
–
–
6,326.8
–
62.5
–
–
–
62.5
6,389.3
–
(1,636.9)
–
–
(1,636.9)
(11.1)
(0.5)
–
–
–
(11.6)
(1,648.5)
4,740.8
499.8
2.9
–
1,033.3
–
3,204.8
4,740.8
–
–
–
6,326.8
–
–
–
6,326.8
–
61.2
–
–
–
61.2
6,388.0
–
(1,609.4)
–
–
(1,609.4)
(10.8)
(0.4)
–
–
–
(11.2)
(1,620.6)
4,767.4
499.8
2.9
–
1,033.3
–
3,231.4
4,767.4
These financial statements for the group and United Utilities Group PLC (company number: 6559020) were approved by the board of
directors on 25 May 2016 and signed on its behalf by:
Steve Mogford
Chief Executive Officer
Russ Houlden
Chief Financial Officer
118
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Consolidated statement of changes in equity
for the year ended 31 March
At 1 April 2015
Profit after tax
Other comprehensive income
Remeasurement gains on defined benefit
pension schemes (see note 18)
Tax on items taken directly to equity
(see note 6)
Foreign exchange adjustments
Total comprehensive income
Dividends (see note 8)
Transfer of other reserve
Equity-settled share-based payments
(see note 2)
Exercise of share options – purchase
of shares
At 31 March 2016
At 1 April 2014
Profit after tax
Other comprehensive (expense)/income
Remeasurement gains on defined benefit
pension schemes (see note 18)
Tax on items taken directly to equity
(see note 6)
Foreign exchange adjustments
Total comprehensive (expense)/income
Dividends (see note 8)
Transfer of other reserve
Equity-settled share-based payments
(see note 2)
Exercise of share options – purchase
of shares
At 31 March 2015
Share
capital
£m
499.8
–
Share
premium
account
£m
2.9
–
Other
reserve
£m
–
–
Cumulative
exchange
reserve
£m
(8.7)
–
Merger
reserve
£m
329.7
–
Retained
earnings
£m
1,610.7
397.5
Total
£m
2,434.4
397.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
499.8
Share
capital
£m
499.8
–
–
2.9
Share
premium
account
£m
2.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
499.8
–
2.9
–
–
–
–
–
–
–
–
–
–
–
3.0
3.0
–
–
–
–
–
–
–
–
–
–
160.1
160.1
(26.5)
–
531.1
(258.7)
–
2.3
(26.5)
3.0
534.1
(258.7)
–
2.3
–
(5.7)
–
329.7
(6.6)
1,878.8
(6.6)
2,705.5
Other
reserve
£m
158.8
–
Cumulative
exchange
reserve
£m
(5.6)
–
Merger
reserve
£m
329.7
–
Retained
earnings
£m
1,230.3
271.2
Total
£m
2,215.9
271.2
–
–
–
–
–
–
(158.8)
–
–
–
–
(3.1)
(3.1)
–
–
–
–
(8.7)
–
–
–
–
–
–
–
250.5
250.5
(50.1)
–
471.6
(249.4)
158.8
(50.1)
(3.1)
468.5
(249.4)
–
2.9
2.9
–
329.7
(3.5)
1,610.7
(3.5)
2,434.4
On the group’s transition to IFRS in the year ended 31 March 2006, the other reserve arose from the uplift to fair value of the
infrastructure assets. This reserve is a component of retained earnings and, as such, has been transferred and presented within
retained earnings during the year ended 31 March 2015.
The merger reserve arose in the year ended 31 March 2009 on consolidation and represents the capital adjustment to reserves
required to effect the reverse acquisition of United Utilities PLC by United Utilities Group PLC.
119
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Company statement of changes in equity
for the year ended 31 March
At 1 April 2015
Profit after tax
Total comprehensive income
Dividends (see note 8)
Equity-settled share-based payments (see note 2)
Exercise of share options – purchase of shares
At 31 March 2016
At 1 April 2014
Profit after tax
Total comprehensive income
Dividends (see note 8)
Equity-settled share-based payments (see note 2)
Exercise of share options – purchase of shares
At 31 March 2015
Share
capital
£m
499.8
–
–
–
–
–
499.8
Share
capital
£m
499.8
–
–
–
–
–
499.8
Share
premium
account
£m
2.9
–
–
–
–
–
2.9
Share
premium
account
£m
2.9
–
–
–
–
–
2.9
Capital
redemption
reserve
£m
1,033.3
–
–
–
–
–
1,033.3
Capital
redemption
reserve
£m
1,033.3
–
–
–
–
–
1,033.3
Retained
earnings
£m
3,231.4
236.4
236.4
(258.7)
2.3
(6.6)
3,204.8
Retained
earnings
£m
2,525.9
955.5
955.5
(249.4)
2.9
(3.5)
3,231.4
Total
£m
4,767.4
236.4
236.4
(258.7)
2.3
(6.6)
4,740.8
Total
£m
4,061.9
955.5
955.5
(249.4)
2.9
(3.5)
4,767.4
As permitted by section 408 of the Companies Act 2006, the company has not presented its own income statement. The result of
the company for the financial year was a profit after tax of £236.4 million (2015: £955.5 million) after accounting for a £nil (2015:
£726.8 million) reversal of the impairment in the company’s investment in United Utilities PLC and dividends received from subsidiary
undertakings of £258.7 million (2015: £249.4 million).
120
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com Consolidated and company statements of cash flows
for the year ended 31 March
Operating activities
Cash generated from operations
Interest paid
Interest received and similar income
Tax paid
Tax received
Net cash generated from operating activities
Investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds from sale of property, plant and equipment
Grants and contributions received
Purchase of investments
Proceeds from investments
Dividends received from joint ventures
Net cash used in investing activities
Financing activities
Proceeds from borrowings
Repayment of borrowings
Dividends paid to equity holders of the company
Exercise of share options – purchase of shares
Net cash (used in)/generated from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
2016
£m
905.5
(168.7)
1.9
(53.1)
–
685.6
(634.2)
(66.1)
1.4
17.3
–
0.2
4.6
(676.8)
693.0
(474.1)
(258.7)
(6.6)
(46.4)
(37.6)
219.7
182.1
Group
2015
£m
941.7
(175.6)
1.0
(61.9)
1.3
706.5
(665.7)
(63.4)
2.0
18.1
(0.8)
–
4.9
(704.9)
411.2
(19.1)
(249.4)
(3.5)
139.2
140.8
78.9
219.7
2016
£m
261.3
(27.5)
–
–
5.5
239.3
–
–
–
–
–
–
–
–
25.9
–
(258.7)
(6.6)
(239.4)
(0.1)
(0.4)
(0.5)
Company
2015
£m
256.1
(25.7)
–
–
7.1
237.5
–
–
–
–
–
–
–
–
15.6
–
(249.4)
(3.5)
(237.3)
0.2
(0.6)
(0.4)
Note
A1
21
12
12
8
16
121
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS Accounting policies
The principal accounting policies adopted in the preparation of
these financial statements are set out below.
Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs) as adopted
by the European Union (EU). They have been prepared on the
historical cost basis, 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 preparation of financial statements, in conformity with
IFRS, requires management to make estimates and assumptions
that affect the amounts of assets and liabilities at the date of
the financial statements and the amounts of revenues and
expenses during the reporting periods presented. Although these
estimates are based on management’s best knowledge of the
amount, event or actions, actual results ultimately may differ
from these estimates.
The financial statements 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 the approval of the financial statements,
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, taking account of the group’s financial projections,
together with available cash and committed borrowing facilities
as well as consideration of the group’s capital adequacy,
consideration of the primary legal duty of UUW’s economic
regulator to ensure that water and wastewater companies can
finance their functions, and any material uncertainties. The
board has also considered the magnitude of potential impacts
resulting from uncertain future events or changes in conditions,
the likelihood of their occurrence and the likely effectiveness of
mitigating actions that the directors would consider undertaking.
Adoption of new and revised standards
The following standards, interpretations and amendments,
effective for the year ended 31 March 2016, have had no material
impact on the group’s financial statements.
–
–
Amendments to IAS 19 ‘Employee Benefits’, in respect of
employee contributions to defined benefit plans; and
Improvements to IFRS (2012) and IFRS (2013), comprising a
collection of narrow-scope amendments across a number of
standards.
Critical accounting judgements and key sources of
estimation uncertainty
In the process of applying its accounting policies set out in note
A7, the group is required to make certain estimates, judgements
and assumptions that it believes are reasonable based on
the information available. These judgements, estimates and
assumptions affect the amounts of assets and liabilities at the
date of the financial statements and the amounts of revenues
and expenses recognised during the reporting periods presented.
On an ongoing basis, the group evaluates its estimates using
historical experience, consultation with experts and other
methods considered reasonable in the particular circumstances.
Actual results may differ significantly from the estimates, the
effect of which is recognised in the period in which the facts that
give rise to the revision become known.
The following paragraphs detail the estimates and judgements
the group believes to have the most significant impact on the
annual results under IFRS.
Property, plant and equipment
The group recognises property, plant and equipment (PPE)
on its water and wastewater infrastructure assets where such
expenditure enhances or increases the capacity of the network,
whereas any expenditure classed as maintenance is expensed
in the period it is incurred. Determining enhancement from
maintenance expenditure is a subjective area, particularly
when projects have both elements within them. In addition,
management capitalise time and resources incurred by the
group’s support functions on capital programmes.
The estimated useful economic lives of PPE are based on
management’s judgement and experience. When management
identifies that actual useful economic lives differ materially
from the estimates used to calculate depreciation, that charge is
adjusted prospectively. Due to the significance of PPE investment
to the group, variations between actual and estimated useful
economic lives could impact operating results both positively and
negatively, although historically few changes to estimated useful
economic lives have been required.
The group is required to evaluate the carrying values of PPE for
impairment whenever circumstances indicate, in management’s
judgement, that the carrying value of such assets may not be
recoverable. An impairment review requires management to
make subjective judgements concerning the cash flows, growth
rates and discount rates of the cash generating units under
review.
Revenue recognition and allowance for doubtful
receivables
The group recognises revenue generally at the time of delivery
and when collection of the resulting receivable is reasonably
assured. When the group considers that the criteria for revenue
recognition are not met for a transaction, revenue recognition
is delayed until such time as collectability is reasonably assured.
Payments received in advance of revenue recognition are
recorded as deferred income.
United Utilities Water Limited raises bills in accordance with its
entitlement to receive revenue in line with the limits established
by the periodic regulatory price review processes. For water
and wastewater customers with water meters, the receivable
billed is dependent on the volume supplied including the sales
value of an estimate of the units supplied between the date of
the last meter reading and the billing date. Meters are read on
a cyclical basis and the group recognises revenue for unbilled
amounts based on estimated usage from the last billing through
to each reporting date. The estimated usage is based on historical
data, judgement and assumptions; actual results could differ
122
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
from these estimates, which would result in operating revenues
being adjusted in the period that the revision to the estimates
is determined. For customers who do not have a meter, the
receivable billed and revenue recognised is dependent on the
rateable value of the property, as assessed by an independent
rating officer.
At each reporting date, the company and each of its subsidiaries
evaluate the recoverability of trade receivables and record
allowances for doubtful receivables based on experience. These
allowances are based on, amongst other things, a consideration
of actual collection history. The actual level of receivables
collected may differ from the estimated levels of recovery, which
could impact operating results positively or negatively.
Provisions and contingencies
The group is subject to a number of claims incidental to the
normal conduct of its business, relating to and including
commercial, contractual and employment matters, which are
handled and defended in the ordinary course of business.
The group routinely assesses the likelihood of any adverse
judgements or outcomes to these matters as well as ranges of
probable and reasonably estimated losses.
Reasonable estimates involve judgements made by management
after considering information including notifications, settlements,
estimates performed by independent parties and legal counsel,
available facts, identification of other potentially responsible
parties and their ability to contribute, and prior experience. A
provision is recognised when it is probable that an obligation
exists for which a reliable estimate can be made after careful
analysis of the individual matter. The required provision may
change in the future due to new developments and as additional
information becomes available. Matters that either are possible
obligations or do not meet the recognition criteria for a provision
are disclosed as contingent liabilities in note 24, unless the
possibility of transferring economic benefits is remote.
Retirement benefits
The group operates two defined benefit 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. The pension cost under
IAS 19 ‘Employee Benefits’ is assessed in accordance with
the advice of a firm of actuaries based on the latest actuarial
valuation and assumptions determined by the actuary. The
assumptions are based on information supplied to the actuary
by the company, supplemented by discussions between the
actuary and management. The assumptions are disclosed in note
A5. 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.
Derivative financial instruments
The model used to fair value the group’s derivative financial
instruments requires management to estimate future cash
flows based on applicable interest rate curves. Projected cash
flows are then discounted back using discount factors which are
derived from the applicable interest rate curves adjusted for
management’s estimate of counterparty and own credit risk,
where appropriate.
Tax
Assessing the outcome of uncertain tax positions requires
judgements to be made regarding the application of tax law
and the result of negotiations with, and enquiries from, tax
authorities in a number of jurisdictions.
New and revised standards not yet effective
At the date of authorisation of these financial statements, the
following relevant standards were in issue but not yet effective.
The directors anticipate that these standards may have a material
impact on the group’s financial statements and that the group
will adopt these standards on their effective dates.
IFRS 9 ‘Financial Instruments’
The standard is effective for periods commencing on or after
1 January 2018 but has not yet been endorsed by the EU. Under
the provisions of this standard, where the group has chosen
to measure borrowings at fair value through profit or loss, the
portion of the change in fair value due to changes in the group’s
own credit risk will be recognised in other comprehensive
income rather than within profit or loss. If this standard had been
adopted in the current year, a £15.1 million gain would have been
recognised in other comprehensive income rather than within
the income statement.
The standard also broadens the scope of what can be included
within a hedge relationship, which may enable the group’s
regulatory swaps to be designated within cash flow hedge
relationships. If the standard had been adopted in the current
year, with all such swaps being designated and all hedges being
fully effective, £46.2 million of fair value losses would have been
recognised in other comprehensive income rather than within
the income statement.
IFRS 16 ‘Leases’
The standard is effective for periods commencing on or after
1 January 2019 but has not yet been endorsed by the EU. Under
the provisions of the standard most leases, including the majority
of those previously classified as operating leases, will be brought
onto the statement of financial position, as both a right-of-use
asset and a largely offsetting lease liability. The right-of-use
asset and lease liability are both based on the present value of
lease payments due over the term of the lease, with the asset
being depreciated in accordance with IAS 16 ‘Property, Plant
and Equipment’ and the liability increased for the accretion of
interest and reduced by lease payments.
The impact of IFRS 16 has yet to be quantified, but if the standard
had been adopted in the current year a depreciation charge
in relation to the right-of-use asset and a lease interest charge
would be recognised in the income statement in place of the
operating lease charge of £5.0 million.
