25192.04 – 1 June 2017 4:17 PM – Proof 325192.04 – 1 June 2017 4:17 PM – Proof 3United Utilities Group PLCAnnual Report and Financial Statements for the year ended 31 March 2017UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017United Utilities AR2017 - Strategic.indd 301/06/2017 17:36:03 25192.04 – 1 June 2017 4:17 PM – Proof 325192.04 – 1 June 2017 4:17 PM – Proof 3United Utilities is the UK’s largest listed water companyWelcome to ourAnnual Report and Financial Statementsfor the year ended 31 March 2017As the UK’s largest listed water company, we help life flow smoothly for around seven million people and 200,000 businesses in the North West by providing them with clean, fresh water every day.We take away and treat the North West’s wastewater, helping to keep our rivers and beaches clean.Across our region, we are investing to make our network more resilient to the effects of climate change and to continue to improve drinking water quality. We want to ensure that our customers can rely on us for a great service, and that the investment we are making to deliver this gives a boost to the North West’s economy, supporting thousands of jobs, and securing a legacy for the future.Our vision is to be the best UK water and wastewater company, providing great service to our customers.You can read more in our online Annual Report at unitedutilities.com/corporate where we maintain a wide range of information of interest to institutional and private investors including: ›latest news and press releases; ›reports and publications; and ›corporate responsibility content.Read more information on How we create value on page 12Front cover: We have adopted an innovative systems-based approach to our regional water system and wastewater drainage areas which we call Systems Thinking. You can read more about this on page 30 or watch our short video on the home page of unitedutilities.annualreport2017.comUnited Utilities AR2017 - Strategic.indd 401/06/2017 17:36:05 What’s in this report
How we
create value
p 12
Read about our
board of directors
p 52
Financial
statements
p 119
Our performance
in 2016/17
p 34
Read our
remuneration report
p 86
Key dates
for 2017
p 174
Our Annual Report and Financial Statements aims to meet the information needs of our investors
to help them 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 that 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, analysts, regulators, non-governmental organisations, politicians and
devolved authorities. Where we believe that a topic is material to a large number of them, we
either include it in this report or refer to other reports and information (such as our customer
communications, our corporate responsibility 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.
Integrated report
We continually seek to develop our integrated reporting, building on enhancements made in
prior years, in order to improve our communication with stakeholders.
This annual report has been prepared and presented in accordance with the International
Framework published by the International Integrated Reporting Council in December 2013 and
approved by the board.
Contents
ChairmanandChiefExecutive
Officer’sreview
2016/17 highlights
Strategic Report
What we do
Where we operate
Our water cycle
Our industry and market
How we create value
Our vision
Our core values
Our business principles
Our strategy
Our competitive advantage
Our business model
Howweengagewithour
stakeholders
Keyresources
Externalenvironment
Internalenvironment
Planningcycles
SystemsThinking
How we measure our performance
Strategic themes and outcomes
Ourkeyperformanceindicators(KPIs)
OperationalKPIs
FinancialKPIs
Our performance in 2016/17
Operational performance
Financial performance
How we manage risk
Governance
Corporate governance report
Boardofdirectors
Letter from the Chairman
Nomination committee report
Audit committee report
Corporateresponsibilitycommittee
report
Remuneration committee report
Tax policies and objectives
Directors’ report
Statement of directors’ responsibilities
Financial Statements
Independent auditor’s report
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated and company
statementsoffinancialposition
Consolidated statement of changes
in equity
Company statement of changes
in equity
Consolidated and company
statements of cash flows
Guide to detailed financial
statements disclosures
Accounting policies
Notestothefinancialstatements
Five-year summary – unaudited
02
06
10
11
11
12
12
12
12
13
14
15
16
18
24
26
30
31
31
32
33
34
40
46
52
56
66
74
82
86
110
111
117
120
124
125
126
127
128
129
130
131
134
172
Shareholder Information 174
Stock Code: UU.
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Chairman and Chief Executive
Officer’s review
We are on track to deliver our vision of becoming the UK’s
best water and wastewater company, providing great service
to our customers and creating value for our shareholders.
Overview
We have continued to improve performance for shareholders,
customers and the environment as we aim to deliver further value
and sustainable dividends backed by a strong balance sheet. Our
performance in the early part of this regulatory period puts us in an
industry leading position. The acceleration of our capital investment
programme is delivering the benefits of operational efficiencies early
and this is being reflected in our Outcome Delivery Incentive (ODI)
performance where we have achieved another positive net outcome
for the year. Our overall performance against our regulatory contract
gives us confidence to invest an additional £100 million in projects
to improve resilience over the next three years for the benefit of
customers. Our Systems Thinking approach is unparalleled in the
sector and on track to deliver £100 million of savings across the
2015-20 regulatory period, underpinning our business plan. In
addition, we have seen a step change in customer service, delivering
our best ever customer satisfaction scores.
Customer focus
The business has undergone a key cultural shift in recent years so
thatcustomerservicesitsatthecoreofeverythingwedo.Having
significantly improved customers’ experience of our services over the
last regulatory period, in which we became one of the most improved
companies under our regulator Ofwat’s Service Incentive Mechanism
(SIM), we were determined to re-energise our approach to deliver an
even better customer experience.
Our new customer service team was formed at the beginning of
this year and set about benchmarking our performance both in and
outside the sector. From this we identified a range of opportunities to
improve customer satisfaction and reach out to customers struggling
to pay.
Over the year, we have seen sustained improvement of our customer
satisfaction scores under Ofwat’s new SIM measure for this regulatory
period, ending the year as one of the leading companies in our peer
group. We are particularly pleased to have introduced a number of
innovations that set new benchmarks for the sector.
Oneofourmostsuccessfulinnovations,PriorityServices,was
launched during the year. It provides dedicated support for those
customers who are experiencing short or long-term personal
challenges in their lives, such as physical or mental health difficulties,
as well as those struggling financially.
PriorityServicesencompassesthewiderangeofinitiativeswealready
have in place to help customers return to regular payment and adds
tailored assistance to those customers with more specialised needs.
We were delighted to see, over the course of the year, how well it has
been received by customers, with 30,000 customers now registered.
Notwithstanding our benchmark debt management processes and
wide range of schemes to help customers struggling to pay, as our
region suffers from high levels of income deprivation, bad debt and
cash collection will remain a principal challenge for us. Our new team
has made further inroads in this area, reducing household bad debt
to 2.5 per cent in 2016/17 from 3.0 per cent in the previous year.
One new innovation contributing to this success is a targeted
campaign,whichwecallTownActionPlanning,wherewevisit
customers in areas where deprivation is particularly high. The scheme
is proving particularly successful in engaging with hard to reach
customers, helping them understand our various support schemes
and payment options to find the arrangement most suited to their
circumstances. In addition, we have been able to identify customers
eligibleforPriorityServiceswhowouldotherwisehavebeen
unknown to us.
We recently introduced our new customer website, with a very
different look and feel, developed following extensive research,
which aims to deliver improved accessibility and ease of use. Mobile-
enabled, the website reflects customers’ increasing use of devices to
access day-to-day online services, and offers web chat services across
extended hours. This is the first phase of our digital transformation,
aimed at helping customers’ lives flow a little more smoothly.
Ended the year as a
leading company in
our peer group for
customer satisfaction
Systems Thinking and
innovation delivering
ODI performance ahead
of expectations
Additional £100m of
new investment to
improve resilience as
outperformance earned
02
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Pictured:DrJohnMcAdam,ChairmanandSteveMogford,ChiefExecutiveOfficeratourwastewatertreatmentworksinLiverpool.
Financial performance
Group revenue was slightly lower than last year, reflecting the
accountingimpactofourWaterPlusjointventure(JV)aswe
prepared ourselves for the opening of competition in the non-
household retail market on 1 April 2017, partly offset by our allowed
regulatory revenue changes.
Underlying operating profit was up £19 million, at £623 million. This
reflects the new regulated price controls, slightly lower infrastructure
renewals expenditure, only a marginal increase in depreciation (as we
recognised some accelerations in depreciation last year) and a small
decrease in the remaining cost base, partly offset by the accounting
impactofourWaterPlusJV.Reportedoperatingprofitwas£606
million, up £38 million, mainly as a result of reduced profit last year
which was principally due to costs associated with our water quality
incidentinLancashire.
Underlying profit before tax was down £19 million to £389 million, as
the £19 million increase in underlying operating profit was more than
offset by a £36 million increase in underlying net finance expense.
The increase in underlying net finance expense is mainly due to the
impactofhigherRPIinflationonourindex-linkeddebt.Reported
profit before tax was £442 million, up £89 million on the previous
year, reflecting fair value gains on our debt and derivative instruments
this year, versus fair value losses last year, along with other adjusting
items as outlined in the underlying profit measures table on pages
44 to 45.
Underlying earnings per share was 46.0 pence, more than covering
the dividend. Reported earnings per share was higher at 63.6
pence, mainly reflecting a deferred tax credit as a result of the UK
Government’s future planned reduction in the mainstream rate of
corporation tax.
The board is proposing a final dividend of 25.92 pence per ordinary
share, making a total of 38.87 pence per ordinary share for the
2016/17 financial year. This represents an increase of 1.1 per cent, in
linewithourpolicyoftargetinganannualgrowthrateofatleastRPI
inflation through to 2020.
We have a robust capital structure, supported by our policy of
targeting a gearing level, measured as net debt to regulatory capital
value, within the range of 55 per cent to 65 per cent. We aim to
maintain, as a minimum, our existing credit ratings of A3 with
Moody’sandBBB+withStandard&Poor’sforUnitedUtilitiesWater
Limited.Thishelpsusretainefficientaccesstothedebtcapital
markets throughout the economic cycle, and we have debt locked in
at attractive rates versus Ofwat’s cost of debt for the 2015-20 period.
Our pension scheme asset-liability matching approach has proven its
effectiveness, providing us with stability in a time of turbulent market
conditions this year and protecting us from the pension headwinds
hurtingmuchoftheFTSE.Ourpensionspositionremainsstrongand
we had an IAS 19 surplus of £248 million at the 2016/17 financial
year end.
Operational performance
We began this 2015-2020 regulatory period with ODIs, set by Ofwat,
reflecting an increasingly challenging set of performance targets. The
ODIs are skewed heavily towards penalty, so we took the decision
in the first year of the period to accelerate our capital investment
programme to deliver operational performance improvements
as soon as possible with the aim of mitigating the downside risks
represented by the ODIs.
This acceleration has continued in year two, with a further £804
million invested, similar to last year, so that at the end of this
year we had invested around £1.6 billion of our total c£3.6 billion
capital programme for the five years. This programme is providing
for infrastructure renewals in addition to delivering enhanced
environmental performance, climate change resilience initiatives and
customer service improvements.
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Chairman and Chief Executive
Officer’s review
We are delighted that this strategy is paying off with another year
in which we delivered a small ODI reward of £6.7 million, improving
again from the first year of the period. This reflects a considerable
achievement by our operational teams to maintain sector leading
performance across our asset base as new capability is progressively
delivered through accelerated investment, particularly in our
wastewater business.
It is important that we invest effectively, particularly where we are
accelerating spend, and we use our Time, Cost and Quality index
(TCQi) to measure performance in this area. Our capital team
continues to deliver effectively with TCQi again scoring high at c93
per cent for the year.
Systems Thinking
Our integrated approach to delivery of services to customers,
Systems Thinking, continues to progressively improve our operational
capability across the business. For instance, our new telemetry
backbone provides enhanced and more reliable communications
between our assets and our integrated control centre, with the
potential to share more information between the two as our
capabilities grow.
In addition, our real-time production capability for both water
production and sludge processing is delivering efficiency benefits
and flexibility during planned shutdowns and incidents, significantly
improving system resilience during difficult periods. We rolled out our
new field scheduling system during this year in pilot areas and we are
now embracing that learning before rolling out this capability across
our estate.
Performance against
our regulatory contract
Havingsuccessfullylockedinalowcostofdebt,wefeelweareina
strong position to deliver our target for the 2015-20 period of beating
Ofwat’s industry allowed cost of debt. We are making good progress
in implementing a range of initiatives, to deliver over £400 million of
savings and remain confident of meeting our totex allowance.
We are pleased to see continued strong performance in the areas of
private sewers and pollution incidents, as well as good performance
against our leakage targets. Following a good performance on our
ODIs in 2015/16, the £6.7 million achieved this year brings our
cumulative total to £9.2 million, which helps to limit our downside
risk for the regulatory period. Whilst a number of our ODI measures
are still susceptible to one-off events and, on the whole, they get
tougher each year, our performance so far gives us the confidence
to narrow our cumulative target range to between a £30 million net
reward and a £50 million net penalty, across the five-year period.
As part of our responsible approach to resilience, and based on
outperformance we have earned to date, we aim to make around
£100 million available for additional investment across this regulatory
period to deliver significant resilience benefits. The first £20 million
will be made available in the next financial year, with the remaining
investment phased over the rest of this regulatory period.
Retail competition for
non-household customers
For a number of years, we have been building capability to ensure
we were in a strong position ahead of the full opening of the non-
householdretailmarketinAprilofthisyear.WithourWaterPlusjoint
venture with Severn Trent up and running, this reinforces our position
and gives us a first-mover advantage.
Combining the complementary skills of both companies gives Water
Plusscopetodeliveranattractivepropositionforcustomers,as
well as creating synergies to provide an efficient and cost-effective
operation focused on improved customer service and growth.
Since going live with the joint venture in June 2016, the business
has relocated to Stoke-on-Trent, migrated all customers into a single
cloud-based billing system, recruited over 300 people and ensured all
systems were fully market ready.
Long-term planning
In order to maintain a reliable, high quality water service for our
customers, 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 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.
Byanticipatingthesechangeswecanensurewecontinuetodeliver
what customers want at a fair price and in a responsible way. Our
25-yearWaterResourceManagementPlansetsouttheinvestment
needed to ensure we have sufficient water to continue supplying
our customers, taking into account the potential impact of climate
change.
An example of a large project we are currently undertaking, to
address future supply and demand issues for customers, is our 100
kilometre Thirlmere pipeline project, which will extend our integrated
network to encompass West Cumbria. This will provide a secure,
long-term supply for the area and ease pressure on environmentally
sensitive local water resources. The pipeline will cross some of the
mostspecialareasoftheLakeDistrictNationalParkand,asaresult,
we have developed a solution which respects this sensitivity whilst
delivering the lowest whole-life cost. The project demands the
highest levels of stakeholder engagement and consultation to secure
support, and we have been engaging with local communities on the
proposed route since 2013. We were particularly pleased last autumn
to receive the third and final planning approval for this project.
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Water 2020
Ofwat is progressing a number of options for the next price review,
which spans the period 2020-25, including competition in water
resources and bio-processing (or sludge), along with the progressive
transitionfromRPItoCPIinflation.Wehavecontinuedtoengage
proactively and constructively with the regulators and the industry
over the last year, and have submitted comprehensive responses to
Ofwat’s various consultation papers.
In water resources, competition will apply to new resources only
and our long-term water resources management plan indicates that
our region is unlikely to need any new resources for many years. We
will continue to engage strongly in regulatory developments, with
customers and shareholders at the forefront of our thinking.
Our employees
Our people are fundamental to the improvements we have delivered
in operational performance and customer service. We are proud of
theircommitmentanddedication.Employeeengagementremains
at high levels, demonstrating that our employees have a strong
capability to adapt and we would like to thank them for their critical
contribution to the company’s performance.
We have been successful in attracting and retaining people, having
regenerated our graduate and apprentice schemes in 2010 and
continuing to expand them over seven years to help provide an
optimal balance of skills and experience within the group.
In the first year of our apprentice scheme in 2010 we took on six
apprentices, and have built this intake to 54 apprentices in 2016,
taking our total programme to 119 apprentices currently employed.
We are accredited by four awarding bodies and named as one of the
top 100 apprenticeship employers.
We have 64 people currently on our graduate scheme, across a range
of different disciplines, including finance, engineering, commercial
and project management. We encourage diversity among the new
generation we are bringing into this industry and c40 per cent of our
current graduates are female.
We are committed to helping local schools and have 47 trained
Science,Technology,EngineeringandMathematics(STEM)
ambassadors. We frequently attend careers events across our
region and have good links with local universities. In March 2017,
we formally launched a partnership with Teach First, a charity which
strives to end educational inequality by placing and training graduates
to teach in low income communities. This partnership will help with
our desire to be more active with schoolchildren in communities that
are hard to reach within our region, by helping them to improve their
employability skills, raising awareness of future career opportunities
and offering our employees development opportunities in coaching
and mentoring Teach First teachers and students.
Despite continuing with a sustained focus on health, safety and
wellbeing, our employee accident frequency rate for 2016/17 has
increased to 0.196 accidents per 100,000 hours, compared with a
rateof0.104in2015/16.However,aspartofourhealthandsafety
improvement programme, we have implemented several initiatives
and over the same period we have been awarded the workplace
wellbeingcharterandretainedRoSPAgoldstatus.Werecognisethat
we still have more to do, so health and safety will continue to be a
significant area of focus for us.
Strong corporate responsibility credentials
We operate in a manner that aims to deliver the highest levels of
corporate governance and our board continues to provide sound
and prudent governance, consistent with the principles of the UK
Corporate Governance Code.
In the summer of 2016, we were pleased to, once again, attain
IndustryLeadingcompanystatus,asmeasuredthroughthe
EnvironmentAgency’s(EA)annualassessment.Inparticular,we
delivered another strong performance in the area of pollution, and
were one of only two companies to attain a Green rating for serious
pollution incidents.
We have consistently met, or outperformed, our regulatory leakage
targets and our performance to date keeps us on track to meet our
2015-20 targets, as set by Ofwat. We are committed to reducing our
carbon footprint and increasing our generation of renewable energy.
We have reduced our carbon footprint by 22 per cent over the last
10 years and progress in 2016/17 has been encouraging, with a high
proportion of our waste used in regeneration projects and less than 6
per cent sent to landfill in 2016/17.
Our strong corporate responsibility and environmental credentials
were recognised this year when we retained World Class rating in
the Dow Jones Sustainability Index for the ninth consecutive year, an
achievement we are particularly proud of in light of the ever-evolving
standards.