All other standards, interpretations and amendments, which are
in issue but not yet effective, are not expected to have a material
impact on the group’s financial statements.
123
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements
Revenue and segment reporting
1
The group’s revenue predominantly arises from the provision of services within the United Kingdom, with less than one per cent of
external revenue and non-current assets being overseas.
The group has a large and diverse customer base and there is no significant reliance on any single customer.
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 board reviews revenue, underlying operating profit (see page 44), operating
profit, assets and liabilities, regulatory capital expenditure and regulatory capital value (RCV) 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.
2 Directors and employees
Directors’ remuneration
Fees to non-executive directors
Salaries
Benefits
Bonus
Share-based payment charge
2016
£m
0.6
1.2
0.3
0.4
1.0
3.5
2015
£m
0.6
1.1
0.3
0.6
1.3
3.9
Further information about the remuneration of individual directors and details of their pension arrangements are provided in the
directors’ remuneration report on pages 82 to 101.
Remuneration of key management personnel
Salaries and short-term employee benefits
Post-employment benefits
Share-based payment charge
2016
£m
4.9
0.1
1.8
6.8
Key management personnel comprises all directors and certain senior managers who are members of the executive team.
Employee benefits expense (including directors)
Group
Wages and salaries
Social security
Severance
Post-employment benefits:
Defined benefit pension expense (see note 18)
Defined contribution pension costs (see note 18)
Charged to regulatory capital schemes
Employee benefits expense
Within employee benefits expense were £0.9 million (2015: £11.0 million) of restructuring costs.
2016
£m
212.7
19.1
(0.2)
26.1
9.9
36.0
(120.7)
146.9
2015
£m
5.9
0.2
2.4
8.5
2015
£m
206.5
18.1
6.6
26.2
8.8
35.0
(121.1)
145.1
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
2 Directors and employees continued
The total expense included within employee benefits expense in respect of equity-settled share-based payments was £2.3 million
(2015: £2.9 million). The company operates several share option schemes, details of which are given on pages 94 to 97 in the directors’
remuneration report. Further disclosures have not been included as they are considered immaterial to the assessment of the share-
based payments charge.
Average number of employees during the year (full-time equivalent including directors)
Average number of employees during the year
Company
The company has no employees.
2016
number
5,265
2015
number
5,278
3 Operating profit
The following items have been charged/(credited) to the income statement in arriving at the group’s operating profit:
Re-presented*
2015
£m
2016
£m
Other operating costs
Hired and contracted services
Property rates
Materials
Power
Charge for bad and doubtful receivables (see note 14)
Regulatory fees
Third party wholesale charges
Impairment of property, plant and equipment (see note 9)
Cost of properties disposed
Legal and professional expenses
Loss on disposal of property, plant and equipment
Operating leases payable:
Property
Plant and equipment
Impairment of assets classified as held for sale (see note 15)
Loss on disposal of intangible assets
Amortisation of deferred grants and contributions (see note 21)
Compensation from insurers
Other expenses
Other income
Other income
Depreciation and amortisation expense
Depreciation of property, plant and equipment (see note 9)
Amortisation of intangible assets (see note 10)
107.5
86.3
67.2
65.3
39.2
27.9
15.1
11.4
10.5
5.8
5.4
4.2
0.8
2.7
–
(6.9)
(20.1)
63.5
485.8
(3.6)
(3.6)
332.5
31.2
363.7
* The comparatives have been re-presented to allocate £7.0 million accommodation, £3.4 million movements in other provisions, and £2.1 million research and
development, to categories which better reflect the underlying nature of these costs. In addition, a separate category for third party wholesale charges has been
presented, which were previously within other expenses.
93.4
80.5
58.5
69.1
52.9
29.2
10.8
–
0.6
4.8
5.1
3.7
0.7
–
0.5
(7.7)
–
22.2
424.3
(3.3)
(3.3)
323.6
29.0
352.6
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements
3 Operating profit continued
During the year, there were £19.5 million (2015: £nil) of expenses incurred as a result of two significant flooding incidents caused
by storms Desmond and Eva (see page 6) comprising an £11.4 million impairment of property, plant and equipment, £7.0 million
of operating costs and £1.1 million of infrastructure renewals expenditure. Insurance compensation of £20.1 million relating to the
flooding incidents has been recognised to the extent that the group considers the recovery to be ‘virtually certain’ at 31 March 2016.
The group expects there to be further substantial recovery of the flooding incident costs under its insurance cover in the year ending
31 March 2017, though at this stage it is not practicable to estimate the value of this.
In addition, there were £24.8 million (2015: £nil) of costs, largely comprising customer compensation payments included within other
expenses, incurred in relation to a large water quality incident (see page 6) and £11.1 million (2015: £1.1 million) in relation to market
reform restructuring costs incurred preparing the business for open competition in the business retail market.
Research and development expenditure for the year ended 31 March 2016 was £2.3 million (2015: £2.1 million).
During the year, the group obtained the following services from its auditor:
Audit services
Statutory audit – group and company
Statutory audit – subsidiaries
Regulatory reporting
Audit-related services
Other non-audit services
4
Investment income
Interest receivable on short-term bank deposits held at amortised cost
Net pension interest income (see note 18)
2016
£’000
2015
£’000
70
239
45
354
50
238
642
2016
£m
1.9
3.1
5.0
43
291
30
364
30
250
644
2015
£m
1.0
–
1.0
126
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
5 Finance expense
Interest payable
Interest payable on borrowings held at amortised cost(1)
Fair value losses/(gains) on debt and derivative instruments(2)
Fair value hedge relationships:
Borrowings
Designated swaps
Financial instruments at fair value through profit or loss:
Borrowings designated at fair value through profit or loss(3)
Associated swaps(4)
Fixed interest rate swaps(4)
Electricity swaps(4)
Net receipts on swaps and debt under fair value option
Other swaps(4)(5)
Other
Net fair value losses on debt and derivative instruments(6)
Net pension interest expense (see note 18)
Notes:
2016
£m
198.1
198.1
60.8
(62.2)
(1.4)
4.3
(23.5)
(19.2)
46.2
14.2
(16.1)
(3.0)
5.6
46.9
26.3
–
224.4
2015
£m
206.1
206.1
112.8
(122.7)
(9.9)
65.0
(73.5)
(8.5)
133.5
(6.0)
(2.5)
1.1
(3.0)
123.1
104.7
7.0
317.8
(1)
(2)
Includes a £37.9 million (2015: £46.6 million) non-cash inflation uplift expense in relation to the group’s index-linked debt.
Includes foreign exchange losses of £62.1 million (2015: £10.5 million gains), excluding those on instruments measured at fair value through profit or loss. These losses/
gains are largely offset by fair value gains/losses on derivatives.
Includes a £15.1 million gain (2015: £4.6 million loss) on the valuation of debt reported at fair value through profit or loss due to changes in credit spread assumptions.
(3)
(4) These swap contracts are not designated within an IAS 39 hedge relationship and are, as a result, classed as ‘held for trading’ under the accounting standard. These
derivatives form economic hedges and, as such, management intend to hold these through to maturity.
Includes fair value movements in relation to other economic hedge derivatives relating to debt held at amortised cost.
Includes £16.5 million income (2015: £4.0 million) due to net interest on swaps and debt under fair value option.
(5)
(6)
Interest payable is stated net of £21.3 million (2015: £20.9 million) borrowing costs capitalised in the cost of qualifying assets within
property, plant and equipment and intangible assets during the year. This has been calculated by applying a capitalisation rate of 2.7
per cent (2015: 3.1 per cent) to expenditure on such assets as prescribed by IAS 23 ‘Borrowing Costs’.
127
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements
6 Tax
Current tax
UK corporation tax
Adjustments in respect of prior years
Total current tax charge for the year
Deferred tax
Current year
Adjustments in respect of prior years
Change in tax rate
Total deferred tax (credit)/charge for the year
Total tax (credit)/charge for the year
2016
£m
53.3
(9.0)
44.3
18.6
5.6
24.2
(112.5)
(88.3)
(44.0)
2015
£m
56.8
(9.7)
47.1
14.3
9.0
23.3
–
23.3
70.4
The deferred tax credit of £112.5 million (2015: £nil) reflects the enacted reduction in the headline rate of corporation tax to 18 per
cent from 1 April 2020. An additional reduction to 17 per cent effective from 1 April 2020 was announced in the Chancellor’s Budget on
16 March 2016. Subject to enactment, this will result in a future deferred tax credit currently estimated at around £56.0 million.
The table below reconciles the notional tax charge at the UK corporation tax rate to the effective tax rate for the year:
Profit before tax
Tax at the UK corporation tax rate
Adjustments in respect of prior years
Change in tax rate
Net income not taxable/other
Total tax (credit)/charge and effective tax rate for the year
Tax on items taken directly to equity
Deferred tax (see note 19)
On remeasurement gains on defined benefit pension schemes
Change in tax rate
Total tax charge on items taken directly to equity
2016
£m
353.5
70.7
(3.4)
(112.5)
1.2
(44.0)
2016
%
20.0
(1.0)
(31.8)
0.3
(12.5)
2015
£m
341.6
71.7
(0.7)
–
(0.6)
70.4
2016
£m
32.0
(5.5)
26.5
26.5
2015
%
21.0
(0.2)
–
(0.2)
20.6
2015
£m
50.1
–
50.1
50.1
The deferred tax credit of £5.5 million (2015: £nil) reflects the enacted reduction in the headline rate of corporation tax to 18 per cent
from 1 April 2020.
128
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
7 Earnings per share
Profit after tax attributable to equity holders of the company
Earnings per share
Basic
Diluted
2016
£m
397.5
2016
pence
58.3
58.2
2015
£m
271.2
2015
pence
39.8
39.7
Basic earnings per share is calculated by dividing profit after tax for the financial year attributable to equity holders of the company by
681.9 million, being the weighted average number of shares in issue during the year (2015: 681.9 million). Diluted earnings per share
is calculated by dividing profit after tax for the financial year attributable to equity holders of the company by 683.0 million, being the
weighted average number of shares in issue during the year including dilutive shares (2015: 683.3 million).
The difference between the weighted average number of shares used in the basic and the diluted earnings per share calculations
represents those ordinary shares deemed to have been issued for no consideration on the conversion of all potential dilutive ordinary
shares in accordance with IAS 33 ‘Earnings per Share’. Potential dilutive ordinary shares comprise outstanding share options awarded
to directors and certain employees (see note 2).
The weighted average number of shares can be reconciled to the weighted average number of shares including dilutive shares as
follows:
Average number of ordinary shares – basic
Effect of potential dilutive ordinary shares – share options
Average number of ordinary shares – diluted
8 Dividends
Amounts recognised as distributions to equity holders of the company in the year comprise:
Ordinary shares
Final dividend for the year ended 31 March 2015 at 25.14 pence per share (2014: 24.03 pence)
Interim dividend for the year ended 31 March 2016 at 12.81 pence per share (2015: 12.56 pence)
Proposed final dividend for the year ended 31 March 2016 at 25.64 pence per share
(2015: 25.14 pence)
2016
million
681.9
1.1
683.0
2016
£m
171.4
87.3
258.7
174.8
2015
million
681.9
1.4
683.3
2015
£m
163.8
85.6
249.4
171.4
The proposed final dividends for the years ended 31 March 2016 and 31 March 2015 were subject to approval by equity holders
of United Utilities Group PLC as at the reporting dates, and hence have not been included as liabilities in the consolidated financial
statements at 31 March 2016 and 31 March 2015 respectively.
129
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements
9
Property, plant and equipment
Group
Cost
At 1 April 2014
Additions
Transfers
Disposals
At 31 March 2015
Additions
Transfers
Disposals
At 31 March 2016
Accumulated depreciation
At 1 April 2014
Charge for the year
Disposals
At 31 March 2015
Charge for the year
Impairment
Disposals
At 31 March 2016
Net book value at 31 March 2015
Net book value at 31 March 2016
Infra-
Land and
buildings
£m
structure Operational
assets
£m
assets
£m
Fixtures,
fittings,
tools and
equipment
£m
Assets in
course of
construction
£m
272.1
8.4
27.2
(4.1)
303.6
4.5
19.1
(0.3)
326.9
83.4
15.9
(3.8)
95.5
9.0
–
(0.3)
104.2
208.1
222.7
4,555.7
112.8
219.9
(0.4)
4,888.0
98.0
134.8
(0.1)
5,120.7
239.8
35.4
–
275.2
34.6
–
(0.1)
309.7
4,612.8
4,811.0
5,927.2
91.0
273.0
(27.2)
6,264.0
106.3
156.5
(47.2)
6,479.6
2,230.8
233.2
(22.6)
2,441.4
249.6
11.4
(42.2)
2,660.2
3,822.6
3,819.4
482.6
19.9
18.3
(33.6)
487.2
7.4
11.1
(7.6)
498.1
291.5
39.1
(31.8)
298.8
39.3
–
(5.8)
332.3
188.4
165.8
Total
£m
12,164.0
728.5
–
(65.3)
12,827.2
665.8
–
(55.2)
13,437.8
2,845.5
323.6
(58.2)
3,110.9
332.5
11.4
(48.4)
3,406.4
926.4
496.4
(538.4)
–
884.4
449.6
(321.5)
–
1,012.5
–
–
–
–
–
–
–
–
884.4
1,012.5
9,716.3
10,031.4
At 31 March 2016, the group had entered into contractual commitments for the acquisition of property, plant and equipment
amounting to £439.0 million (2015: £394.5 million).
In addition to these commitments, the group has long-term expenditure plans which include investments to achieve improvements in
performance required by regulators and to provide for future growth.
Company
The company had no property, plant and equipment or contractual commitments for the acquisition of property, plant and equipment
at 31 March 2016 or 31 March 2015.
130
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com 10 Intangible assets
Cost
At 1 April 2014
Additions
Disposals
At 31 March 2015
Additions
Transfer to assets classified as held for sale (see note 15)
At 31 March 2016
Accumulated amortisation
At 1 April 2014
Charge for the year
Disposals
At 31 March 2015
Charge for the year
Transfer to assets classified as held for sale (see note 15)
At 31 March 2016
Net book value at 31 March 2015
Net book value at 31 March 2016
The group’s intangible assets relate mainly to computer software.
At 31 March 2016, the group had entered into contractual commitments for the acquisition of intangible assets amounting to
£8.3 million (2015: £2.3 million).
Company
The company had no intangible assets or contractual commitments for the acquisition of intangible assets at 31 March 2016 or
31 March 2015.
11 Joint ventures
At 31 March 2016, the group’s interests in joint ventures mainly comprised its interest in AS Tallinna Vesi (Tallinn Water). Joint
management of Tallinn Water is based on a shareholders’ agreement.
The joint ventures have no significant contingent liabilities to which the group is exposed. The group has issued guarantees of
£4.7 million in support of its joint ventures (2015: £4.7 million) which are included in the contingent liabilities total disclosed in
note 24.