In addition, at the Finance for the Future Awards in October 2016,
we were honoured to win the Communicating Integrated Thinking
award, an international award sponsored by Deloitte, Accounting for
SustainabilityandtheInstituteofCharteredAccountantsinEngland
and Wales.
Outlook
We are encouraged by our continued strong operational and
environmental performance, as well as our improvements in
customer satisfaction. We have plans to improve further, supported
by our Systems Thinking approach to operating the business, and
the acceleration of our capital investment programme. Overall, we
are encouraged by our progress, in the early part of this regulatory
period, and are confident that we can deliver our targets for both
customers and shareholders. We continue to deliver sustainable
dividendgrowth,withanannualgrowthtargetofatleastRPIinflation
through to 2020, supported by a robust financial position.
Finally, we would like to thank our employees, customers and wider
stakeholders for their continued support.
Dr John McAdam
Chairman
Steve Mogford
ChiefExecutiveOfficer
The strategic report on pages 10 to 49 was approved at a meeting of the board on
24May2017andsignedoffonitsbehalfbySteveMogford,ChiefExecutiveOfficer.
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2016/17 highlights
Operational highlights
Our planned acceleration of investment and Systems Thinking approach has successfully delivered operational benefits and now
helped us to achieve Outcome Delivery Incentive (ODI) rewards in the first two years of this five-year regulatory period. Alongside
this, our new customer service management team is delivering further improvements in customer satisfaction, which saw us end the
year as one of the leading companies in our peer group for Service Incentive Mechanism (SIM) scores, with record SIM scores across a
range of areas throughout the year and our customers continuing to rate us highly on billing and wastewater services.
The best service
to customers
At the lowest
sustainable cost
In a responsible
manner
A leading company for Service
Incentive Mechanism (SIM) scores
› Re-energised our approach, delivering
further improvements in customer
satisfaction
› Achieved our best ever qualitative SIM
scores, above industry average for
the full year, and ending the year as a
leading company in the sector
› Customer complaints reduced 27 per
cent, with a 55 per cent reduction in
issues not resolved at first contact
Accelerated investment delivering
operational and customer benefits
Delivering or exceeding our targets
› Remain on track to meet our totex
allowance
› Outperformed Ofwat's revenue
allowance on household retail cost to
serve despite challenging targets
› Lowcostofdebtlocked-inplacesusin
a strong position to deliver our target
of beating Ofwat's industry allowed
cost of debt
Systems Thinking driving improved
operational performance, resilience
and innovation
› Design for Manufacture and Assembly
› Improving resilience of our network
(DfMA) innovative approach
› Delivered another net ODI reward of
£6.7 million, giving us confidence to
refine our ODI target range further to
a £30 million reward to a £50 million
penalty over the 2015-20 period
› Effectiveandefficientdeliveryof
capital programme, with TCQi score
remaining high at 93 per cent
› On track to deliver the £100 million
of totex savings across the regulatory
period underpinning our business plan
Solid financial performance
› Underlying operating profit up 3 per cent
› Effectivepensionshedgingprotecting
us from volatile market conditions
Excellent Environmental, Social and
Governance (ESG) credentials
› IndustryLeadingstatusinthe
EnvironmentAgency’sassessment,
and one of only two companies
to attain Green rating for serious
pollution incidents
› Retained World Class rating in Dow
Jones Sustainability Index for ninth
consecutive year
Launched Priority Services
› Offering dedicated support for
customers experiencing short or long-
term personal or financial challenges
Additional investment to improve
resilience
› £100 million additional investment
across this regulatory period as
outperformance is earned
› First £20 million being made available
in 2017/18, with the remaining
investment to be phased over the next
two years of this regulatory period
Pictured: We've undertaken a series of
roadshows across the North West to speak to
customersaboutourPriorityServices.
Pictured: Storm overspill pipes travelling from
Norway to Anchorsholme to be used as part
of our bathing water quality programme.
Pictured: Floating solar panels at Godley
Reservoir, Greater Manchester producing
renewable energy.
Read more about how we performed against our Operational KPIs on page 32
Read more about our Operational performance on pages 34 to 39
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Financial highlights
We delivered a solid performance with underlying operating profit up 3 per cent. We have a robust capital structure and effective
pensions hedging policy in place, protecting us from the headwinds of turbulent market conditions. We delivered a net reward on our
ODIs and improved bad debt performance in a challenging environment. We have now delivered seven years of sustainable dividend
growthofatleastRPIinflation,increasingourtotaldividendthisyearby1.1percentinlinewithourpolicy.
Revenue
16/17
15/16
14/15
13/14
12/13
Underlying operating profit*
16/17
15/16
14/15
13/14
12/13
Reported operating profit*
16/17
15/16
14/15
13/14
12/13
Total dividend per share
16/17
15/16
14/15
13/14
12/13
£1,704m
£1,730m
£1,720m
£1,689m
£1,636m
£622.9m
£604.1m
£664.3m
£634.6m
£604.2m
£605.5m
£567.9m
£653.3m
£636.9m
£601.6m
38.87p
38.45p
37.7p
36.04p
34.32p
Revenue was down £26 million at £1,704
million, reflecting the accounting impact of
ourWaterPlusJV,whichcompletedon1June
2016, partly offset by our allowed regulatory
revenue changes.
Underlying operating profit was higher by
£19 million, at £622.9 million, reflecting the
new regulatory price controls, a reduction in
infrastructure renewals expenditure and lower
total costs, offset by the accounting impact of our
WaterPlusJV.
Reported operating profit was higher by
£38 million, at £605.5 million, reflecting the
£19 million increase in underlying operating
profit for the reasons detailed above, as
well as reduced profit last year due to costs
associated with the water quality incident.
Total dividend per ordinary share for 2016/17
of 38.87 pence. This is an increase of 1.1 per
cent on last year, in line with our policy of
targetinganannualgrowthrateofatleastRPI
inflation through to 2020.
* A guide to alternative performance measures and a reconciliation between underlying operating profit and reported
operating profit is shown on pages 44 to 45.
Read more about how we performed against our Financial KPIs on page 33
Read more about our Financial performance on pages 40 to 43
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25344.04 – 1 June 2017 4:17 PM – ShellsluglineDelivering our strategyUnited Utilities AR2017 - Strategic.indd 801/06/2017 17:36:13 25192.04 – 1 June 2017 4:17 PM – Proof 3sluglineDelivering our strategyStrategic ReportThe strategic report details our performance over the past year and how it has been achieved in line with our business model and strategy.What we doWhere we operate10Our water cycle11Our industry and market11How we create valueOur vision 12Our core values12Our business principles12Our strategy12Our competitive advantage13Our business model14 Howweengagewithourstakeholders15 Key resources16 Externalenvironment18 Internal environment 24 Planningcycles26 Systems Thinking30How we measure our performanceStrategic themes and outcomes31Ourkeyperformanceindicators(KPIs)31 OperationalKPIs32 FinancialKPIs33Our performance in 2016/17 Operational performance34 Financial performance40How we manage risk 46United Utilities AR2017 - Strategic.indd 901/06/2017 17:36:15 25192.04 – 1 June 2017 4:17 PM – Proof 3BlackpoolPrestonLancasterKendalWorkingtonWhitehavenBurnleyCreweStockportBlackburnBoltonLiverpoolManchesterWarringtonChesterCarlisleBarrow-in FurnessWhat we do“ We're proud to help life flow smoothly in the North West.”Where we operateFrom Crewe to Carlisle, our offices and water and wastewater treatment works span the North West of England.We gather our water from a range of different sources, but predominantlyfromourreservoirsinthePenninesandtheLakeDistrict.WeextractwaterfromLakeVyrnwyinWalesforcustomersinMerseyside and Cheshire, while the rest is taken from the River Dee, boreholes and streams.Of the 1,700 million litres we supply every day, well over half is from Cumbria and Wales. The two biggest reservoirs are ThirlmereandHaweswaterinCumbria.Haweswaterholds more than 84,800 million litres of water – equivalent to around 33,900 Olympic swimming pools.We own and manage over 56,000 hectares of land, making usthelargestcorporatelandownerinEngland.Much of this is catchment land (the areas immediately surrounding our reservoirs). We recognise that quality control starts right at the point of collection, so we keep our catchment land as clean and sustainable as we can. This helps with the water quality for our customers and makes a huge difference to the environment.We help to protect over 400km of coastline and around 7,000km of rivers flowing across our region.10UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017United Utilities AR2017 - Strategic.indd 1001/06/2017 17:36:15 Our water cycle
The collection, treatment, use and return
of water to the environment is naturally
a cyclical process.
We collect water from the environment,
which we clean and store before
distributing it to our customers for
their use.
We then collect it as wastewater and
treat it before returning clean water back
to the environment.
The stages of this water cycle and our
involvement in each of these can be seen
in the chart to the right.
W e c o l lect water from
t h e e nvironment
k
a
Water is collected from our
catchment land and stored
in our 168 reservoirs or
taken directly from
boreholes.
W
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a
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t
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c
a
e recycle w ate r b
to rivers an d th e s e
W
The treated
water is then
returned safely into
rivers and the sea.
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Water is
treated in our 91
water treatment works
to produce high quality
drinking water.
Clean water is
protected in our
covered reservoirs.
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.
W e distribute
th e w ater
e
h
t
t
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Wastewater is
treated in our 567
wastewater treatment works
so that it meets stringent
environmental standards and
is ready to return to
the environmentt.
United
Utilities
Water
Cycle
Wastewater is
collected from our
customers and taken
to our treatment
works using our
77,000km of
sewerage pipes.
W
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t
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olle
w
a
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e
ct
r
3m households
and 200,000
businesses can enjoy
our water supply and
wastewater
collection services 24
hours a day.
Customers u s e
the water
Our industry and market
Everyday,over50millionhouseholdandnon-householdcustomers
inEnglandandWalesreceivewaterandwastewaterservices.These
customers are served by 10 licensed companies which are split
regionally based on river catchment areas.
We, along with the other nine water and wastewater companies,
comprise the vast majority of the total water and wastewater sector,
as depicted on the pie chart to the left.
The remainder is made up of licensed companies which provide
water-only services and tend to be smaller in size.
UnitedUtilitiesWaterLimitedholdslicencestoprovidewaterand
wastewater services to a population of approximately 7 million
peopleintheNorthWestofEngland.
As each company in the water sector operates as a regional monopoly
for the majority of its services, they are subject to regulation in terms
of both price and performance.
We provide services to approximately 3 million households, and
this generates around two-thirds of our total revenue. We also
serve approximately 200,000 businesses, ranging in size from large
manufacturing companies to small shops.
The privatisation of the industry, 28 years ago, has been widely
perceived as a success, making a significant contribution to public
health as a result of over £100 billion investment in maintaining and
improving assets and services since 1989.
Industry constitution
We are the second largest of the 10 licensed water and
wastewater companies, based on the size of our asset base, as
measuredbyRegulatoryCapitalValue(RCV).
United U�li�es RCV
Total RCV of other 9
water and waste companies
Total RCV for all
water-only companies
It has led to improvements in the quality of services, 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.
In order to protect the interests of customers and the environment,
at privatisation, three separate bodies were set up to regulate the
activities of water and wastewater companies under the areas of
economic, drinking water quality, and environmental regulation.
This has evolved to fit with the tightening of laws and regulations
over time.
Read more about our Political and regulatory environment
on pages 20 and 21
Stock Code: UU.
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How we create value
Our vision is to be the best UK water and wastewater company,
providing great service to our customers.
Our core values
Our three core values provide the cultural framework within which we are working towards achieving our vision, and we encourage our
employees to live these values in everything they do in their daily work.
Customer focus
Integrity
Innovation
Everythingthatwedowillbeaboutour
customers, not us.
We will make promises knowingly and
keep them.
We will innovate to make our services
better, safer, faster and cheaper for our
customers.
Through our core values, we are embedding a customer service orientated culture, recognising the importance of maintaining a relationship
built on trust and confidence, and continually striving to improve the customer experience.
Read more about our Values and culture in our Governance section on page 65
Our business principles
We strongly believe that only by talking and listening to our customers and stakeholders can we act more responsibly and improve the way
we do things.
Read more about our How we engage with our stakeholders on page 15
With this in mind, we developed a set of business principles through conversations with our customers and stakeholders that demonstrate our
commitment to delivering our services in an environmentally sustainable, economically beneficial and socially responsible manner.
These business principles cover five key themes:
Providing great service
to customers
Working to protect and
enhance the environment
Actively supporting local
communities
Supporting our employees
to achieve their full
potential in a safe
workplace
Delivering good value to
stakeholders and managing
our supply chain fairly
More about business principles can be found on our website at: corporate.unitedutilities.com/united-utilities-business-principles
Our strategy
Our strategy is to create sustainable value by delivering:
The best service
to customers
At the lowest
sustainable cost
In a responsible
manner
Thesethreestrategicthemesareusedasaframeworkforustomeasureeachaspectofourperformance,andeachofouroperationalKPIs
is closely linked to one of these strategic themes, although it is indicative of the interconnectivity of our business that these may often link
broadly to more than one of these strategic themes.
Read more about our Operational KPIs on page 32
With our core values and business principles in mind, to demonstrate how we will deliver our strategy with a focus on what our customers and
stakeholders want, we have broken down our three strategic themes into eight key outcomes, as set out in our business model.
Read more about our Strategic themes and outcomes on page 31
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Our competitive advantage
How we offer value
The following are key features that we believe make us attractive to investors, alongside the specific differentiating factors described below.
Clarity on allowed
returns through
to 2020, with
a track record
of regulatory
outperformance
Planning for
the long-term,
protecting and
delivering essential
services
Wholesale revenue
and asset base linked
to RPI inflation to at
least 2020
Significant
improvements in
customer service
and operational
performance, with
more to come
Sustainable
dividend policy,
targeting a growth
rate of no less than
RPI inflation per
annum to at least
2020
Customer and
environmental
benefits delivered
through substantial
capital investment,
driving long-term
RCV growth
Robust capital
structure: stable
A3 credit rating
Deeply integrated
with the environment,
with external
recognition for our
responsible business
credentials
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How we differentiate ourselves from our competitors within the water industry
Systems Thinking approach to how we
operate improves efficiency and resilience
Prudent financial risk management
delivers long-term predictability
We have adopted an innovative systems-based approach to our regional
water system and wastewater drainage areas which we call Systems
Thinking.
Bythinkingofourentirenetworkasasystem,andusingourintegrated
control centre, we are able to optimise cost and service performance, as
well as encourage a proactive, rather than reactive, culture.
This helps us to:
›
›
improve the reliability of our assets to reduce unplanned service
interruptions;
improve our use of data, at local asset level and centrally, to optimise
performance; and
› allocate resources to production teams with full accountability for
asset and system performance.
This approach was built into our business plan in order to help us deliver
both operational improvements and cost savings across the regulatory
period.
As a result of this Systems Thinking approach, we are improving the
resilience of our assets and network. This enables us to continue to
provide a reliable service to our customers long into the future.
Our clearly articulated financial risk management policies, covering a
variety of market risks, help us reduce our exposure to the economic and
regulatory environment, therefore providing more predictable returns to
investors.
Our policy on inflation hedging is to match the debt portion of our
RCV,offsetbytheeffectofourpensionschemeliabilities,withindex-
linked debt. This provides equity shareholders with a reliable one-to-
oneexposuretoRPImovements,controllingtherisksofunexpected
movements in inflation.
Interest rate exposure on our remaining nominal debt is managed by fixing
the underlying interest cost out to 10 years, on a reducing balance basis, and
is supplemented by substantively fixing interest rates for each forthcoming
regulatory period at the time of the price control determination. This
enables us to manage uncertainty in the approach to setting the cost of
debt at each price review, and our approach to debt financing enables
us to consistently lock in long-term debt at good relative value.
We adopt an asset-liability matching policy for our defined benefit pension
schemes by investing in assets such as fixed income swaps, corporate
bonds and gilts which perform in line with the liabilities so as to hedge
against changes in swap and gilt yields. This therefore reduces the volatility
of the required funding level.
Thepensionschemesalsohedgeinflationexposure,partlythroughRPI
swaps and partly through an inflation funding mechanism, whereby
companycontributionsareflexedformovementsinRPI,providinga
naturalhedgeagainstanyinflationaryupliftontheRCV.
Read more about Systems Thinking on page 30
Read more about our Financial risk
management on pages 152 to 159
Stock Code: UU.
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Our business model
Key resources
Natural resources
People
Assets
Financing
› Collect water for treatment
› Develop and motivate our
› Significant capital investment
› Robust capital structure
› Maintain sustainable
diverse workforce
programme
› Long-termdebtlockedinat
catchment land, protecting
the natural environment
› Management incentives
based on performance
term fixed assets
› Efficientmaintenanceoflong-
good relative value
› Processwastetogenerate
› Working with suppliers who
› Innovative solutions and
renewable energy
share our values
Systems Thinking approach
› Proactiveengagementwith
equity and credit investors
and access to range of
markets
Read more about Key
resources on pages 16 to 18
P L A N (25, 5, 1 year)
Read more about Planning
on pages 26 to 29
l
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Wholesale
Water
Wholesale
Wastewater
Systems
Thinking
Household
Retail
O
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Read more about External
environment on pages 18 to 23
The best service
to customers
Outcomes
› Providegreatwater
› Dispose of wastewater
› Deliver a service customers can
rely on
At the lowest
sustainable cost
Outcomes
› Valueformoney
› Improved efficiency
Read more about Internal
environment on page 24
In a responsible
manner
Outcomes
› Protectandenhancetheenvironment
› Support local communities
› Support employees in a safe
workplace
Provide an appropriate risk and return for investors
How we measure our performance – operational KPIs
› Wholesale ODI composite
› SIM – qualitative
› SIM – quantitative
› Totex outperformance
› Financing outperformance
› Householdretailcosttoserve
› Leakage
› EAperformanceassessment
› Dow Jones Sustainability Index
Read more about Outcomes on page 31
Read more about Risk on pages 46 to 49
Read more about KPIs on pages 31 to 33
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How we engage with our stakeholders
Delivering water and wastewater services to 7 million people in the
North West brings us into contact with a wide variety of stakeholders.