Total
£m
229.8
64.2
(29.5)
264.5
67.0
(20.6)
310.9
119.6
29.0
(29.0)
119.6
31.2
(2.3)
148.5
144.9
162.4
131
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements
12 Investments
Group
At 1 April 2014
Additions
Currency translation differences
At 31 March 2015
Disposals
Currency translation differences
At 31 March 2016
£m
6.9
0.8
0.9
8.6
(0.2)
0.3
8.7
During the year, the group reduced its investment in Muharraq Holding Company 1 Limited through a £0.2 million repayment of a
shareholder loan.
During the year ended 31 March 2015, the group increased its investment in Muharraq Holding Company 1 Limited by £0.8 million.
At 31 March 2016, the group’s investments mainly comprised its investment in Muharraq Holding Company 1 Limited. These
investments are held at fair value.
Company
Cost
At 31 March 2016, 31 March 2015 and 1 April 2014
Impairment
At 1 April 2014
Reversal
At 31 March 2016 and 31 March 2015
Net book value at 31 March 2016 and 31 March 2015
Shares in
subsidiary
undertakings
£m
6,326.8
726.8
(726.8)
–
6,326.8
In the year ended 31 March 2016, a review has been performed supporting the carrying value of the £6,326.8 million investment in
United Utilities PLC.
During the year ended 31 March 2015, the review resulted in the reversal of an impairment made during the year ended 31 March
2010. The reviews are based on a ‘fair value less costs of disposal’ valuation.
13 Inventories
Properties held for resale
Other inventories
Company
The company had no inventories at 31 March 2016 or 31 March 2015.
2016
£m
19.7
9.6
29.3
2015
£m
31.2
9.3
40.5
132
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
14 Trade and other receivables
Trade receivables
Amounts owed by subsidiary undertakings
Amounts owed by related parties (see note A6)
Other debtors
Prepayments and accrued income
2016
£m
175.1
–
2.9
54.4
137.5
369.9
Group
2015
£m
176.6
–
2.8
22.6
153.8
355.8
2016
£m
–
62.5
–
–
–
62.5
Company
2015
£m
–
61.2
–
–
–
61.2
At 31 March 2016, the group had £2.5 million (2015: £2.5 million) of trade and other receivables classified as non-current.
The carrying amounts of trade and other receivables approximate their fair value.
Trade receivables do not carry interest and are stated net of allowances for doubtful receivables, an analysis of which is as follows:
Group
At the start of the year
Amounts charged to operating expenses (see note 3)
Trade receivables written off
At the end of the year
2016
£m
100.5
39.2
(45.3)
94.4
2015
£m
97.9
52.9
(50.3)
100.5
At each reporting date, the group evaluates the recoverability of trade receivables and records allowances for doubtful receivables
based on experience.
At 31 March 2016 and 31 March 2015, the group had no trade receivables that were past due and not individually impaired.
The following table provides information regarding the ageing of net trade receivables that were past due and individually impaired:
Trade receivables
At 31 March 2016
At 31 March 2015
Aged
between
one
Aged
year and greater than
two years
two years
£m
£m
5.1
37.5
3.2
43.6
Aged
less than
one year
£m
127.0
125.8
Carrying
value
£m
169.6
172.6
At 31 March 2016, the group had £5.5 million (2015: £4.0 million) of trade receivables that were not past due.
Company
At 31 March 2016 and 31 March 2015, the company had no trade receivables that were past due.
The directors consider that the carrying amount of trade and other receivables approximates to their fair value at 31 March 2016 and
31 March 2015.
133
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS Notes to the financial statements
15 Assets classified as held for sale
During the year, the group entered into an agreement which will involve the disposal of its non-household water and wastewater retail
business, principally comprising billing and customer service activities, into a new joint venture with Severn Trent PLC. As at 31 March
2016, completion of the disposal was expected within 12 months, subject to clearance from the Competition and Markets Authority,
and so £18.3 million of intangible assets have been classified as held for sale. These assets have subsequently been impaired by
£2.7 million during the year to give a carrying value of £15.6 million, which ensures that the assets are valued at fair value less cost to
sell in accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’. See note 25 for events occurring after
31 March 2016.
16 Cash and cash equivalents
Cash at bank and in hand
Short-term bank deposits
Cash and short-term deposits
Book overdrafts (included in borrowings, see note 17)
Cash and cash equivalents in the statement of cash flows
2016
£m
4.8
208.8
213.6
(31.5)
182.1
Group
2015
£m
4.5
239.5
244.0
(24.3)
219.7
2016
£m
–
–
–
(0.5)
(0.5)
Company
2015
£m
–
–
–
(0.4)
(0.4)
Cash and short-term deposits include cash at bank and in hand, deposits, and other short-term highly liquid investments which are
readily convertible into known amounts of cash and have a maturity of three months or less. The carrying amounts of cash and cash
equivalents approximate their fair value.
Book overdrafts, which result from cash management practices, represent the value of cheques issued that had not cleared as at the
balance sheet date.
17 Borrowings
Group
Non-current liabilities
Bonds
Bank and other term borrowings
Current liabilities
Bonds
Bank and other term borrowings
Book overdrafts (see note 16)
2016
£m
4,439.2
2,069.6
6,508.8
–
437.7
31.5
469.2
6,978.0
2015
£m
4,239.6
1,827.7
6,067.3
425.9
127.9
24.3
578.1
6,645.4
For further details of the principal economic terms and conditions of outstanding borrowings see note A3.
134
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
17 Borrowings continued
Company
Non-current liabilities
Amounts owed to subsidiary undertakings
Current liabilities
Book overdrafts (see note 16)
2016
£m
1,636.9
1,636.9
0.5
0.5
1,637.4
2015
£m
1,609.4
1,609.4
0.4
0.4
1,609.8
Borrowings are unsecured and are measured at amortised cost. The carrying amounts of borrowings approximate their fair value.
18 Retirement benefit surplus
Defined benefit schemes
The net pension expense before tax recognised in the income statement in respect of the defined benefit schemes is summarised as
follows:
Current service cost
Curtailments/settlements
Administrative expenses
Pension expense charged to operating profit
Net pension interest (income)/expense (credited)/charged to investment income/finance expense
(see notes 4 and 5)
Net pension expense charged before tax
2016
£m
22.3
1.1
2.7
26.1
(3.1)
23.0
2015
£m
18.1
5.5
2.6
26.2
7.0
33.2
Defined benefit pension costs excluding curtailments/settlements included within employee benefit expense were £25.0 million
(2015: £20.7 million) comprising current service costs and administrative expenses. Total post-employment benefits expense excluding
curtailments/settlements charged to operating profit of £34.9 million (2015: £29.5 million) comprise the defined benefit costs
described above of £25.0 million (2015: £20.7 million) and defined contribution pension costs of £9.9 million (2015: £8.8 million) (see
note 2).
The reconciliation of the opening and closing net pension surplus/(obligations) included in the statement of financial position is as
follows:
Group
At the start of the year
Expense recognised in the income statement
Contributions paid
Remeasurement gains gross of tax
At the end of the year
2016
£m
79.2
(23.0)
58.9
160.1
275.2
2015
£m
(177.4)
(33.2)
39.3
250.5
79.2
135
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements
18 Retirement benefit surplus continued
Included in the contributions paid of £58.9 million (2015: £39.3 million) were deficit repair contributions of £33.3 million
(2015: £9.7 million). No inflation funding mechanism payments were made during the year (2015: £5.5 million).
Remeasurement gains and losses are recognised directly in the statement of comprehensive income.
The return on plan assets, excluding amounts included in interest
Actuarial gains/(losses) arising from changes in financial assumptions
Actuarial (losses)/gains arising from changes in demographic assumptions
Actuarial gains arising from experience
Remeasurement gains on defined benefit pension schemes
2016
£m
56.0
98.1
(46.6)
52.6
160.1
2015
£m
705.2
(500.8)
10.2
35.9
250.5
For more information in relation to the group’s defined benefit pension schemes see note A5.
Defined contribution schemes
During the year, the group made £9.9 million (2015: £8.8 million) of contributions to defined contribution schemes which are included
in employee benefit expense (see note 2).
Company
The company did not participate in any of the group’s pension schemes during the years ended 31 March 2016 and 31 March 2015.
19 Deferred tax liabilities
The following are the major deferred tax liabilities and assets recognised by the group, and the movements thereon, during the current
and prior year:
Group
At 1 April 2014
Charged/(credited) to the income statement
Charged to equity (see note 6)
At 31 March 2015
(Credited)/charged to the income statement
Charged to equity (see note 6)
At 31 March 2016
Accelerated
tax
depreciation
£m
1,084.0
41.0
–
1,125.0
(88.2)
–
1,036.8
Retirement
benefit
obligations
£m
(35.5)
2.0
50.1
16.6
6.5
26.5
49.6
Other
£m
1.9
(19.7)
–
(17.8)
(6.6)
–
(24.4)
Total
£m
1,050.4
23.3
50.1
1,123.8
(88.3)
26.5
1,062.0
Certain deferred tax assets and liabilities have been offset in accordance with IAS 12 ‘Income Taxes’.
Company
The company had no deferred tax assets or liabilities at 31 March 2016 or 31 March 2015.
136
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
20 Provisions
Group
At 1 April 2014
Charged/(credited) to the income statement
Utilised in the year
At 31 March 2015
(Credited)/charged to the income statement
Utilised in the year
At 31 March 2016
Severance
£m
2.4
6.6
(4.2)
4.8
(0.2)
(3.7)
0.9
Other
£m
13.9
(3.4)
(2.8)
7.7
11.5
(5.0)
14.2
Total
£m
16.3
3.2
(7.0)
12.5
11.3
(8.7)
15.1
The group had no provisions classed as non-current at 31 March 2016 or 31 March 2015.
The severance provision as at 31 March 2016 and 31 March 2015 relates to severance costs as a result of group reorganisation.
Other provisions principally relate to contractual and legal claims against the group and represent management’s best estimate of the
value of settlement, the timing of which is dependent on the resolution of the relevant legal claims.
Company
The company had no provisions at 31 March 2016 or 31 March 2015.
21 Trade and other payables
Non-current
Deferred grants and contributions
Other creditors
Current
Trade payables
Amounts owed to subsidiary undertakings
Other tax and social security
Deferred grants and contributions
Other creditors
Accruals and deferred income
The average credit period taken for trade purchases is 26 days (2015: 28 days).
The carrying amounts of trade and other payables approximate their fair value.
2016
£m
517.4
13.1
530.5
2016
£m
44.1
–
4.9
9.0
3.4
280.3
341.7
Group
2015
£m
476.7
3.3
480.0
Group
2015
£m
40.1
–
4.7
9.1
3.7
323.6
381.2
2016
£m
–
–
–
2016
£m
–
9.5
–
–
1.6
–
11.1
Company
2015
£m
–
–
–
Company
2015
£m
–
9.2
–
–
1.6
–
10.8
137
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements
21 Trade and other payables continued
Deferred grants and contributions
Group
At the start of the year
Cash received during the year
Transfers of assets from customers
Credited to the income statement – revenue
Credited to the income statement – other operating expenses (see note 3)
At the end of the year
22 Share capital
Group and company
Issued, called up and fully paid
Ordinary shares of 5.0 pence each
Deferred shares of 170.0 pence each
2016
£m
485.8
17.3
32.8
(2.6)
(6.9)
526.4
2015
million
681.9
274.0
955.9
2015
£m
450.7
18.1
27.0
(2.3)
(7.7)
485.8
2015
£m
34.1
465.7
499.8
2016
million
681.9
274.0
955.9
2016
£m
34.1
465.7
499.8
Refer to the directors’ report for details of the voting rights of each category of shares.
23 Operating lease commitments
Group
Commitments under non-cancellable operating leases due
Within one year
In the second to fifth years inclusive
After five years
Property
2016
£m
Plant and
equipment
2016
£m
Property
2015
£m
Plant and
equipment
2015
£m
3.0
10.4
278.6
292.0
0.7
0.5
–
1.2
3.5
11.6
280.4
295.5
0.7
0.5
–
1.2
In respect of the group’s commitment to significant property leases, there are no contingent rentals payable, or restrictions on
dividends, debt or further leasing imposed by these lease arrangements. Wherever possible, the group ensures that it has the benefit
of security of tenure where this is required by operational and accommodation strategies. Escalation of rents is via rent reviews at
agreed intervals.
The company had no operating lease commitments at 31 March 2016 or 31 March 2015.
24 Contingent liabilities
The group has entered into performance guarantees as at 31 March 2016 where a financial limit has been specified of £9.8 million
(2015: £9.7 million).
The company has not entered into performance guarantees as at 31 March 2016 or 31 March 2015.
25 Events after the reporting period
On 3 May 2016, the Competition and Markets Authority approved the joint venture arrangement with Severn Trent PLC detailed in
note 15 and, as a result, completion is expected to occur in June 2016.
There were no further events arising after the reporting date that require recognition or disclosure in the financial statements for the
year ended 31 March 2016.
138
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
Notes to the financial statements – appendices
A1 Cash generated from operations
Profit before tax
Adjustment for investment income (see note 4) and finance expense
(see note 5)
Adjustment for share of profits of joint ventures
Operating profit
Adjustments for:
Depreciation of property, plant and equipment (see note 9)
Amortisation of intangible assets (see note 10)
Impairment of property, plant and equipment (see note 9)
Impairment of assets classified as available for sale (see note 15)
Loss on disposal of property, plant and equipment (see note 3)
Loss on disposal of intangible assets (see note 3)
Amortisation of deferred grants and contributions (see note 21)
Equity-settled share-based payments charge (see note 2)
Other non-cash movements*
Changes in working capital:
Decrease/(increase) in inventories
(Increase)/decrease in trade and other receivables
(Decrease)/increase in trade and other payables
Increase/(decrease) in provisions (see note 20)
Pension contributions paid less pension expense charged to
operating profit
Cash generated from operations
2016
£m
353.5
219.4
(5.0)
567.9
332.5
31.2
11.4
2.7
5.4
–
(6.9)
2.3
(3.8)
11.2
(14.1)
(4.1)
2.6
(32.8)
905.5
Group
2015
£m
341.6
316.8
(5.1)
653.3
323.6
29.0
–
–
5.1
0.5
(7.7)
2.9
(1.2)
(0.7)
(23.0)
(23.2)
(3.8)
(13.1)
941.7
2016
£m
230.8
27.9
–
258.7
–
–
–
–
–
–
–
–
–
–
2.6
–
–
Company
2015
£m
950.0
26.3
–
976.3
–
–
–
–
–
–
–
–
(726.8)
–
6.5
0.1
–
–
261.3
–
256.1
* Material non-cash transactions during the prior year include, for the company, the reversal of a past impairment made against the company’s investment in its subsidiary,
United Utilities PLC (see note 12).