Ensuringwebuildstrong,constructiverelationshipswiththemisvital
for the success of our business.
We approach stakeholder engagement in an inclusive way, taking
time to understand which stakeholders are interested in which topics,
holding genuine, two-way conversations with them and, through
continuous engagement, working hard to understand any concerns
or issues from their perspective to ensure a suitable response from
the company.
Interactions with our stakeholders take many forms, from formal
meetings to day-to-day contacts, and focus on a range of topics
from the future direction of the sector through to everyday
operational matters.
Customers – through continuous focus on improving service, we can
help to build their trust and confidence in our service delivery.
Suppliers – by maintaining a good relationship and working towards
the same goals, we can deliver projects on time, to budget and to the
required quality.
Investors and analysts – to help them understand our business in
order to assist them in making the right investment decisions for
themselves, their investors and clients.
Regulators – to help shape the policy and regulatory framework
within which we operate.
Third Sector and NGOs – through engagement with groups
representing economic, environmental, social and governance
interests, we can better understand their issues and seek solutions to
what are shared problems.
Politicians – by maintaining good lines of communications with North
WestMPsandtheirlocaloffices,wecanhelpresolvewater-related
constituency issues as well as discuss national policy topics.
Devolved authorities – by engaging with the emerging devolved
arrangements, such as new metropolitan mayors, we can better
understand the needs of the region we serve.
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Public consultation for the West Cumbria Pipeline
Since 2013 we have carried out four phases of public
consultation resulting in over 50 public exhibitions held in
locations across Cumbria, over 150 local and parish council
meetings, and many other stakeholder consultations. The
standard and level of detail was commended by all three
planning authorities and helped them reach their decisions.
It also means we have now achieved the first four ODIs, which
are applicable to this scheme, and all ahead of time. It is
worth noting that these first ODIs were critical in achieving the
remaining milestones.
Work on the new pipeline has now begun, with the project due
to be in service by March 2022.
Pictured:Our partnership with the West Cumbria Rivers Trust
supports environmental engagement with the local community as
well as a visitors drop-in centre in Keswick.
EnnerdaleWaterandtheRiverEhen,inWestCumbria,are
habitats for protected species. To avoid the risk of long-term
damage to the wildlife that relies on these water sources ,we
needtostopusingEnnerdaleasasourceofwaterby2022
whentheEnvironmentAgencywithdrawsitsabstraction
licence.ToreplacethelossofEnnerdaleasawatersource,we
will be linking customers in parts of Cumbria to our regional
water network by constructing a major new pipeline from
Thirlmere to West Cumbria, a new water treatment works,
pumpingstations,andundergroundservicereservoirs.By
tapping into the spare capacity at Thirlmere reservoir, and
with careful planning, we can ensure enough water for West
Cumbria’s households and businesses, whilst playing our part in
giving nature a helping hand.
This project is as much about where we are working as it is
about what we are building. It required planning permission
fromthreelocalauthorities–Copeland,AllerdaleandLake
DistrictNationalParkAuthority.Theschemereceivedapproval
in November 2016 and all three planning decisions were
unanimous. This is no mean feat considering the largest section
will require a 40-metre wide passage through a number of
designatedareasintheLakeDistrictNationalPark.
This result is the culmination of several years of detailed
planning and consultation with our customers. We’ve
worked closely with local communities, businesses and
stakeholders to develop the scheme, ensuring we minimise
traffic inconvenience and safeguard the environment
during construction.
You can find out more about our consultation by watching a short video online at
unitedutilities.annualreport2017.com/strategic-report/our-business-model/how-we-engage-with-our-stakeholders
Stock Code: UU.
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Our business model
Key resources
Natural resources
Our‘InstrumentofAppointment’orLicenceisessentialforusto
utilise the natural environment in the North West to create value for
our business.
Raw water
Rainfall in the North West is greater than in other parts of
the country, and therefore water supply is not as constrained.
Nonetheless, it is in everyone’s interest to make the most of this
precious resource. We continuously encourage our customers
to use water more efficiently and have increased the number of
households fitted with meters. Our water-saving initiatives can save
our customers money on their bills as well as preserving this vital
resource. We have a regulatory annual leakage target, based on the
sustainable economic level of leakage, and we have consistently met
or outperformed this target.
Catchment land
We own over 56,000 hectares of land around our reservoirs. Our
sustainablecatchmentmanagementprogramme(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 Catchment Wise project is
looking at working with others to improve the lakes, rivers and coastal
waters where we return wastewater in the North West.
Bioresources
Anotherkeyresourceiswaste.Bioresourcesfromwastewatercan
be processed to generate renewable energy, helping to save power
costs and providing an ongoing opportunity to reduce carbon
emissions. Our advanced digestion facility at Davyhulme is one of the
largest works of its type and we now inject biogas from Davyhulme’s
wastewater treatment into the national gas network. We recycle
waste by supplying treated bio solids to agriculture, which provides a
valuable resource for farmers.
People
Our employees play a critical role in increasing long-term value
generation. Fundamental to the decisions we take, and the
operational performance we deliver, is a skilled, engaged and
motivated team.
Wages and long-term incentives
Our employees are paid a competitive base salary along with a staff
benefits offering and the opportunity to join both the employee
healthcare scheme and our share incentive plan. Independent
studies have shown that this enhances the quality of work, increases
employee retention and reduces absenteeism, in addition to
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.
Human resources policies
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, and disabled colleagues have equipment and working
practices modified for them, as far as possible, wherever it is safe and
practical to do so. We have procedures and policies in place to ensure
weactinaccordancewiththeUniversalDeclarationofHumanRights.
Diverse workforce
We value diversity, providing equality of opportunity and recruiting
and promoting employees on the basis of merit, which we believe
provides the benefit of a more comprehensive and balanced skills-set.
Despite being a highly engineering-based organisation, women are
represented at all levels of our company. One-third of our combined
board and executive team is female, as the chart below shows.
Gender diversity across our business
Male
Group board
Execu�ve team*
Senior managers
Wider employees
No.
6
4
40
3,404
Female
Group board
Execu�ve team*
Senior managers
Wider employees
2
3
7
1,973
%
75%
57%
85%
63%
25%
43%
15%
37%
Pictured: Our advanced digestion facility in Davyhulme, Manchester.
*FiguresexcludeCEOandCFO,whoareincludedinthegroupboardfigures
As at 31 March 2017, there were 15 male (88 per cent) and 2 female (12 per cent)
employees who were appointed as statutory directors of subsidiary group companies
but who do not fulfil the Companies Act 2006 definition of ‘senior managers’.
Key:
Thebestservicetocustomers Atthelowestsustainablecost Inaresponsiblemanner
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Health and safety
Employee training and development
The health and safety of our employees is fundamental, both for
their welfare and 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 to improve health and safety conditions
for our employees, and have been awarded the UK Workplace
Wellbeing Charter.
Supply chain relationships
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.
Our suppliers are contributing significantly towards the c£9 billion
forecast contribution we are making to the regional economy over
the 2015-20 period.
We place a strong emphasis on providing comprehensive training
and development opportunities for our employees, which helps to
improve our internal skills-base as well as create a more engaged
workforce.
We strive to enhance our understanding of best business practices in
other companies and sectors around the world and, by bringing this
learning back to our business, we have increased our organisational
knowledge and capability. This 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 a high calibre of engineers, in a profession which has
seen declining numbers in the UK in recent years.
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Developing our workforce for the future
automation(ICA)roles.Historically,wehavefoundtheseroles
difficult to fill so we took the decision, based on success in other
areas, to grow our own talent in this field.
We’ve worked nationally to develop a new apprentice standard
for this role, and have expanded our own Technical Training
CentreinBoltontoincludeaTelemetry/ICAsection.
Funds have been invested in resourcing kit and the latest industry
standards. A technical trainer has been recruited to deliver and
develop a full, tailored curriculum to enable us to grow the best
talent for the job.
Our first batch of eight telemetry/ICA apprentices began in
September 2016. They are the first step in enabling us to meet
our long-term business needs and grow the workforce of the
future.
Pictured:ApprenticesAlexWard(left)andKensyHodgson.
We recognise that there is a wealth of unlocked potential within
the diverse communities in which we operate. We invest and
support these communities through a range of early careers
activities and structured training programmes. These include
our Apprentice, Degree apprentice and Graduate programmes,
theYouthEmploymentProgramme–NEET(notinemployment
educationortraining)andSTEM(science,technology,engineering
and mathematics) Careers Support.
We have found it increasingly difficult to find and attract
experienced individuals with specific cyber capabilities. There
is a relatively low availability of these skills in the North West, and
in the UK as a whole, but an increase in demand for
these capabilities.
Our cyber apprentice programme, begun in September 2014,
has helped us with this challenge and we completed our first
apprenticeship transition to a permanent role in September 2016.
We are now almost half-way through our second cyber apprentice
programme, with plans for a third to start in September 2018.
We will be exploring how we widen cyber training to include
more industry and government collaboration and are liaising with
Defra and the National Cyber Security Centre (NCSC) about such
opportunities and to see how this training fits in with the wider
government apprenticeship agenda.
The opportunity to have secondments outside of our business,
and to offer secondments to the NCSC, will prove invaluable as
we collectively face the cyber challenge across the water sector.
Our Operational Capability Review highlighted a potential
business risk for telemetry/instrumentation control and
Stock Code: UU.
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Our business model
Assets
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
similarassetsandnetworks.However,itisnotthereplacementcost
of our assets upon which we are allowed to earn a return through our
revenues.Weearnareturnonourregulatorycapitalvalue(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.
Long-term solutions
Many of our assets are long-term in nature, for example our
impounding reservoirs have a useful economic life of around 200
years.Bycarefullyreviewingourpotentialcapitalprojects,and
considering the most efficient long-term solutions, we can save
future operating costs, help to reduce future customer bills, and
work towards being able to operate in a more sustainable manner. It
is important that we have the right systems and procedures in place
in order to monitor and control the assets efficiently and effectively
withinournetwork.Embracinginnovationinourassetconfiguration
and work processes can help to make our future service better, faster
and cheaper.
Investing in the region
Since privatisation in 1989, total capital investment of over
£15 billion has provided substantial benefits to our customers and
our region’s environment. It has also contributed to the North West's
economy through job creation, both within our company and also
inoursupplychain.Disciplinedinvestment,alongwithRPIinflation,
alsogrowsourRCV,increasingfuturerevenues.
2015-20 investment programme
We expect to invest around £3.6 billion across 2015-20 and
to continue with a substantial investment programme, for the
foreseeable future, in order to meet more stringent environmental
standards 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,requiredbyEuropeanlegislation,overthenext15years.
Financing
Capital structure
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 we seek best relative value when issuing
new debt.
Controlling our finance costs
Lockinginlong-termdebtatgoodrelativevaluecanhelpkeep
our finance costs low and give us the potential 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 changes in the economic and
regulatory environment.
External environment
Natural environment
Whether it is 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 in the protection and, where appropriate, enhancement of the
natural environment of the North West. This in turn brings economic
benefits such as underpinning the region’s tourist industry.
Preparing for climate change
We plan far into the future to ensure we are prepared for the
changing natural environment, most notably the risks and
opportunities presented by 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. At other times, we must tackle
flooding incidents caused by the intensive bursts of rainfall which
are becoming more frequent due to changing weather patterns. The
potential effect of climate change on our future water resources is
includedinour25-yearWaterResourceManagementPlan.
Preparing for a changing population
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 without placing too much pressure on
customer bills.
Returning water safely to nature
We have a responsibility to return water to the environment safely.
Spills from our network can lead to pollution which, depending on
their severity, can damage the natural environment and potentially
lead to loss of reputation and financial penalties. We have had
one of our best years in relation to serious pollution incidents, and
itremainsanimportantareaoffocus.TheEnvironmentAgency
assesses water companies’ performance across a basket of measures,
including pollution, and its overall assessment is included as one of
ourKPIs(seepage32).Allofthepollutionsub-measuresarereported
within our Corporate Responsibility pages on our website at:
corporate.unitedutilities.com/cr-environment
Reducing our environmental impact
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 it
further.Lessthan6percentofourwastegoestolandfillandouruse
of recycled products is increasing. We plan to substantially increase
our renewable energy production from 2015 to 2020 with the main
contributor being solar opportunities. This will provide environmental
benefits and add value to shareholders through energy cost savings.
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Our road to resilience
We face resilience challenges across our business in systems,
finance and skills, as well as in customer and stakeholder
expectations for a reliable, wholesome water supply and
good environmental management. Resilience is not a new
issueforus.However,deliveringthelevelofresiliencenow
expected by customers, in light of pressures from a changing
climate, growing population, ageing infrastructure and market
competition, may lead to some significant redirection of
investment, particularly in ensuring the ongoing resilience of key
populationcentreslikeManchesterandLiverpool.
We have been at the forefront of managing record-breaking
extremes of weather over the last few years. This has actively
tested our resilience and our response and recovery capabilities.
Given the scale of the flood events in December 2015, the fact
that relatively few customers suffered interruptions to their water
supplyhighlightsanunderlyinglevelofresilience.Butthereisstill
roomforimprovement.TheLancashirewaterqualityincidentwe
experienced during 2015 tested our ability to respond to such a
large scale event, and regrettably, it had a significant impact on a
large number of customers over a prolonged period.
We learnt a great deal from our experiences and have already
made significant progress in enhancing our resilience. We are
following a risk-based approach to better understand our overall
risk and prioritise actions to reduce it further. Our methodology
isalignedwithboththeUKWaterIndustryResearchLtd(UKWIR)
document'ResiliencePlanning:GoodPracticeGuide'andthe
Cabinet Office guidance 'Keeping the Country Running: Natural
HazardsandInfrastructure'whichadvocatesconsiderationofthe
4Rs to address system resilience risks:
› redundancy – backup installation or spare capacity to allow
continuity of service;
› resistance – providing strength or protection to resist a hazard
impacting;
› reliability – design systems to continue operating under a broad
range of conditions; and
› response and recovery – plan to ensure a fast, effective response
to disruptive events.
Redundancy and resistance are generally seen as being the most
effective at removing risk but tend to be at the highest cost. A
risk-based approach allows all mitigating actions to be assessed
onalike-for-likebasis.Everyinterventioncostcanbecompared
to the risk benefit ensuring that interventions can be prioritised
and tested for value for money. Other activities underway
include:
› understanding our customers' needs and providing them with a
better service during events;
› investing in our assets to reduce the likelihood of a large scale
disruption to service;
› training our people and reinforcing the importance of delivering
a resilient service; and
› testing and enhancing our contingency planning capability.
Through the rest of this 2015-20 regulatory period, and
into the next, we will continue to develop our understanding
of the risks and take further action to control them where
appropriate, including:
› as part of our responsible approach to resilience, and based
on outperformance we have earned to date, we aim to make
around £100 million available for additional investment across
this regulatory period to deliver significant resilience benefits;
› gaininginsightfromourinspectionoftheHaweswaterAqueduct
about the resilience of supplies, to a growing population in
Manchester, and determining what needs to be done to ensure
the supply is secure now and remains so in the future;
› developing a resilience measure that will help customers
understand the level they currently experience so that we can
have a more informed conversation about how much they value
resilience of service compared to other risks; and
› enhancing our response and recovery plans, for the most
significant risks, to ensure that, should the worst happen, we can
recover service as quickly as possible.
Our experience in this regulatory period will deliver a more secure
and reliable service to customers in the future. There are other
trends that we need to manage to deliver long-term resilience:
› population growth – the number of households we supply is
expected to grow from 3 million now to 3.6 million by 2040;
› ageing demographic – as people live longer, there will be
a higher proportion of older customers. These changing
demographics will affect our services – from our core
water and wastewater services to support services such as
customer liaison;
› evolving technology – there will be technological advances and
changes in the way in which we communicate with one another.
We will adapt our customer services to meet the demands and
expectations of our customers; and
› climate change – as the UK climate continues to 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. We must seek to tackle flooding incidents caused by the
intensive bursts of rainfall, which are becoming more frequent
due to changing weather patterns.
In order to maintain a reliable, high quality water and
wastewater service for our customers in the future, we have
to anticipate those changes and core issues that are likely
to impact on our activities and balance them against our
customers’ priorities.
Stock Code: UU.
unitedutilities.com/corporate
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Our business model
Political and regulatory environment
Over a long time frame the political and regulatory environment
can change significantly. In the 28 years since the UK water industry
was privatised, we have seen substantial tightening of laws and
regulations. While to some extent changes to the regulatory
environment are outside of our direct control, maintaining good
relationships is important to enable positive participation in
regulatorydiscussions.Bypositivelyengaging,andusingourindustry
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
knownasAssetManagementPlan(AMP)periods.Priortothestartof
each five-year period, companies submit their business plans which
include their projected expenditure to enhance and maintain their
assets. Following review of these plans, Ofwat sets the prices each
company can charge their customers across the period. This report
coversthesecondyearofthe2015-20(AMP6)period.
Ofwat introduced a number of important changes for the 2015-20
period, 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;
Ofwat (the Water Services
Regulation Authority) is the
economic regulator of the water
andseweragesectorsinEngland
and Wales, responsible for
ensuring the companies provide
customers with good-quality,
efficient service at a fair price.
Read more online at:
ofwat.gov.uk
Ofwat’s service incentive mechanism (SIM) assessment is continuing
to be used as a measure of customer satisfaction. This will reward
companies who perform well on customer service, or penalise
companies who perform badly, relative to other water companies.
Eachyearallwatercompaniesarerequiredtopublishanannual
performance report, the first of which was published in July 2016 and
can be found on our website, where our report for this financial year
will also be made available:
corporate.unitedutilities.com/annualperformancereport
Market reform
From 1 April 2017, the 2014 Water Act opened retail competition to
all non-household customers, including sewerage as well as water
services. We are well positioned following our experiences in the
competitiveScottishmarketandourJVwithSevernTrent,combining
ourrespectivenon-householdretailbusinessesunderWaterPlus.
› domestic retail – covering customer-facing activities (principally
customer contact, billing, meter reading and cash collection) for
household customers; and
Following a request from Government, Ofwat assessed the potential
costs and benefits of extending retail competition to household
customers, and recently reported back to Government.