The group has received property, plant and equipment of £32.8 million (2015: £27.0 million) in exchange for the provision of future
goods and services (see notes 21 and A7).
A2 Net debt
Group
At the start of the year
Net capital expenditure
Dividends (see note 8)
Interest
Tax
Fair value movements*
Inflation uplift on index-linked debt (see note 5)
Other
Cash generated from operations (see note A1)
At the end of the year
2016
£m
5,924.0
681.6
258.7
166.8
53.1
42.4
37.9
1.5
(905.5)
6,260.5
2015
£m
5,515.9
709.0
249.4
174.6
60.6
107.2
46.6
2.4
(941.7)
5,924.0
* Fair value movements includes net fair value losses on debt and derivative instruments of £26.3 million (2015: £104.7 million), less £16.1 million (2015: £2.5 million) of net
receipts on swaps and debt under fair value option (see note 5).
Net debt comprises borrowings, net of cash and short-term deposits and derivatives.
139
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements – appendices
A3 Borrowings
Terms and debt repayment schedule
The principal economic terms and conditions of outstanding borrowings, along with fair value and carrying value, were as follows:
Currency
Year of final
repayment
GBP
USD
USD
EUR
GBP
EUR
GBP
JPY/USD
EUR
GBP
2018
2018
2019
2020
2022
2027
2027
2029
2030
2035
USD
2028
GBP
GBP
GBP
JPY
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
2015
2016
2016
2017
2020
2020
2020
2020
2020
2020
2020
2020
2022
2023
2025
2025
2026
2029
2029
2029
2029
2029
2030
2030
Fair
value
2016
£m
2,293.0
169.6
183.9
263.2
455.9
449.5
38.4
382.7
81.4
23.7
244.7
338.0
338.0
4,830.1
–
127.5
269.9
31.7
65.7
64.7
64.5
64.5
64.2
64.4
64.2
63.9
98.3
105.0
101.1
24.2
96.4
58.6
54.6
57.6
57.4
55.2
55.0
56.2
Carrying
value
2016
£m
2,373.0
162.5
185.6
269.3
455.1
434.5
41.0
411.1
96.1
25.1
292.7
338.0
338.0
4,267.0
–
127.5
267.4
32.0
59.3
59.3
59.4
59.5
59.3
59.6
59.6
59.7
100.0
105.2
101.2
25.2
100.0
54.2
52.5
53.7
53.7
54.4
54.3
54.1
Fair
value
2015
£m
2,218.0
175.1
181.3
259.1
427.5
457.9
–
391.2
75.4
–
250.5
333.7
333.7
4,798.5
447.6
117.5
271.9
29.2
67.0
65.8
65.5
65.5
65.2
65.3
65.1
64.8
–
105.0
101.6
–
–
59.3
59.1
58.2
58.0
55.6
55.4
56.8
Carrying
value
2015
£m
2,252.1
167.0
183.0
265.8
424.1
432.4
–
408.1
86.3
–
285.4
333.7
333.7
4,059.6
425.9
117.5
264.1
28.8
58.5
58.5
58.6
58.7
58.6
58.8
58.8
58.9
–
103.8
99.9
–
–
55.4
55.8
55.0
54.9
53.7
53.6
53.4
Borrowings in fair value hedge relationships
5.375% 150m bond
4.55% 250m bond
5.375% 350m bond
4.25% 500m bond
5.75% 375m bond
1.129% 52m bond
5.625% 300m bond
5.02% JPY 10bn dual currency loan
2.058% 30m bond
5% 200m bond
Borrowings designated at fair value through
profit or loss
6.875% 400m bond
Borrowings measured at amortised cost
6.125% 425m bond
Short-term bank borrowings – fixed
1.97%+RPI 200m IL loan
1.30%+LIBOR 5bn bond
2.46%+RPI 50m IL loan
2.10%+RPI 50m IL loan
1.93%+RPI 50m IL loan
1.90%+RPI 50m IL loan
1.88%+RPI 50m IL loan
1.84%+RPI 50m IL loan
1.73%+RPI 50m IL loan
1.61%+RPI 50m IL loan
0.80%+LIBOR 100m loan
0.47%+RPI 100m IL loan
0.49%+RPI 100m IL loan
0.013%+RPI 25m IL bond
0.1275%+RPI 100m IL loan
1.29%+RPI 50m (amortising) IL loan
1.23%+RPI 50m (amortising) IL loan
1.12%+RPI 50m (amortising) IL loan
1.10%+RPI 50m (amortising) IL loan
0.75%+RPI 50m (amortising) IL loan
0.76%+RPI 50m (amortising) IL loan
1.15%+RPI 50m (amortising) IL loan
140
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
A3 Borrowings continued
Borrowings measured at amortised cost continued
1.11%+RPI 50m (amortising) IL loan
0.178%+RPI 35m IL bond
0.709%+LIBOR 100m (amortising) loan
0.691%+LIBOR 150m (amortising) loan
3.375%+RPI 50m IL bond
0.573%+LIBOR 100m (amortising) loan
0.511%+LIBOR 150m (amortising) loan
0.01%+RPI 100m (amortising) IL loan
0.01%+RPI 75m (amortising) IL loan
1.9799%+RPI 100m IL bond
1.66%+RPI 35m IL bond
2.40%+RPI 70m IL bond
1.7829%+RPI 100m IL bond
1.3258%+RPI 50m IL bond
1.5802%+RPI 100m IL bond
1.5366%+RPI 50m IL bond
1.397%+RPI 50m IL bond
1.7937%+RPI 50m IL bond
Commission for New Towns (amortising) loan – fixed
1.847%+RPI 100m IL bond
1.815%+RPI 100m IL bond
1.662%+RPI 100m IL bond
1.591%+RPI 25m IL bond
1.5865%+RPI 50m IL bond
1.556%+RPI 50m IL bond
1.435%+RPI 50m IL bond
1.3805%+RPI 35m IL bond
1.702%+RPI 50m IL bond
1.585%+RPI 100m IL bond
Book overdrafts (see note 16)
Currency
Year of final
repayment
Fair
value
2016
£m
Carrying
value
2016
£m
Fair
value
2015
£m
Carrying
value
2015
£m
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
2030
2030
2032
2032
2032
2033
2033
2033
2034
2035
2037
2039
2040
2041
2042
2043
2046
2049
2053
2056
2056
2056
2056
2056
2056
2056
2056
2057
2057
2016
56.2
33.6
95.6
142.9
107.6
93.7
140.0
94.7
71.1
171.4
51.6
113.5
172.8
78.9
166.6
82.5
81.8
91.1
52.5
180.8
179.4
173.1
42.4
85.6
84.5
82.0
56.7
86.1
165.1
31.5
7,461.1
54.2
35.3
100.0
150.0
72.8
100.0
150.0
99.7
74.7
136.4
43.6
85.0
135.0
67.3
134.5
67.1
67.3
67.0
28.7
131.6
131.0
130.8
32.6
65.3
65.0
64.8
45.3
63.5
125.9
31.5
6,978.0
56.8
–
97.7
146.2
110.9
96.1
–
–
–
174.9
52.9
117.2
177.4
80.7
171.7
85.0
85.0
95.0
55.6
186.8
185.5
178.8
43.6
86.9
86.9
84.2
58.2
88.7
172.1
24.3
7,350.2
53.5
–
100.0
150.0
72.0
100.0
–
–
–
135.0
43.0
83.8
133.6
66.7
133.2
66.5
66.6
66.3
29.3
129.9
129.3
129.1
32.2
64.5
64.2
63.9
44.7
62.6
124.2
24.3
6,645.4
IL
Index-linked debt – this debt is adjusted for movements in the Retail Prices Index with reference to a base RPI established at
trade date
RPI
The UK general index of retail prices (for all items) as published by the Office for National Statistics (Jan 1987 = 100)
Borrowings are unsecured. Funding raised in currencies other than sterling is swapped to sterling to match funding costs to income and
assets.
141
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements – appendices
A4 Financial risk management
Risk management
The board is responsible for treasury strategy and governance, which is reviewed on an annual basis. The annual treasury strategy
review covers (as applicable) the group’s funding, liquidity, capital management and interest rate management strategies, along with
the delegation of specific funding and hedging authorities to the treasury committee.
The treasury committee, a subcommittee of the board, has responsibility for setting and monitoring the group’s adherence to treasury
policies, along with oversight in relation to the activities of the treasury function.
Treasury policies cover the key financial risks: liquidity risk, credit risk, market risk (inflation, interest rate, electricity price and currency)
and capital risk. These policies are reviewed by the treasury committee for approval on at least an annual basis, or following any major
changes in treasury operations and/or financial market conditions.
Day-to-day responsibility for operational compliance with the treasury policies rests with the treasurer. An operational compliance
report is provided monthly to the treasury committee, which details the status of the group’s compliance with the treasury policies and
highlights the level of risk against the appropriate risk limits in place.
The group’s treasury function does not act as a profit centre and does not undertake any speculative trading activity.
Liquidity risk
The group looks to manage its liquidity risk by maintaining liquidity within a board approved duration range. Liquidity is actively
monitored by the group’s treasury function and is reported monthly to the treasury committee through the operational compliance
report.
At 31 March 2016, the group had £888.6 million (2015: £1,244.0 million) of available liquidity, which comprised £213.6 million (2015:
£244.0 million) of cash and short-term deposits, £600.0 million (2015: £600.0 million) of undrawn committed borrowing facilities, and
£75.0 million (2015: £400.0 million) of undrawn term loan facilities. Short-term deposits mature within three months.
The group had available committed borrowing facilities as follows:
Group
Expiring within one year
Expiring after one year but in less than two years
Expiring after more than two years
Undrawn borrowing facilities
2016
£m
150.0
150.0
300.0
600.0
2015
£m
50.0
150.0
400.0
600.0
These facilities are arranged on a bilateral rather than a syndicated basis, which spreads the maturities more evenly over a longer time
period, thereby reducing the refinancing risk by providing several renewal points rather than a large single refinancing point.
Company
The company did not have any committed facilities available at 31 March 2016 or 31 March 2015.
142
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A4 Financial risk management continued
Maturity analysis
Concentrations of risk may arise if large cash flows are concentrated within particular time periods. The maturity profile in the
following table represents the forecast future contractual principal and interest cash flows in relation to the group’s financial liabilities
with agreed repayment periods and derivatives on an undiscounted basis. Derivative cash flows have been shown net where there is a
contractual agreement to settle on a net basis; otherwise the cash flows are shown gross.
Group
At 31 March 2016
Bonds
Bank and other term borrowings
Adjustment to carrying value(2)
Borrowings
Derivatives:
Payable
Receivable
Adjustment to carrying value(2)
Derivatives – net assets
At 31 March 2015
Bonds
Bank and other term borrowings
Adjustment to carrying value(2)
Borrowings
Derivatives:
Payable
Receivable
Adjustment to carrying value(2)
Derivatives – net assets
Notes:
Total(1)
£m
9,620.9
3,148.8
(5,791.7)
6,978.0
1,154.6
(1,671.3)
12.8
(503.9)
Total(1)
£m
10,067.1
2,536.9
(5,958.6)
6,645.4
1,039.6
(1,534.2)
17.2
(477.4)
Adjust-
ment(2)
£m
(5,791.7)
(5,791.7)
12.8
12.8
Adjust-
ment(2)
£m
(5,958.6)
(5,958.6)
17.2
17.2
1 year
or less
£m
146.4
505.8
1–2
years
£m
178.9
89.8
2–3
years
£m
707.4
107.4
3–4
years
£m
535.9
109.7
4–5
years
£m
103.7
656.9
More
than
5 years
£m
7,948.6
1,679.2
652.2
268.7
814.8
645.6
760.6
9,627.8
94.7
(128.1)
117.1
(196.2)
393.2
(700.0)
411.1
(485.4)
26.4
(8.0)
112.1
(153.6)
(33.4)
(79.1)
(306.8)
(74.3)
18.4
(41.5)
1 year
or less
£m
593.3
184.5
1–2
years
£m
143.4
348.9
2–3
years
£m
173.3
84.2
3–4
years
£m
691.1
85.8
4–5
years
£m
502.8
86.9
More
than
5 years
£m
7,963.2
1,746.6
777.8
492.3
257.5
776.9
589.7
9,709.8
89.3
(124.2)
70.7
(101.4)
101.3
(176.9)
369.9
(626.9)
383.0
(502.3)
25.4
(2.5)
(34.9)
(30.7)
(75.6)
(257.0)
(119.3)
22.9
(1) Forecast future cash flows are calculated, where applicable, using forward interest rates based on the interest environment at year-end and are therefore susceptible to
changes in market conditions. For index-linked debt it has been assumed that RPI will be three per cent over the life of each instrument.
(2) The carrying value of debt is calculated following various methods in accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’ and therefore this
adjustment reconciles the undiscounted forecast future cash flows to the carrying value of debt in the statement of financial position.
Company
The company has total borrowings of £0.5 million (2015: £0.4 million), which are payable within one year, and £1,636.9 million (2015:
£1,609.4 million), which are payable within one to two years.
143
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Notes to the financial statements – appendices
A4 Financial risk management continued
Credit risk
Credit risk arises principally from trading (the supply of services to customers) and treasury activities (the depositing of cash and
holding of derivative and foreign exchange instruments). The group does not believe it is exposed to any material concentrations of
credit risk.
The group manages its risk from trading through the effective management of customer relationships. Concentrations of credit risk
with respect to trade receivables are limited due to the group’s customer base consisting of a large number of unrelated households
and businesses. The Water Industry Act 1991 (as amended by the Water Industry Act 1999) prohibits the disconnection of a water
supply and the limiting of supply with the intention of enforcing payment for certain premises including domestic dwellings. However,
allowance is made by the water regulator in the price limits at each price review for a proportion of debt deemed to be irrecoverable.
In addition, under the group’s revenue recognition policy, revenue is only recognised when collection of the resulting receivable is
reasonably assured. Considering the above, the directors believe there is no further credit risk provision required in excess of the
allowance for doubtful receivables (see note 14).
The group manages its risk from treasury activities by establishing a total credit limit by counterparty, which comprises a counterparty
credit limit and an additional settlement limit to cover intra-day gross settlement cash flows. In addition, potential derivative exposure
limits are also established to take account of potential future exposure which may arise under derivative transactions. These limits are
calculated by reference to a measure of capital and credit ratings of the individual counterparties and are subject to a maximum single
counterparty limit. A control mechanism to trigger a review of specific counterparty limits, irrespective of credit rating action, is in
place. This entails daily monitoring of counterparty credit default swap levels and/or share price volatility. Credit exposure is monitored
daily by the group’s treasury function and is reported monthly to the treasury committee through the operational compliance report.
At 31 March 2016 and 31 March 2015, the maximum exposure to credit risk for the group and company is represented by the carrying
amount of each financial asset in the statement of financial position:
Cash and short-term deposits (see note 16)
Trade and other receivables (see note 14)
Investments (see note 12)
Derivative financial instruments
2016
£m
213.6
369.9
8.7
765.6
1,357.8
Group
2015
£m
244.0
355.8
8.6
682.6
1,291.0
2016
£m
–
62.5
–
–
62.5
Company
2015
£m
–
61.2
–
–
61.2
The credit exposure on derivatives is disclosed gross of any collateral held. At 31 March 2016, the group held £127.5 million (2015:
£117.5 million) as collateral in relation to derivative financial instruments (included within borrowings in note A3).
144
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
A4 Financial risk management continued
Market risk
The group’s exposure to market risk primarily results from its financing arrangements and the economic return which it is allowed on
the regulatory capital value (RCV).
The group uses a variety of financial instruments, including derivatives, in order to manage the exposure to these risks.
Inflation risk
The group earns an economic return on its RCV, comprising a real return through revenues and an inflation return as an uplift to its
RCV. To the extent that nominal debt liabilities finance a proportion of the RCV, there is an asset-liability mismatch which potentially
exposes the group to the risk of economic loss where actual inflation is lower than that implicitly locked-in through nominal debt.
The group’s index-linked borrowings, which are linked to RPI inflation, form an economic hedge of the group’s regulatory assets, which
are also linked to RPI inflation. In particular, index-linked debt delivers a cash flow benefit compared to nominal debt, as the inflation
adjustment on the index-linked liabilities is a deferred cash flow until the maturity of each financial instrument, providing a better
match to the inflation adjustment on the regulated assets, which is recognised as a non-cash uplift to the RCV.
In addition, the group’s pension obligations also provide an economic hedge of the group’s regulatory assets. The pension schemes’
inflation funding mechanism (see note A5) ensures that future contributions will be flexed for movements in RPI and smoothed over a
rolling five-year period, providing a natural hedge against any inflationary uplift on the RCV.
The group seeks to manage this risk by identifying opportunities to amend the economic hedge currently in place where deemed
necessary and subject to relative value. Inflation risk is reported monthly to the treasury committee in the operational compliance
report.
The carrying value of index-linked debt held by the group was £3,447.3 million at 31 March 2016 (2015: £3,083.8 million).
Sensitivity analysis
The following table details the sensitivity of profit before tax to changes in the RPI on the group’s index-linked borrowings. The
sensitivity analysis has been based on the amount of index-linked debt held at the reporting date and, as such, is not indicative of the
years then ended. In addition, it excludes the hedging aspect of the group’s regulatory assets and post-retirement obligations described
above.
Increase/(decrease) in profit before tax and equity
1 per cent increase in RPI
1 per cent decrease in RPI
2016
£m
(35.0)
35.0
2015
£m
(31.4)
31.4
The sensitivity analysis assumes a one per cent change in RPI having a corresponding one per cent impact on this position over a
12-month period. It should be noted, however, that there is a time lag by which current RPI changes impact on the income statement,
and the analysis does not incorporate this factor. The portfolio of index-linked debt is calculated on either a three or eight-month lag
basis. Therefore, at the reporting date the index-linked interest and principal adjustments impacting the income statement are fixed
and based on the annual RPI change either three or eight months earlier.
Company
The company had no material exposure to inflation risk at 31 March 2016 or 31 March 2015.
145
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A4 Financial risk management continued
Interest rate risk
The group’s policy is to structure debt in a way that best matches its underlying assets and cash flows. The group earns an economic
return on its RCV, comprising a real return through revenues, determined by the real cost of capital fixed by the regulator for each five-
year regulatory pricing period, and an inflation return as an uplift to its RCV.
The preferred form of debt therefore is sterling index-linked debt which incurs fixed interest, in real terms, and forms a natural hedge
of regulatory assets and cash flows.
Where conventional long-term debt is raised in a fixed-rate form, to manage exposure to long-term interest rates, the debt is generally
swapped at inception to create a floating rate liability for the term of the liability through the use of interest rate swaps. These
instruments are typically designated within a fair value accounting hedge.
To manage the exposure to medium-term interest rates, the group fixes underlying interest rates on nominal debt out to ten years
in advance on a reducing balance basis. This is supplemented by managing residual exposure to interest rates within the relevant
regulatory price control period by fixing substantively all residual floating underlying interest rates on projected nominal debt across
the immediately forthcoming regulatory period at around the time of the price control determination.
The group seeks to manage its risk by maintaining its interest rate exposure within a board approved range. Interest rate risk is
reported monthly to the treasury committee through the operational compliance report.
Sensitivity analysis
The following table details the sensitivity of the group’s profit before tax and equity to changes in interest rates. The sensitivity analysis
has been based on the amount of net debt and the interest rate hedge positions in place at the reporting date and, as such, is not
indicative of the years then ended.
Increase/(decrease) in profit before tax and equity
1 per cent increase in interest rate
1 per cent decrease in interest rate
2016
£m
175.6
(183.0)
Group
2015
£m
174.2
(190.9)
2016
£m
(16.4)
16.4
Company
2015
£m
(16.1)
16.1
The sensitivity analysis assumes that both fair value hedges and borrowings designated at fair value through profit or loss are
effectively hedged and it excludes the impact on post-retirement obligations.
The exposure largely relates to fair value movements on the group’s fixed interest rate swaps which manage the exposure to medium-
term interest rates. Those swaps are not included in hedge relationships.
146
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
A4 Financial risk management continued
Repricing analysis
The following tables categorise the group’s borrowings, derivatives and cash deposits on the basis of when they reprice or, if earlier,
mature. The repricing analysis demonstrates the group’s exposure to floating interest rate risk.
Total
£m
1 year
or less
£m
1–2
years
£m
2–3
years
£m
3–4
years
£m
4–5 More than
5 years
£m
years
£m
Group
At 31 March 2016
Borrowings in fair value hedge relationships
Fixed rate instruments
Effect of swaps
Borrowings designated at fair value through
profit or loss
Fixed rate instruments
Effect of swaps
Borrowings measured at amortised cost
Fixed rate instruments
Floating rate instruments
Index-linked instruments
Effect of fixed interest rate swaps
Total borrowings
Cash and short-term deposits
Net borrowings
At 31 March 2015
Borrowings in fair value hedge relationships
Fixed rate instruments
Effect of swaps
Borrowings designated at fair value through
profit or loss
Fixed rate instruments
Effect of swaps
Borrowings measured at amortised cost
Fixed rate instruments
Floating rate instruments
Index-linked instruments
Effect of fixed interest rate swaps
Total borrowings
Cash and short-term deposits
Net borrowings
2,373.0
–
2,373.0
–
2,373.0
2,373.0
338.0
–
338.0
–
338.0
338.0
156.2
663.5
3,447.3
4,267.0
–
6,978.0
(213.6)
6,764.4
Total
£m
127.7
663.5
3,447.3
4,238.5
(3,006.3)
3,943.2
(213.6)
3,729.6
1 year
or less
£m
2,252.1
–
2,252.1
–
2,252.1
2,252.1
333.7
–
333.7
–
333.7
333.7
572.7
403.1
3,083.8
4,059.6
–
6,645.4
(244.0)
6,401.4
543.8
403.1
3,083.8
4,030.7
(2,656.3)
3,960.2
(244.0)
3,716.2
–
–
–
–
–
–
0.5
–
–
0.5
(125.0)
(124.5)
–
(124.5)
1–2
years
£m
–
–
–
–
–
–
617.4
(617.4)
–
455.1
(455.1)
–
–
–
–
0.6
–
–
0.6
1,127.1
1,127.7
–
1,127.7
3–4
years
£m
–
–
–
0.5
–
–
0.5
(50.0)
(49.5)
–
(49.5)
2–3
years
£m
–
–
–
–
–
–
0.4
–
–
0.4
(250.0)
(249.6)
–
(249.6)
0.5
–
–
0.5
(125.0)
(124.5)
–
(124.5)
–
–
–
–
–
–
0.6
–
–
0.6
325.0
325.6
–
325.6
1,300.5
(1,300.5)
–
338.0
(338.0)
–
26.3
–
–
26.3
1,729.2
1,755.5
–
1,755.5
4–5
years
£m
More than
5 years
£m
615.8
(615.8)
–
424.1
(424.1)
–
1,212.2
(1,212.2)
–
–
–
–
0.5
–
–
0.5
(50.0)
(49.5)
–
(49.5)
–
–
–
333.7
(333.7)
–
0.6
–
–
0.6
1,127.1
1,127.7
–
1,127.7
26.9
–
–
26.9
1,954.2
1,981.1
–
1,981.1
147
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS Notes to the financial statements – appendices
A4 Financial risk management continued
Company
Borrowings measured at amortised cost
Floating rate instruments
Total borrowings
2016
1 year
or less
£m
Total
£m
2015
1 year
or less
£m
Total
£m
1,637.4
1,637.4
1,637.4
1,637.4
1,609.8
1,609.8
1,609.8
1,609.8
Electricity price risk
The group is allowed a fixed amount of revenue by the regulator, in real terms, to cover electricity costs for each five-year regulatory
pricing period. To the extent that electricity prices remain floating over this period, this exposes the group to volatility in its operating
cash flows. The group’s policy, therefore, is to manage this risk by fixing a proportion of electricity commodity prices in a cost-effective
manner.
The group has fixed the price on a substantial proportion of its anticipated net electricity usage out to the end of the AMP in 2020,
partially through entering into electricity swap contracts.
Sensitivity analysis
The following table details the sensitivity of the group’s profit before tax and equity to changes in electricity prices. The sensitivity
analysis has been based on the amounts of electricity swaps in place at the reporting date and, as such, is not indicative of the years
then ended.
Increase/(decrease) in profit before tax and equity
20 per cent increase in electricity commodity prices
20 per cent decrease in electricity commodity prices
The company has no exposure to electricity price risk.
2016
£m
7.7
(7.7)
2015
£m
9.5
(9.5)
Currency risk
Currency exposure principally arises in respect of funding raised in foreign currencies.
To manage exposure to currency rates, foreign currency debt is hedged into sterling through the use of cross currency swaps and these
are often designated within a fair value accounting hedge.
The group seeks to manage its risk by maintaining currency exposure within board approved limits. Currency risk in relation to foreign
currency denominated financial instruments is reported monthly to the treasury committee through the operational compliance
report.
The group and company have no material net exposure to movements in currency rates.
Capital risk management
The group’s objective when managing capital is to maintain efficient access to debt capital markets throughout the economic cycle. The
board therefore believes that it is appropriate to maintain gearing, measured as group consolidated net debt (including derivatives) to
regulatory capital value (RCV) of United Utilities Water Limited (UUW), within a target range of 55 per cent to 65 per cent. As at
31 March 2016, group consolidated gearing was 61 per cent (2015: 59 per cent), which is comfortably within this range.
Assuming no significant changes to existing rating agencies’ methodologies or sector risk assessments, the group aims to maintain, as a
minimum, its existing credit ratings of A3 with Moody’s Investors Service (Moody’s) and BBB+ with Standard & Poor’s Ratings Services
(Standard & Poor’s) for UUW and debt issued by its financing subsidiary, United Utilities Water Finance PLC.
In order to maintain existing credit ratings, the group needs to manage its capital structure with reference to the ratings methodology
and measures used by Moody’s and Standard & Poor’s. The ratings methodology is normally based on a number of key ratios (such as
RCV gearing, adjusted interest cover and Funds from Operations (FFO) to debt) and threshold levels as updated and published from
time to time by Moody’s and Standard & Poor’s. The group looks to manage its risk by maintaining the relevant key financial ratios
used by the credit rating agencies to determine a corporate’s credit rating, within the thresholds approved by the board. Capital risk is
reported monthly to the treasury committee through the operational compliance report.
Further detail on the precise measures and methodologies used to assess water companies’ credit ratings can be found in the
methodology papers published by the rating agencies.
148
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
A4 Financial risk management continued
Fair values
The table below sets out the valuation basis of financial instruments held at fair value and financial instruments where fair value has
been separately disclosed in the notes as the carrying value is not a reasonable approximation of fair value.
Group
2016
Available for sale financial assets
Investments
Financial assets at fair value through profit or loss
Derivative financial assets – fair value hedge
Derivative financial assets – held for trading(1)
Financial liabilities at fair value through profit or loss
Derivative financial liabilities – held for trading(1)
Financial liabilities designated as fair value through profit or loss
Financial instruments for which fair value has been disclosed
Financial liabilities in fair value hedge relationships
Other financial liabilities at amortised cost
2015
Available for sale financial assets
Investments
Financial assets at fair value through profit or loss
Derivative financial assets – fair value hedge
Derivative financial assets – held for trading(1)
Financial liabilities at fair value through profit or loss
Derivative financial liabilities – held for trading(1)
Financial liabilities designated as fair value through profit or loss
Financial instruments for which fair value has been disclosed
Financial liabilities in fair value hedge relationships
Other financial liabilities at amortised cost
Note:
Level 1
£m
Level 2
£m
Level 3
£m
–
–
–
–
–
(2,149.5)
(1,309.9)
(3,459.4)
8.7
583.8
181.8
(261.7)
(338.0)
(143.5)
(3,520.2)
(3,489.1)
–
–
–
–
–
–
–
–
Level 1
£m
Level 2
£m
Level 3
£m
–
–
–
–
–
8.6
521.6
161.0
(205.2)
(333.7)
(2,142.6)
(2,530.3)
(4,672.9)
(75.4)
(2,268.2)
(2,191.3)
–
–
–
–
–
–
–
–
Total
£m
8.7
583.8
181.8
(261.7)
(338.0)
(2,293.0)
(4,830.1)
(6,948.5)
Total
£m
8.6
521.6
161.0
(205.2)
(333.7)
(2,218.0)
(4,798.5)
(6,864.2)
(1) These derivatives form economic hedges and, as such, management intend to hold these through to maturity. Derivatives forming an economic hedge of the currency
exposure on borrowings included in these balances were £177.2 million (2015: £152.2 million).
– Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or
liabilities;
– Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable
for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
– Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are
not based on observable market data (unobservable).
The group has calculated fair values using quoted prices where an active market exists, which has resulted in £3,459.4 million
(2015: £4,672.9 million) of ‘level 1’ fair value measurements. In the absence of an appropriate quoted price, the group has applied
discounted cash flow valuation models utilising market available data in line with prior years. The £1,213.5 million reduction
(2015: £1,493.9 million increase) in ‘level 1’ fair value measurements is largely due to the maturity of a £425.0 million bond during the
year and a decrease in the number of observable quoted bond prices at 31 March 2016.
In respect of the total change during the year in the fair value of financial liabilities designated at fair value through profit or loss, of
a £4.3 million loss (2015: £65.0 million), a £15.1 million gain (2015: £4.6 million loss) is attributable to changes in own credit risk. The
cumulative amount recognised in the income statement due to changes in credit spread was £74.1 million profit (2015: £59.0 million).