The Water Act paves the way for the future introduction of
competition for certain parts of the wholesale, or upstream, business.
Ofwat proposed, in its Water 2020 consultation document in 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.
› non-household retail – covering customer-facing activities for
business customers.
Separate retail price controls should provide retail businesses with
greater incentives and focus on delivering a more efficient service to
non-household customers, as competition expands, and to household
customers under an industry average cost to serve approach.
The way companies’ operating and capital costs are assessed has
been modified to encourage them to utilise the most efficient,
sustainable solutions under a totex model that looks at capex and
opex together and treats them equivalently. Where companies out/
underperform their totex allowance, this gain/pain is shared between
investors and customers, ensuring both receive the impact.
In a move to a more outcomes-based approach, there was greater
emphasis placed on customer engagement to set the outcomes.
Companies’ performance is now 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.
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25192.04 – 1 June 2017 4:17 PM – Proof 3Environmental and quality regulation The water and wastewater industry in the UK is subject to substantial domesticandEuropeanUnionregulation,placingsignificantstatutoryobligations on water and wastewater companies with regards 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 inEnglandandWales;itsetsdrinkingwater quality and environmental standards (manybasedonEuropeanlaw)whichwatercompanies must meet. Read more at: gov.uk/defraThe Environment Agency controls how much water can be drawn from the environment and the quality of water returned to rivers andthesea.TheEAproducesanassessmentof water and wastewater companies’ annual performance, and we include this as one of ourKPIs,seepage32.Readmoreat:gov.uk/government/organisations/environment-agencyThe Drinking Water Inspectorate is responsible for ensuring compliance with the drinking water quality regulations. Read more at: dwi.gov.ukNatural 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. Read more at: naturalengland.org.ukThe Consumer Council for Water (CCW) represents customers’ interests relating to price, service and value for money. It investigates customer complaints. Customers who remain dissatisfied can refer their complaint to be adjudicated by an independent service, WATRS (see below). Read more at: ccwater.org.ukWATRS 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. Read more at: watrs.orgCompetitive environment TheotherwatercompaniesinEnglandandWalesarenaturallyour main competitors and we benchmark our performance on a comparative basis. Away from the water sector, in line with our vision to be the best UK water and wastewater company, we benchmark our customer service performance against other leading service providers inourregion.Inaddition,asapubliclylistedFTSE100company,the other UK and worldwide listed utilities are competitors from an investment perspective.Value creation 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 page 14, with the subsequent pages of this report mapping to its colour-coded sections.Read more about our Our competitive advantage on page 13Performance measurement 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 to deliver the best service to customers, at the lowest sustainable cost, in a responsible manner.Read more about our KPIs on pages 31 to 33Decision-makingSystems Thinking lies at the heart of our day-to-day decision-making, 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, communities and other stakeholders. For many years, we have included corporate responsibility factors as strategic considerations, supported by our corporate responsibility committee which is chaired by one of our non-executive directors.Read more about our Governance on pages 52 to 11721unitedutilities.com/corporate Stock Code: UU.Strategic ReportUnited Utilities AR2017 - Strategic.indd 2101/06/2017 17:36:24 Our business model
Economic environment
Changes in the economy, such as inflation, interest rates or
unemployment levels, can influence our ability to create value. While
they are outside of our direct control, we can mitigate some of the
potential adverse impacts associated with market movements, such
as on inflation and interest rates, through our hedging strategies.
Regional deprivation
In recent years, unemployment in the North West has generally been
higher than the national average. However, over the last year this
unemployment rate has improved faster than, and is now broadly
in line with, the national average. A report from the Department
for Communities and Local Government, published during 2015/16,
reaffirmed that the North West has the most deprived regions in
England, with three of the top five local authority districts with the
highest proportion of ‘highly deprived’ neighbourhoods (categorised
as the most deprived 10 per cent). Even as the North West’s 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
for 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.
United Utilities
supply area
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Deprivation scale
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Least
Pictured: Map of English counties ranked by multiple deprivation
index score. For more details visit gov.uk/government/collections/
english-indices-of-deprivation
Bad debt remains 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 continue to refine and enhance them
whilst also helping customers back into making regular payments
through the use of manageable payment plans.
Market rate movements
Interest rates have remained below the long-term trend and we have
benefited from this as we drew down, or raised, over £600 million of
new debt in 2016/17. Comparatively low interest rates have also been
beneficial to our future cost of debt as we continue with our interest
rate hedging strategy.
RPI inflation has risen since the UK voted to leave the European
Union, increasing to 3.1 per cent at March 2017, following on from
lower inflation over the last couple of years. However, RPI inflation
remains on the low side versus levels seen in the last 10 years. 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.
However, we 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
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.
Economic contribution
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
make purchases from their suppliers and when people, whose jobs
are supported by United Utilities, spend their personal incomes.
Social environment
We see some significant societal trends that we plan to address
in our long-term strategy.
Population changes
We anticipate an increase in the North West’s 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 by looking at new ways to help,
like the introduction of our social tariff in 2015, supporting older
customers. We are also adapting to the increasing use of social media
and digital technology by our stakeholders.
Investing in local communities
The communities in which we operate are of great importance to our
business – they are 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.
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Technological environment
Advances in technology can be used to help deliver improvements
inthequalityorcostofourservice.Embracinginnovation,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.
Energy generation
We have 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
ChemicalEngineersawardforinnovationin2013/14.Thenin2015/16
webuiltEurope’slargestfloatingsolararraysystemonourreservoir
in Godley, Greater Manchester.
Technological risks
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.
Changing customer behaviours
We must be mindful of our customers’ ever increasing use of
technology. We have recognised the increasing power of social media
as communication channels for customers, and we recently invested
in a new digital external communications capability and a number of
website improvements.
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Delivering our digital strategy
Four years ago we began a journey to improve our core IT
provision and develop the deep foundations necessary for a
relevant and efficient digital water and wastewater business.
During 2016/17, non-household competition provided an
opportunity to demonstrate and leverage our investment in
digital foundations and our capability with data. We delivered a
business-to-business digital integration platform which connects
United Utilities wholesale systems to the market operator of
England'snon-householdwatermarket(MOSL)andmarket
participants. Our data analytics investments delivered high data
completeness scores for market entry and continue to support
our market activities. This enabled United Utilities to enter
‘Shadow Operations’ with live transactions in October 2016 and
successfully complete full market opening in April 2017.
In addition, we are driving forward a digital strategy which
has seen us deliver new handheld smartphone devices and
applications to employees across job functions to provide
data at the point of need and to establish the foundation
for future rapid delivery of digital apps. This improvement is
already changing the way we think about data and processes
and enabling new innovation and improvements which were
previously too complex or costly to implement.
As part of our market readiness systems, we use simple robotic
processautomation(RPA)techniquestoimprovetheefficiency
of case creation by automating high frequency tasks triggered
bymarkettransactions.ThisearlyuseofRPAhastaughtussome
useful lessons and helped inform our next steps in the practical
use of software robotics and automation. We will use this
learning to drive greater efficiency, quality and optimisation of
our back office process.
To continue the improvement of our customer experience,
we are investing in digital channels for our household retail
customers including a new internet site, automated speech
recognition and a customer mobile app.
We continuously track developments in technology, which could
help our digital journey, and are investing in innovation to make
sure we develop and exploit new technologies to maximum
benefit. Specifically, we are investing in concept work around
the use of Internet of Things (IoT) sensors and data analytics
to enhance situational awareness and available data more
dynamically with increased cost efficiency. We believe the use of
this technology will unlock new automated and predictive ways
of working and allow us to deliver better outcomes for all of our
stakeholders.
Pictured: Our new mobile app allows customers to pay their bill and
give a meter reading via their smartphone.
Stock Code: UU.
unitedutilities.com/corporate
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Our business model
Internal environment
Governance
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.
Values and culture
Our culture is embodied in our three core values of customer focus,
integrity and innovation, and we operate under these three core
values at all levels of our business.
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 observe
sound and prudent governance in compliance with the principles of
the UK Corporate Governance Code.
Prudent risk management
As would be expected 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.
Given the complex legal and regulatory environment within which
we operate, we are exposed to a range of risks. 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,
and we face risks in relation to potential future changes in legislation
or regulation, as well as from environmental impacts such as
climate change.
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 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
principal risks and uncertainties.
Identifying and then being able to act upon potential opportunities
canbeakeydeterminantforaddingvalue.Everyquarter,senior
management across each main area of the group routinely
undertakes business reviews, including the identification and
evaluation of potential opportunities.
We are committed to delivering our services in a responsible way
and our approach to responsible business practice is outlined in
ourBusinessPrinciplesdocumentavailableonourwebsiteat:
corporate.unitedutilities.com/united-utilities-business-principles
These core values are interrelated, as innovating to improve our
services and acting with integrity in the way we carry out our
activities all help us to continue to improve customer service.
Customer focus
Everythingwedowillbeaboutourcustomers,notus.
Over recent years, we have instilled a more customer-centric
approach right across our organisation, and this evolving culture has
been a key driver in the major improvements in customer service we
have been able to deliver.
Puttingcustomersrightattheheartofwhatwedohasalsohelped
deliver benefits for shareholders and wider stakeholders.
Integrity
We will make promises knowingly and keep them.