The carrying amount is £135.9 million (2015: £131.6 million) higher than the amount contracted to settle on maturity.
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Notes to the financial statements – appendices
A4 Financial risk management continued
Company
The company does not hold any financial instruments that are measured subsequent to initial recognition at fair value or where fair
value has been separately disclosed in the notes as the carrying value is not a reasonable approximation of fair value.
A5 Retirement benefits
Defined benefit schemes
The group participates in two major funded defined benefit pension schemes in the United Kingdom – the United Utilities Pension
Scheme (UUPS) and the United Utilities PLC group of the Electricity Supply Pension Scheme (ESPS), both of which are closed to new
employees. The assets of these schemes are held in trust funds independent of the group’s finances.
The trustees are composed of representatives of both the employer and employees. The trustees are required by law to act in the
interests of all relevant beneficiaries and are responsible for the investment policy with regard to the assets plus the day-to-day
administration of the benefits.
The group also operates a series of unfunded, unregistered retirement benefit schemes. The costs of these schemes are included in the
total pension cost, on a basis consistent with IAS 19 ‘Employee Benefits’ and the assumptions set out below.
Information about the pension arrangements for executive directors is contained in the directors’ remuneration report.
Under the schemes, employees are entitled to annual pensions on retirement. Benefits are also payable on death and following other
events such as withdrawing from active service. No other post-retirement benefits are provided to these employees.
The defined benefit obligation includes benefits for current employees, former employees and current pensioners as analysed in the
table below:
Group
Total value of current employees benefits
Deferred members benefits
Pensioner members benefits
Total defined benefit obligation
2016
£m
831.6
624.1
1,514.7
2,970.4
2015
£m
839.9
666.5
1,548.1
3,054.5
The duration of the combined schemes is around 20 years. The schemes’ duration is an indicator of the weighted-average time until
benefit payments are settled, taking account of the split of the defined benefit obligation between current employees, deferred
members and the current pensioners of the schemes.
Funding requirements
The latest funding valuation of the schemes was carried out by an independent qualified actuary as at 31 March 2013 and reported a
deficit. The basis on which liabilities are valued for funding purposes differs from the basis required under IAS 19. Under UK legislation
there is a requirement that pension schemes are funded prudently.
The group has a plan in place with the schemes’ trustees to address the funding deficit by 31 December 2020, through a series of
annual deficit recovery contributions.
The group and trustees have agreed long-term strategies for reducing investment risk in each scheme.
For UUPS, this includes an asset-liability matching policy which aims to reduce the volatility of the funding level of the pension plan by
investing in assets such as fixed income swaps and gilts which perform in line with the liabilities so as to hedge against changes in swap
and gilt yields. For ESPS, a partial hedge is in place to protect against changes in swap and gilt yields.
In addition, the group has had an Inflation Funding Mechanism (IFM) in place since 2010; details of this are outlined in the 2011 annual
report. In 2013, it extended the mechanism to the ESPS and increased the fixed percentage rate used to 3.0 per cent per annum from
2.75 per cent per annum. To the extent that inflation, as measured by the RPI index at each 31 March preceding the payment due
date, is different from 3.0 per cent per annum, the inflation reserve will increase/decrease. Additional contributions are then payable
annually based on the size of the inflation reserve.
The group expects to make contributions of £64.2 million in the year ending 31 March 2017, comprising £38.9 million to UUPS and £4.1
million to ESPS in respect of deficit repair contributions, £19.8 million and £0.8 million in respect of regular contributions to UUPS and
ESPS respectively, and £0.6 million in respect of expenses to the ESPS.
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A5 Retirement benefits continued
Impact of scheme risk management on IAS 19 disclosures
Under the prescribed IAS 19 basis, pension scheme liabilities are calculated based on current accrued benefits. Expected cash flows are
projected forward allowing for RPI and the current member mortality assumptions. These projected cash flows are then discounted by
an AA ‘corporate bond’ rate, which comprises an underlying interest rate and a credit spread.
The group has de-risked its pension schemes through hedging strategies applied to the underlying interest rate and the forecast RPI.
The underlying interest rate has been largely hedged through external market swaps and gilts, the value of which is included in the
schemes’ assets, and the forecast RPI has been largely hedged through the IFM, with RPI in excess of 3.0 per cent per annum being
funded through an additional schedule of deficit contribution.
As a consequence, the reported statement of financial position under IAS 19 remains volatile to changes in credit spread which have
not been hedged, primarily due to the difficulties in doing so over long durations; changes in inflation, as the IFM results in changes to
the IFM deficit contributions rather than a change in the schemes’ assets; and, to a lesser extent, changes in mortality as management
has decided not to hedge this exposure due to its lower volatility in the short-term and the relatively high hedging costs.
In contrast, the schemes’ specific funding basis, which forms the basis for regular (non-IFM) deficit repair contributions, is unlikely to
suffer from significant volatility due to credit spread or inflation. This is because a prudent, fixed credit spread assumption is applied,
and inflation-linked contributions are included within the IFM.
In the year ended 31 March 2016, the discount rate has increased by 0.3 per cent, which includes a 0.7 per cent increase in credit
spreads offset by a decrease in swap yields over the year. The IAS 19 remeasurement gain of £160.1 million reported in note 18 has
largely resulted from the impact of the increase in credit spreads during the year, partially offset by the impact of a 0.2 per cent
increase in inflation.
Reporting and assumptions
The results of the latest funding valuations at 31 March 2013 have been adjusted to take account of the requirements of IAS 19 in
order to assess the position at 31 March 2016, by taking account of experience over the period, changes in market conditions, and
differences in the financial and demographic assumptions. The present value of the defined benefit obligation, and the related current
service costs, were measured using the projected unit credit method.
Financial assumptions
The main financial and demographic assumptions used by the actuary to calculate the defined benefit surplus of UUPS and ESPS are
outlined below:
Group
Discount rate
Pensionable salary growth and pension increases
Price inflation
2016
% p.a.
3.4
3.2
3.2
2015
% p.a.
3.1
3.0
3.0
During the year, the group has undertaken a review of its pension assumptions and has made a number of amendments as a result. To
align with market practice, the discount rate is now based on an AA ‘corporate bond’ curve rather than a broader AA ‘non-gilt’ curve
that was previously used. This has resulted in a 0.2 per cent increase in the discount rate during the year and a 0.2 per cent increase in
credit spreads. In addition, the allowance for inflation risk premium has been removed from the basis of the inflation rate assumption
to better align with the risk management strategy, which has increased the inflation assumption by 0.3 per cent.
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A5 Retirement benefits continued
Demographic assumptions
Mortality in retirement is assumed to be in line with the Continuous Mortality Investigation’s (CMI) S1NA year of birth tables, with
a one-year age rating for males in the UUPS only, reflecting actual mortality experience; and CMI 2014 (2015: CMI 2014) long-term
improvement factors, with a long-term annual rate of improvement of 1.75 per cent (2015: 1.5 per cent). The current life expectancies
at age 60 underlying the value of the accrued liabilities for the schemes are:
Group
Retired member – male
Non-retired member – male
Retired member – female
Non-retired member – female
2016
years
27.1
29.2
30.7
32.9
2015
years
26.6
28.3
30.2
32.0
Sensitivity of the key scheme assumptions
The measurement of the group’s defined benefit surplus is sensitive to changes in key assumptions, which are described above. The
sensitivity calculations presented below allow for the specified movement in the relevant key assumption, whilst all other assumptions
are held constant. This approach does not take into account the inter-relationship between some of these assumptions or any hedging
strategies adopted.
– Asset volatility
If the schemes’ assets underperform relative to the discount rate used to calculate the schemes’ liabilities, this will create a deficit.
The schemes hold some growth assets (equities, diversified growth funds and emerging market debt) which, though expected to
outperform the discount rate in the-long term, create volatility in the short-term. The allocation to growth assets is monitored to
ensure it remains appropriate given the schemes’ long-term objectives.
– Discount rate
An increase/decrease in the discount rate of 0.1 per cent would have resulted in a £58.4 million (2015: £60.1 million) decrease/
increase in the schemes’ liabilities at 31 March 2016, although as long as credit spreads remain stable this will be largely offset by
an increase in the value of the schemes’ bond holdings and other instruments designed to hedge this exposure. The discount rate is
based on AA ‘corporate bond’ yields of a similar duration to the schemes’ liabilities.
– Price inflation
An increase/decrease in the inflation assumption of 0.1 per cent would have resulted in a £55.3 million (2015: £56.6 million)
increase/decrease in the schemes’ liabilities at 31 March 2016, as a significant proportion of the schemes’ benefit obligations are
linked to inflation. In some cases, caps on the level of inflationary increases are in place to protect against extreme inflation. The
majority of the assets are either unaffected by or loosely correlated with inflation, meaning that an increase in inflation will also
increase the deficit. Any change in inflation out-turn results in a change to the cash contributions provided under the IFM.
– Life expectancy
An increase/decrease in the mortality long-term annual rate of improvement of 0.25 per cent would have resulted in a £45.4 million
(2015: £36.7 million) increase/decrease in the schemes’ liabilities at 31 March 2016. The majority of the schemes’ obligations are to
provide benefits for the life of the member and, as such, the schemes’ liabilities are sensitive to these assumptions.
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A5 Retirement benefits continued
Further reporting analysis
At 31 March, the fair value of the schemes’ assets recognised in the statement of financial position were as follows:
Group
Equities
Other non-equity growth assets
Gilts
Bonds
Other
Total fair value of schemes’ assets
Present value of defined benefit obligations
Net retirement benefit surplus
Schemes’
assets
%
9.8
9.4
36.9
41.0
2.9
100.0
Schemes’
assets
%
9.9
10.2
14.7
43.6
21.6
100.0
2016
£m
318.3
304.3
1,196.2
1,332.7
94.1
3,245.6
(2,970.4)
275.2
2015
£m
308.7
320.4
461.8
1,365.8
677.0
3,133.7
(3,054.5)
79.2
The fair values in the table above are all based on quoted prices in an active market, where applicable.
The assets, in respect of UUPS, included in the table above, have been allocated to each asset class based on the return the assets are
expected to achieve as UUPS has entered into a variety of derivative transactions to change the return characteristics of the physical
assets held in order to reduce undesirable market and liability risks. As such, the breakdown shown separates the assets of the
schemes to illustrate the underlying risk characteristics of the assets held.
Both of the schemes employ a strategy where the asset portfolio is made up of a growth element and a defensive element. Assets
in the growth portfolio are shown as equities and other non-equity growth assets above, while assets held in the defensive portfolio
represent the remainder of the schemes’ assets.
The defensive element of the portfolio contains a proportion of assets set aside for collateral purposes linked to the derivative
contracts entered into, as described above. The collateral portfolio, comprising cash and eligible securities readily convertible to cash,
provides sufficient liquidity to manage the derivative transactions and is expected to achieve a return in excess of LIBOR.
Movements in the fair value of the schemes’ assets were as follows:
Group
At the start of the year
Interest income on schemes’ assets
The return on plan assets, excluding amounts included in interest
Member contributions
Benefits paid
Administrative expenses
Company contributions
At the end of the year
2016
£m
3,133.7
96.3
56.0
5.8
(102.4)
(2.7)
58.9
3,245.6
2015
£m
2,377.0
101.0
705.2
6.3
(92.5)
(2.6)
39.3
3,133.7
The group’s actual return on the schemes’ assets was a gain of £152.3 million (2015: £806.2 million), principally due to gains on
derivatives hedging the schemes’ liabilities.
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A5 Retirement benefits continued
Movements in the present value of the defined benefit obligations are as follows:
Group
At the start of the year
Interest cost on schemes’ obligations
Actuarial gains/(losses) arising from changes in financial assumptions
Actuarial (losses)/gains arising from changes in demographic assumptions
Actuarial gains arising from experience
Curtailments/settlements
Member contributions
Benefits paid
Current service cost
At the end of the year
2016
£m
(3,054.5)
(93.2)
98.1
(46.6)
52.6
(1.1)
(5.8)
102.4
(22.3)
(2,970.4)
2015
£m
(2,554.4)
(108.0)
(500.8)
10.2
35.9
(5.5)
(6.3)
92.5
(18.1)
(3,054.5)
A contingent liability exists in relation to the equalisation of Guaranteed Minimum Pension (GMP). The UK Government intends
to implement legislation which could result in an increase in the value of GMP for males. This would increase the defined benefit
obligation of the schemes. At this stage, until the Government develops its proposals and publishes guidance, it is not possible to
quantify the impact of this change.
A6 Related party transactions
Group
Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not
disclosed in this note.
Trading transactions
There were sales of services of £1.2 million (2015: £1.0 million) and purchases of goods and services of £0.7 million (2015: £0.8 million)
between the group and its joint ventures. Sales of services to related parties were on the group’s normal trading terms.
At 31 March 2016, amounts owed by joint ventures were £2.9 million (2015: £2.8 million) and there were no amounts owed to joint
ventures (2015: £nil). The amounts outstanding are unsecured and will be settled in accordance with normal credit terms. No expense
or allowance has been recognised for bad and doubtful receivables in respect of the amounts owed by related parties (2015: £nil).
In addition, the group has issued guarantees of £4.7 million (2015: £4.7 million) in support of its joint ventures (see note 11).
Details of transactions with key management are disclosed in note 2.
Company
The parent company receives dividend income and pays and receives interest to and from subsidiary undertakings in the normal course
of business. Total dividend income received during the year amounted to £258.7 million (2015: £249.5 million) and total net interest
payable during the year was £27.9 million (2015: £26.3 million). Amounts outstanding at 31 March 2016 and 31 March 2015 between
the parent company and subsidiary undertakings are provided in notes 14, 17 and 21.
At 31 March 2016 and 31 March 2015, no related party receivables and payables were secured and no guarantees were issued in
respect thereof. Balances will be settled in accordance with normal credit terms. No allowance for doubtful receivables has been made
for amounts owed by subsidiary undertakings as at 31 March 2016 and 31 March 2015.
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A7 Accounting policies
Of the accounting policies outlined below, those deemed to be
the most significant for the group are those that align with the
critical accounting judgements and key sources of estimation
uncertainty set out on pages 122 to 123.
Basis of consolidation
The group financial statements consolidate the financial
statements of the company and entities controlled by the
company (its subsidiaries), and incorporate the results of its share
of joint ventures using the equity method of accounting. The
results of subsidiaries and joint ventures acquired or disposed
of during the year are included in the consolidated income
statement from the date control is obtained or until the date that
control ceases, as appropriate.
Where necessary, adjustments are made to the financial
statements of subsidiaries to bring the accounting policies used
under the relevant local GAAP into line with those used by the
group.
Subsidiaries
Subsidiaries are entities controlled by the group. Control is
achieved where the group is exposed to, or has the rights to,
variable returns from its involvement in an entity and has the
ability to affect those returns through its power over the entity.
In the parent company accounts, investments are held at cost less
provision for impairment.
On acquisition, the assets and liabilities and contingent liabilities
of a subsidiary are measured at their fair values at the date of
acquisition. Any excess of the cost of acquisition over the fair
values of the identifiable net assets acquired is recognised as
goodwill. Any deficiency of the cost of acquisition below the fair
values of the identifiable net assets acquired is credited to the
income statement in the period of acquisition. All intra-group
transactions, balances, income and expenses are eliminated on
consolidation.
Joint ventures
Joint ventures are entities in which the group holds an interest
on a long-term basis and which are jointly controlled with one or
more parties under a contractual arrangement. The group’s share
of joint venture results and assets and liabilities is incorporated
using the equity method of accounting. Under the equity method,
an investment in a joint venture is initially recognised at cost and
adjusted thereafter to recognise the group’s share of the profit or
loss.
Revenue recognition
Revenue represents the fair value of the income receivable in
the ordinary course of business for goods and services provided,
exclusive of value added tax and foreign sales tax. Where
relevant, this includes an estimate of the sales value of units
supplied to customers between the date of the last meter reading
and the period end.
The group recognises revenue generally at the time of delivery
and when collection of the resulting receivable is reasonably
assured. Should the group consider that the criteria for revenue
recognition are not met for a transaction, revenue recognition
would be delayed until such time as collectability is reasonably
assured. Payments received in advance of revenue recognition
are recorded as deferred income.
Operating profit
Operating profit is stated after charging operational expenses but
before investment income and finance expense.
Borrowing costs and finance income
Except as noted below, all borrowing costs and finance income
are recognised in the income statement on an accruals basis.
Transaction costs that are directly attributable to the acquisition
or issue of a financial asset or financial liability are included in the
initial fair value of that instrument.
Where borrowing costs are attributable to the acquisition,
construction or production of a qualifying asset, such costs are
capitalised as part of the specific asset.
Tax
The tax expense represents the sum of current tax and deferred
tax.
Current tax
Current tax is based on the taxable profit for the period and is
provided at amounts expected to be paid or recovered using
the tax rates and laws that have been enacted or substantively
enacted at each reporting date.
Taxable profit differs from the net profit as reported in the income
statement because it excludes items of income or expense that
are taxable or deductible in other years and it further excludes
items that are never taxable or deductible.
Current tax is charged or credited in the income statement,
except when it relates to items charged or credited to equity, in
which case the tax is also dealt with in equity.
Deferred tax
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used
in the computation of taxable profit. Deferred tax liabilities are
provided, using the liability method, on all taxable temporary
differences at each reporting date. Such assets and liabilities are
not recognised if the temporary difference arises from goodwill or
from the initial recognition (other than in a business combination)
of other assets and liabilities in a transaction that affects neither
the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries and interests
in joint ventures, except where the group is able to control the
reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future.
Deferred tax is measured at the average tax rates that are
expected to apply in the periods in which the temporary timing
differences are expected to reverse based on tax rates and
laws that have been enacted or substantively enacted at each
reporting date.
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Notes to the financial statements – appendices
A7 Accounting policies continued
The carrying amount of deferred tax assets is reviewed at each
reporting date and is reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered.
Deferred tax is charged or credited in the income statement,
except when it relates to items charged or credited to equity, in
which case the deferred tax is also dealt with in equity.
Property, plant and equipment
Property, plant and equipment comprises water and wastewater
infrastructure assets and overground assets.
The useful economic lives of these assets are primarily as follows:
–
Water and wastewater infrastructure assets:
–
Impounding reservoirs 200 years;
–
Mains and raw water aqueducts 30 to 300 years;
–
Sewers and sludge pipelines 60 to 300 years;
–
Sea outfalls 77 years;
–
Buildings 10 to 60 years;
–
Operational assets 5 to 80 years; and
–
Fixtures, fittings, tools and equipment 3 to 40 years.
Employee and other related costs incurred in implementing the
capital schemes of the group are capitalised.
Water and wastewater infrastructure assets
Infrastructure assets comprise a network of water and
wastewater pipes and systems. Expenditure on the infrastructure
assets, including borrowing costs where applicable, relating to
increases in capacity or enhancements of the network is treated
as additions. Amounts incurred in maintaining the operating
capability of the network in accordance with defined standards
of service are expensed in the year in which the expenditure is
incurred. Infrastructure assets are depreciated by writing off their
cost (or deemed cost for infrastructure assets held on transition
to IFRS), less the estimated residual value, evenly over their useful
economic lives.
Other assets
All other property, plant and equipment is stated at historical cost
less accumulated depreciation.
Historical cost includes expenditure that is directly attributable
to the acquisition of the items, including relevant borrowing
costs, where applicable, for qualifying assets. Subsequent costs
are included in the asset’s carrying amount or recognised as a
separate asset, as appropriate, only when it is probable that
future economic benefits associated with the item will flow to
the group and the cost of the item can be measured reliably. All
other repairs and maintenance costs are charged to the income
statement during the financial period in which they are incurred.
Freehold land and assets in the course of construction are
not depreciated. Other assets are depreciated by writing off
their cost, less their estimated residual value, evenly over their
estimated useful economic lives, based on management’s
judgement and experience.
Depreciation methods, residual values and useful economic lives
are reassessed annually and, if necessary, changes are accounted
for prospectively. The gain or loss arising on the disposal or
retirement of an asset is determined as the difference between
the sales proceeds and the carrying amount of the asset and is
recognised in other operating costs.
Transfer of assets from customers and developers
Where the group receives from a customer or developer an item
of property, plant and equipment (or cash to construct or acquire
an item of property, plant and equipment) that the group must
then use, either to connect the customer to the network, or to
provide the customer with ongoing access to a supply of goods
or services, or to do both, such items are capitalised at their fair
value and included within property, plant and equipment, with a
credit of the same amount to deferred grants and contributions.
The assets are depreciated over their useful economic lives
and the deferred contributions released to revenue over the
same period (or where the receipt of property, plant and
equipment is solely to connect the customer to the network,
the deferred contribution is released immediately to revenue).
This interpretation has been applied to transfers of assets from
customers received on or after 1 July 2009.
Assets transferred from customers or developers are accounted
for at fair value. If no market exists for the assets then
incremental cash flows are used to arrive at fair value.
Intangible assets
Intangible assets are measured initially at cost and are amortised
on a straight-line basis over their estimated useful economic lives.
The carrying amount is reduced by any provision for impairment
where necessary. On a business combination, as well as recording
separable intangible assets already recognised in the statement
of financial position of the acquired entity at their fair value,
identifiable intangible assets that arise from contractual or other
legal rights are also included in the acquisition statement of
financial position at fair value.
Internal expenditure is capitalised as internally generated
intangibles only if it meets the criteria of IAS 38 ‘Intangible
Assets’.
Intangible assets, which relate primarily to computer software,
are amortised over a period of three to ten years.
Impairment of tangible and intangible assets
Intangible assets and property, plant and equipment are reviewed
for impairment at each reporting date to determine whether
there is any indication that those assets may have suffered an
impairment loss. If any such indication exists, the recoverable
amount of the asset is estimated in order to determine the extent
of the impairment loss, if any. Where the asset does not generate
cash flows that are independent from other assets, the group
estimates the recoverable amount of the cash generating unit to
which the asset belongs.
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A7 Accounting policies continued
The recoverable amount is the higher of fair value less costs to
sell, and value in use. Value in use represents the net present
value of expected future cash flows, discounted on a pre-tax
basis, using a rate that reflects current market assessments of the
time value of money and the risks specific to the asset for which
the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash generating unit)
is estimated to be less than its carrying amount, the carrying
amount of the asset (or cash generating unit) is reduced to its
recoverable amount. Impairment losses in respect of non-current
assets are recognised in the income statement within operating
costs.
Where an impairment loss subsequently reverses, the reversal is
recognised in the income statement and the carrying amount of
the asset is increased to the revised estimate of its recoverable
amount, but not so as to exceed the carrying amount that would
have been determined had no impairment loss been recognised
in prior years.
Non-current assets held for sale
Non-current assets classified as held for sale are measured
at the lower of carrying value and fair value less costs to sell.
Non-current assets are classified as held for sale if their carrying
amount will be recovered through a sale transaction rather
than through continuing use. This condition is regarded as
having been met only when the sale is highly probable and the
asset is available for immediate sale in its present condition.
Management must be committed to the sale, which should be
expected to qualify for recognition as a completed sale within one
year from the date of classification.
Financial instruments
Financial assets and financial liabilities are recognised and
derecognised on the group’s statement of financial position on
the trade date when the group becomes/ceases to be a party to
the contractual provisions of the instrument.
Cash and short-term deposits
Cash and short-term deposits include cash at bank and in hand,
deposits and other short-term highly liquid investments which
are readily convertible into known amounts of cash, have a
maturity of three months or less from the date of acquisition and
which are subject to an insignificant risk of change in value. In
the consolidated statement of cash flows and related notes, cash
and cash equivalents include cash and short-term deposits, net of
book overdrafts.
Financial investments
Investments (other than interests in subsidiaries, joint ventures
and fixed deposits) are initially measured at fair value, including
transaction costs. Investments classified as available for sale in
accordance with IAS 39 ‘Financial Instruments: Recognition and
Measurement’ are measured at subsequent reporting dates at
fair value. Gains and losses arising from changes in fair value are
recognised directly in equity, until the security is disposed of or is
determined to be impaired, at which time the cumulative gain or
loss previously recognised in equity is included in the net profit or
loss for the period.
Trade receivables
Trade receivables are initially measured at fair value, and are
subsequently measured at amortised cost, less any impairment
for irrecoverable amounts. Estimated irrecoverable amounts are
based on historical experience of the receivables balance.
Trade payables
Trade payables are initially measured at fair value and are
subsequently measured at amortised cost.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according
to the substance of the contractual arrangements entered into.
An equity instrument is any contract that evidences a residual
interest in the assets of the group after deducting all of its
liabilities.
Equity instruments
Equity instruments issued by the group are recorded at the
proceeds received, net of direct issue costs.
Borrowings
The group’s default treatment is that bonds and loans are
initially measured at fair value being the cash proceeds received
net of any direct issue costs. They are subsequently measured
at amortised cost applying the effective interest method. The
difference between the net cash proceeds received at inception
and the principal cash flows due at maturity is accrued over the
term of the borrowing.
The default treatment of measuring at amortised cost, whilst
associated hedging derivatives are recognised at fair value,
presents an accounting measurement mismatch that has the
potential to introduce considerable volatility to both the income
statement and the statement of financial position. Therefore,
where feasible, the group takes advantage of the provisions under
IAS 39 ‘Financial Instruments: Recognition and Measurement’
to make fair value adjustments to its borrowing instruments to
reduce this volatility and better represent the economic hedges
that exist between the group’s borrowings and associated
derivative contracts.
Where feasible, the group designates its financial instruments
within fair value hedge relationships. In order to apply fair value
hedge accounting, it must be demonstrated that the hedging
derivative has been, and will continue to be, a highly effective
hedge of the risk being hedged within the applicable borrowing
instrument.
Borrowings designated within a fair value hedge
relationship
Where designated, bonds and loans are initially measured at fair
value being the cash proceeds received net of any direct issue
costs. They are subsequently adjusted for any change in fair value
attributable to the risk being hedged at each reporting date, with
the change being charged or credited to finance expense in the
income statement.
Hedge accounting is discontinued prospectively when the hedging
instrument is sold, terminated or exercised, or where the hedge
relationship no longer qualifies for hedge accounting.
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements – appendices
A7 Accounting policies continued
Borrowings designated at fair value through profit or loss
Designation is made where the requirements to designate within
a fair value hedge cannot be met at inception despite there
being significant fair value offset between the borrowing and
the hedging derivative. Where designated, bonds and loans are
initially measured at fair value being the cash proceeds received
and are subsequently measured at fair value at each reporting
date, with changes in fair value being charged or credited to
finance expense in the income statement.
Derivative financial instruments
Derivative financial instruments are measured at fair value at
each reporting date, with changes in fair value being charged or
credited to finance expense in the income statement. The group
enters into financial derivatives contracts to manage its financial
exposure to changes in market rates (see note A4).
Derivatives and borrowings – valuation
Where an active market exists, designated borrowings and
derivatives recorded at fair value are valued using quoted
market prices. Otherwise, they are valued using a net present
value valuation model. The model uses applicable interest rate
curve data at each reporting date to determine any floating cash
flows. Projected future cash flows associated with each financial
instrument are discounted to the reporting date using discount
factors derived from the applicable interest curves adjusted for
counterparty credit risk where appropriate. Discounted foreign
currency cash flows are converted into sterling at the spot
exchange rate at each reporting date. Assumptions are made with
regard to credit spreads based on indicative pricing data.
The valuation of debt designated in a fair value hedge relationship
is calculated based on the risk being hedged as prescribed by
IAS 39 ‘Financial Instruments: Recognition and Measurement’.
The group’s policy is to hedge its exposure to changes in the
applicable underlying interest rate and it is this portion of the
cash flows that is included in the valuation model (excluding any
applicable company credit risk spread).
The valuation of debt designated at fair value through the
profit or loss incorporates an assumed credit risk spread in the
applicable discount factor. Credit spreads are determined based
on indicative pricing data.
Inventories
Inventories are stated at the lower of cost and net realisable
value. For properties held for resale, cost includes the cost of
acquiring and developing the sites, including borrowing costs
where applicable.
Net realisable value represents the estimated selling price less
all estimated costs of completion and costs to be incurred in
marketing, selling and distribution.
Employee benefits
Retirement benefit obligations
The group operates two defined benefit pension schemes, which
are independent of the group’s finances, for its employees.
Actuarial valuations of the schemes are carried out as determined
by the pension scheme trustees using the projected unit credit
method at intervals of not more than three years, the rates of
contribution payable and the pension cost being determined on
the advice of the actuaries, having regard to the results of these
valuations. In any intervening years, the actuaries review the
continuing appropriateness of the contribution rates.
Defined benefit assets are measured at fair value while liabilities
are measured at present value. The difference between the two
amounts is recognised as a surplus or obligation in the statement
of financial position.
The cost of providing pension benefits to employees relating
to the current year’s service (including curtailment gains and
losses) is included within the income statement within employee
benefits expense. The net interest on the schemes’ surplus/
obligation is included in the income statement within investment
income or finance expense.
Remeasurement gains and losses are recognised outside the
income statement in retained earnings and presented in the
statement of comprehensive income.
In addition, the group also operates a defined contribution
pension section within the United Utilities Pension Scheme.
Payments are charged as employee costs as they fall due. The
group has no further payment obligations once the contributions
have been paid.
Share-based compensation arrangements
The group operates equity-settled, share-based compensation
plans, issued to certain employees. The equity-settled share-
based payments are measured at fair value at the date of grant.
The fair value determined at the grant date is expensed on a
straight-line basis over the vesting period, based on estimates
of the number of options that are expected to vest. Fair value is
based on simulation models, according to the relevant measures
of performance. The group has the option to settle some of these
equity-settled share-based payments in cash.
At each reporting date, the group revises its estimate of the
number of options that are expected to become exercisable
with the impact of any revision being recognised in the income
statement, and a corresponding adjustment to equity over the
remaining vesting period.
Provisions
Provisions are recognised when the group has a present
legal or constructive obligation as a result of past events, it
is probable that an outflow of resources will be required to
settle the obligation, and the amount can be reliably estimated.
Expenditure that relates to an existing condition caused by past
operations that does not contribute to current or future earnings
is expensed.
Foreign currency translation
Transactions and balances
Transactions in foreign currencies are recorded at the exchange
rates applicable on the dates of the transactions. At each reporting
date, monetary assets and liabilities denominated in foreign
currencies are translated into sterling at the relevant rates of
exchange applicable on that date. Gains and losses arising on
retranslation are included in net profit or loss for the period.
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
A7 Accounting policies continued
Exchange differences arising on investments in equity instruments
classified as available for sale are included in the gains or losses
arising from changes in fair value which are recognised directly in
equity. In order to hedge its exposure to certain foreign exchange
risks, the group enters into derivative instruments (see note A4).
Group companies
On consolidation, the statements of financial position of overseas
subsidiaries and joint ventures (none of which has the currency
of a hyperinflationary economy) are translated into sterling at
exchange rates applicable at each reporting date. The income
statements are translated into sterling using the average rate
unless exchange rates fluctuate significantly, in which case the
exchange rate at the date the transaction occurred is used.
Exchange differences resulting from the translation of such
statements of financial position at rates ruling at the beginning
and end of the period, together with the differences between
income statements translated at average rates and rates ruling
at the period end, are dealt with as movements on the group’s
cumulative exchange reserve, a separate component of equity.
Such translation differences are recognised as income or expense
in the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition
of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate. The group has
elected to treat goodwill and fair value adjustments arising on
acquisitions before the date of implementation of IFRS 3 ‘Business
Combinations’ (1 April 1999) as sterling denominated assets and
liabilities.
Grants and contributions
Grants and contributions receivable in respect of property, plant
and equipment are treated as deferred income, which is credited
to the income statement over the estimated useful economic
lives of the related assets.
Leases
Leases are classified according to the substance of the
transaction. Operating leases are leases that do not transfer
substantially all the risks and rewards of ownership to the lessee.
Operating lease rentals are charged to the income statement on a
straight-line basis over the period of the lease.
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Notes to the financial statements – appendices
A8 Subsidiaries and other group undertakings
Details of the group’s subsidiary undertakings, joint ventures and associates are set out below. Unless otherwise specified, the
registered address for each entity is Haweswater House, Lingley Mere Business Park, Lingley Green Avenue, Great Sankey, Warrington
WA5 3LP, United Kingdom. For further details of joint ventures and associates please see notes 11 and 12.
Proportion of
share capital
owned/voting
rights %* Nature of business
Class of share
capital held
Subsidiary undertakings
Great Britain
Halkyn District Mines Drainage Company Limited
North West Water International Limited
North West Water Limited
United Utilities (Overseas Holdings) Limited
United Utilities Energy Limited
United Utilities Healthcare Trustee Limited
United Utilities International Limited
United Utilities North West Limited
United Utilities Operational Services Limited
United Utilities Pensions Trustees Limited
United Utilities PLC
United Utilities Property Services Limited
United Utilities Renewable Energy Limited
United Utilities Total Solutions Limited
United Utilities Utility Solution (Industrial) Limited
United Utilities Utility Solution Holdings Limited
United Utilities Water Finance PLC
United Utilities Water Limited
United Utilities Water Operations Holdings Limited
United Utilities Water Sales Limited
UU (ESPS) Pension Trustee Limited
UU Group Limited
UU Secretariat Limited
YCL Transport Limited
The Netherlands
United Utilities (Tallinn) BV
United Utilities BV
United Utilities Europe Holdings BV
Thailand
Manta Management Services Limited(1)
Water Resources Limited(1)
Joint ventures
Great Britain
Lingley Mere Business Park Development Company
Limited
Lingley Mere Management Company Limited
Selectusonline Limited
Estonia
AS Tallinna Vesi(2)
160
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
99.9 Dormant
100.0 Holding company for international business
100.0 Dormant
100.0 Holding company
100.0
Energy generation
100.0 Corporate trustee
100.0 Consulting services and project management
100.0 Holding company
100.0 Operations and maintenance contract holder
100.0 Corporate trustee
100.0 Holding and management company
100.0 Property management
100.0 Renewable energy generation
100.0 Water and wastewater services
100.0 Holding company
100.0 Holding company
100.0
100.0 Water and wastewater services
100.0 Holding company
100.0 Water and wastewater retail services
100.0 Corporate trustee
100.0 Dormant
100.0 Dormant
100.0 Non-trading
Financing company
100.0 Holding company
100.0 Holding company
100.0 Holding company
49.0 Management company
100.0 Non-trading
Ordinary
50.0 Development company
Ordinary
Ordinary
50.0 Property management
16.7 Procurement portal
Ordinary
35.3 Water and wastewater services
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
A8 Subsidiaries and other group undertakings continued
Associated undertakings
Bahrain
Muharraq STP Company BSC(c)(3)
Muharraq Wastewater Services Company WLL(3)
Jebel Ali Free Zone, Dubai, UAE
Muharraq Holding Company 1 Limited(4)
Muharraq Holding Company 2 Limited(4)
Class of share
capital held
Ordinary
Ordinary
Ordinary
Ordinary
Proportion of
share capital
owned/voting
rights %* Nature of business
20.0 Project company
35.0 Operations and maintenance company
20.0 Holding company
20.0 Holding company
* With the exception of United Utilities PLC, shares are held by subsidiary undertakings rather than directly by United Utilities Group PLC.
Notes:
(1) Registered address: 4th Floor, Iyara Building Room 405, 2/22 Chan Road, Thung Wat Don Sub-district, Sathon District, Bangkok, 10120 Thailand.
(2) Registered address: Adala 10, Tallinn 10614, Estonia.
(3) Registered address: Building 200, Road 13, Block 115, Hidd, Kingdom of Bahrain.
(4) Registered address: Al Tamimi & Company, 9th Floor, Dubai World Trade Centre, Sheikh Zayed Road, Dubai, United Arab Emirates.
161
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS
Five-year summary – unaudited
The financial summary (unaudited) set out below has been derived from the audited consolidated financial statements of United
Utilities Group PLC for the five years ended 31 March 2016. It should be read in conjunction with the consolidated financial
statements and related notes, together with the strategic report.
Year ended 31 March
Continuing operations
Revenue
Operating profit per published results
Underlying operating profit
Profit before tax per published results
Underlying profit before tax
Profit after taxation per published results
Underlying profit after tax
Earnings per share (basic) per published results (pence)
Underlying earnings per share (pence)
2016
£m
1,730.0
2015
£m
1,720.2
2014
£m
1,688.8
2013
£m
1,636.0
2012
£m
1,564.9
567.9
604.1
353.5
408.1
397.5
325.3
58.3p
47.7p
653.3
664.3
341.6
447.4
271.2
354.1
39.8p
51.9p
630.2
634.6
543.3
388.1
738.6
304.9
108.3p
44.7p
601.6
604.2
311.8
351.4
287.8
264.2
42.2p
38.7p
591.5
594.1
280.4
327.0
311.4
240.9
45.7p
35.3p
Dividend per ordinary share (pence)
38.45p
37.70p
36.04p
34.32p
32.01p
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
11,280.8
626.0
11,906.8
(8,357.1)
(844.2)
(9,201.3)
10,664.8
638.8
11,303.6
(7,867.7)
(1,001.5)
(8,869.2)
9,929.6
542.9
10,472.5
(7,660.3)
(596.3)
(8,256.6)
9,777.8
630.2
10,408.0
(7,845.8)
(690.3)
(8,536.1)
9,310.9
719.9
10,030.8
(7,607.0)
(659.2)
(8,266.2)
Total net assets and shareholders’ equity
2,705.5
2,434.4
2,215.9
1,871.9
1,764.6
Net cash generated from operating activities
Net cash used in investing activities
Net cash (used in)/generated from financing activities
Net (decrease)/increase in cash and cash equivalents
685.6
(676.8)
(46.4)
(37.6)
706.5
(704.9)
139.2
140.8
797.2
(678.6)
(211.5)
(92.9)
631.1
(643.8)
(115.5)
(128.2)
Net debt
RCV gearing(1) (%)
Note:
6,260.5
61%
5,924.0
59%
5,519.9
58%
5,450.6
60%
559.8
(498.4)
5.8
67.7
5,076.4
59%
(1) Regulatory capital value (RCV) gearing is calculated as group net debt (see note A2), divided by the RCV expressed in out-turn prices, of United Utilities Water Limited.
162
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com SHAREHOLDER INFORMATIONOUR GOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTS Shareholder information
Key dates
–
23 June 2016
Ex-dividend date for 2015/16 final dividend
–
–
–
–
–
–
–
–
–
24 June 2016
Record date for 2015/16 final dividend
22 July 2016
Annual general meeting
1 August 2016
Payment of 2015/16 final dividend to shareholders
23 November 2016
Announcement of half-year results for the six months ending
30 September 2016
15 December 2016
Ex-dividend date for 2016/17 interim dividend
16 December 2016
Record date for 2016/17 interim dividend
1 February 2017
Payment of 2016/17 interim dividend to shareholders
May 2017
Announce the final results for the 2016/17 financial year
June 2017
Publish the annual report and financial statements for the
2016/17 financial year
Electronic communications
We’re encouraging our shareholders to receive their shareholder
information by email and via our website. Not only is this a
quicker way for you to receive information, it helps us to be
more sustainable by reducing paper and printing materials and
lowering postage costs.
Registering for electronic shareholder communications is very
straightforward, and is done online via shareview.co.uk which is a
website provided by our registrar, Equiniti.
Log on to shareview.co.uk and you can:
–
set up electronic shareholder communication;
–
view your shareholdings;
–
–
update your address details if you change your address; and
get your dividends paid directly into your bank account.
Please do not use any electronic address provided in this notice
or in any related document to communicate with the company for
any purposes other than those expressly stated.
Why not make life easy and have your dividends
paid straight to your bank?
–
The dividend goes directly into your bank account and is
available straight away
Online annual report
Our annual report is available online. View or download the full
annual report and financial statements from:
corporate.unitedutilities.com
–
–
–
–
No need to pay dividend cheques into your bank account
No risk of losing cheques in the post
No risk of having to replace spoiled or out-of-date cheques
It’s cost-effective for your company
To take advantage of this, please contact Equiniti via
shareview.co.uk or complete the dividend mandate form that
you receive with your next dividend cheque.
If you choose to have your dividend paid directly into your bank
account you’ll receive one tax voucher each year. This will be
issued with the interim dividend normally paid in February and
will contain details of all the dividends paid in that tax year. If
you’d like to receive a tax voucher with each dividend payment,
please contact Equiniti.
Go to Equiniti for more information via shareview.co.uk
164
To go straight to the investor page on
our website scan the QR code with
your smartphone
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016
Stock Code: UU.
unitedutilities.com
Keeping you in the picture
You can find information about United Utilities quickly and easily
on our website: corporate.unitedutilities.com. Here the annual
report and financial statements, corporate responsibility report,
other reports, company announcements, the half-year and final
announcements and associated presentations are published.
Registrar
The group’s registrar, Equiniti, can be contacted on
0371 384 2041 or textphone for those with hearing difficulties:
0371 384 2255. Lines are open 8.30 am to 5.30 pm, Monday to
Friday excluding public holidays.
The address is:
Equiniti, Aspect House, Spencer Road,
Lancing, West Sussex, BN99 6DA.
Overseas shareholders may contact them on:
+44 (0)121 415 7048
Equiniti offers a share dealing service by telephone:
0345 603 7037 and online:
shareview.co.uk/dealing
Equiniti also offers a stocks and shares ISA for United Utilities
shares, call 0345 300 0430 or go to: shareview.co.uk/dealing
Looking after your investment
We are delighted that our approach to responsible business has
again helped us retain a Dow Jones Sustainability Index world-
class rating for the eighth consecutive year, and achieve industry
leader status for the second time. We also performed strongly in
the Carbon Disclosure Project, scoring over 97 per cent for the
quality of our disclosure, and secured 90 per cent in BitC’s CR
index. We have maintained the Carbon Trust Water Standard for
our efforts to reduce water use in West Cumbria.
This document is printed on Essential Silk Coated which contains
Environmental Chlorine Free (ECF) virgin fibre sourced from well-
managed, responsible, FSC® certified forests.
Key shareholder facts
Balance analysis as at 31 March 2016
2
.
8
0
7
1
,
5
9
9
1
1
,
0
0
0
6
.
1
9
1
8
,
3
3
3
,
1
0
0
0
0
1
,
0
0
1
3
.
1
1
7
2
8
,
1
0
0
0
0
0
,
1
0
0
0
1
1
5
.
0
3
3
0
9
,
1
0
0
0
0
1
1
,
0
0
0
0
0
0
,
4
6
.
3
0
2
6
.
5
7
9
7
9
% of shares
Number of holdings
,
1
0
0
0
0
0
0
0
,
1
,
0
0
0
0
0
1
,
i
t
o
h
g
h
e
s
t
,
1
0
0
0
0
0
0
1
,
Shareholders by location
4%
16%
19%
61%
United Kingdom
North America
Europe
Rest of the World
Dividend history – pence per share
Interim
Final
Total ordinary
2012
10.67
21.34
32.01
2013
11.44
22.88
34.32
2014
12.01
24.03
36.04
2015
12.56
25.14
37.70
2016
12.81
25.64
38.45
Warning to shareholders
Please be very wary of any unsolicited contact about your
investments or offers of free company reports. It may be
from an overseas ‘broker’ who could sell you worthless or
high risk shares. If you deal with an unauthorised firm, you
would not be eligible to receive payment under the Financial
Services Compensation Scheme. Further information and a
list of unauthorised firms that have targeted UK investors is
available from the Financial Conduct Authority at
fca.org.uk/consumers/protect-yourself/unauthorised-firms
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sluglineUNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2016Stock Code: UU.unitedutilities.com FINANCIAL STATEMENTSOUR GOVERNANCESTRATEGIC REPORTSHAREHOLDER INFORMATION
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United Utilities Group PLC
Haweswater House
Lingley Mere Business Park
Lingley Green Avenue
Great Sankey
Warrington
WA5 3LP
Telephone +44 (0)1925 237000
Stock Code: UU.
Registered in England and Wales
Registered number 6559020
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