Acting with integrity, both at board level and as a company, underpins
our approach to responsible business and building trust. We actively
encourage our employees to express their opinions and ideas through
various engagement and social channels, such as our annual ‘Your
Opinion Survey’, through news articles on our intranet, and on our
social media collaboration tool Yammer.
Innovation
We will innovate to make our services better, safer, faster and
cheaper for our customers.
Innovation is a critical enabler in creating value, helping us to be
ahead of our competitors, and we welcome ideas on how we can
innovate across all levels of our business.
Our employees are given the opportunity to develop and present
their ideas to senior management, facilitating and encouraging an
innovative environment.
Utilising innovation from our suppliers is part of our supply chain
approach, which provides another avenue to benefit from new ideas
and technologies.
Read more about our Governance on pages 52 to 110
Read more about our Values and culture on page 65
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Business insight
Challenging our graduates to innovate
TheannualCEOChallenge,opentofirstandsecondyear
graduates, aims to find practical, innovative solutions to real
business problems.
Our graduates are our thought leaders of the future and it is this
population that participates in the challenge. The programme
provides graduates with a unique, exciting experience and the
opportunity to manage and implement their own live projects.
They have to secure financial backing, work with internal and
external stakeholders, control budgets, manage a project and get
to grips with the technical details, in a short period of time.
The programme provides a safe learning environment for
graduates in which they can thrive and deliver great solutions for
the company. Graduates get exposure to senior leaders and to
partsofthecompanytheywouldnotnormallyencounter.Past
participantsagreethattheCEOChallengeisexcellentfortheir
personal development.
Our innovation team is on hand to offer guidance and support
throughout the activity to ensure projects align to our business
strategy and that the solutions provide a viable benefit to the
business and to our customers.
The teams present their findings to a judging panel including the
CEOandtheHeadofInnovation.Awinningteamisselected
and there are also individual awards and incentives to recognise
high performance. For example, one 'rising star' award-winning
graduate,fromlastyear’sCEOChallenge,isnowworkingdirectly
forourCEO.
Any team that develops a successful project has the opportunity
to implement this into the business. There have been a number
of projects that have delivered proven business benefits and are
now rolled out across the organisation. Some examples are:
TechTool – used to determine appropriate options for performing
rising main condition assessment and likelihood of failure.
This has enabled the business to better inform maintenance
investments and interventions regarding rising mains. It is now
being utilised on an ongoing basis by the business.
Odowatch (the electronic nose) – a tool used to help us detect
potential for odour problems early on, allowing us to act before
our customers are affected.
Domestic Fats, Oils and Greases (FOG) campaign – with the help
of FOG funnels distributed to employees and, in collaboration
with Sainsbury’s, to our customers we were able to collect around
3,000 litres of FOG.
Pictured:SteveMogford(centre)presentstheCEOChallengeAwardtothisyear'swinningteamofgraduates.
Stock Code: UU.
unitedutilities.com/corporate
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Our business model
Planning – key milestones
P L A N (25, 5, 1 year)
2017
2020
Our non-household retail JV, Water
Plus, was operational and ready for
the market opening to competition
Over 90 per cent of meters will
be automatically read
We will reduce, by more than 40
per cent , the number of properties
flooded internally by sewage
Wholesale
Water
Wholesale
Wastewater
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Thinking
Household
Retail
O
D
United Utilities
non-household
retail operations
Severn Trent
non-household
retail operations
2020+
We will continue to improve bathing
waters to at least ‘sufficient’ or
‘good’ status
Planning cycles
We have structured our business in line with Ofwat’s four distinct price
control areas:
2025
We will extend our integrated water
supply network into West Cumbria
› Wholesale water;
› Wholesale wastewater;
› Householdretail;and
› Non-household retail.
2027
We will improve all inland rivers to
be at least ‘good’ status
2030
We will work with others to achieve
‘Blue Flag’ beaches along our coastline
2040
We will serve 600,000 more
households in the North West
We will install 3 million extra
water meters, covering 76 per cent
of households
The non-household retail area is now subsumed within our joint
venturewithSevernTrent,WaterPlus.Whilewecaninfluenceit,we
cannot control it. It is not part of our consolidated group, therefore it
does not form part of our group’s business model.
The three business areas within our business model (wholesale water,
wholesale wastewater, and household retail) undertake both long-
term and shorter term planning to identify how they can best deliver
their 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 take
into account the internal and external factors described on pages
18 to 24. Underpinning our approach to planning, we undertake a
cycleofcontinuousassessmentusingKPIs,andotherperformance
measures, which helps us formulate our future improvement plans
for our various stakeholders.
Wholesale business areas
Allofthegroup’sRCV,ofjustover£10billion,sitswithinthe
wholesale water and wholesale wastewater business areas, and we
are allowed to earn an annual return on this asset base on the basis
of an industry-allowed cost of debt and equity set by Ofwat. Allowed
costs for both of these 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.
Retail business areas
Allowed costs within the household retail price control are
determined using a water industry average cost to serve approach,
rewarding companies who are able to achieve costs below the
industry average. The opening of full competition in the non-
household retail price control from 1 April 2017 provides a strong
incentive for water companies to deliver efficiencies and service
improvements in that area.
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Planning 25 years+
We provide an essential service and in order to maintain a reliable,
high quality water service for our customers, we have to look a long
way ahead, to anticipate and plan for the changes and core issues
that are likely to impact on our activities. Our long-term strategy then
helps us to define what we need to deliver over the shorter term,
which in turn helps to create value.
Over 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;
› population growth;
› the implications of the UK’s exit from the European Union; and
› combining affordable bills with a modern, responsive service.
By anticipating and planning ahead, we can ensure that we continue
to deliver what customers want at a fair price and in a responsible
way, in line with our three strategic themes.
Our Strategic Direction Statement, ‘Playing our part to support the
North West’, sets out our long-term strategy for the next 25 years,
examining the challenges ahead and how we will focus our resources
and talents in order to meet them.
We consulted with thousands of customers and other stakeholders to
ensure their expectations are reflected in our plans.
Our 25-year Water Resource Management Plan sets out the
investment needed to ensure we have sufficient water to continue
supplying our customers, taking into account the potential impact of
climate change.
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Some of the key ways we create value over the long-term are by:
› investing in our people to ensure a committed, capable
and motivated workforce delivering high performance;
› close collaboration with suppliers and disciplined investment,
based on a sustainable whole-life cost modelling;
› efficiently implementing a robust and appropriate mix
of debt and equity financing;
› 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.
Read more online at corporate.unitedutilities.com/future
Business insight
Supporting Defra's approach to
the natural environment
Defra has established 'Pioneer' projects to explore, test and trial
aspects of its approach to making the country the healthiest and
most beautiful place to live, work and bring up a family, not just
for today but for generations to come. The aim is that we will be
the first generation to leave the natural environment of England
in a better state than we found it. The Pioneer projects will:
› test new tools and methods that apply a natural capital
approach in practice;
› demonstrate a joined-up integrated approach to delivery;
› pioneer and ‘scale-up’ the use of new funding opportunities;
and
› grow our understanding of ‘what works’, sharing lessons and
best practice.
These four ‘asks’ form the basis of the Pioneers and each will
seek to apply them within their respective environments (urban,
catchment, marine and landscape). It is a principle of the Pioneers
that they will need to be flexible and adaptable, trying new and
innovative thinking and approaches and share the learning widely
with others as they progress.
It is also a principle that the ways of working developed as part
of the Pioneers utilise existing resources or secure new funding
sources to deliver environmental outcomes. The aim is that
others can then replicate what is achieved.
We are actively supporting the two Pioneers that are just starting
out in the North West. The urban Pioneer is set in the Greater
Manchester City Region and the catchment Pioneer is being
piloted in Cumbria. We will be contributing resources to both
groups, as water is a key element of the natural environment,
and the intent of the Pioneers supports our customer promise of
protecting and enhancing the environment.
The purpose of the Cumbria Pioneer is to build on the work that
has already been completed in the county, working together with
partners and communities to share knowledge, learn lessons
and encourage innovative ways of improving and investing in the
environment.
The purpose of the Urban Pioneer is to make a clear and evident
contribution to Greater Manchester’s natural environment,
engaging and connecting people with nature in their city,
maximising their health and economic benefits through
investment in the environment, creating sustainable growth and
a good quality of life. It will support communities and decision-
makers across Greater Manchester as they work to improve the
environment, focusing on the local challenges and situations.
Stock Code: UU.
unitedutilities.com/corporate
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Our business model
Planning 5 years
Eachfive-yearregulatoryperiodisdesignedtohelpusachieveour
long-term vision.
Bysubmittingarobust,balancedplantoOfwat,priortothestartof
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, that contract by providing
the best service to customers, at the lowest sustainable cost, in a
responsible manner.
Our five-year plan for 2010-15 focused on improving customer
satisfaction, meeting our statutory obligations and delivering
shareholder value. We delivered on each of these, providing us with a
strong platform to deliver further in 2015-20.
For the current 2015-20 regulatory period, some of the key ways in
which we are aiming to create value are:
Improve customer service – improving efficiency and reducing costs,
as well as improving our SIM performance to increase rewards /
reduce penalties from Ofwat.
Enhance our debt collection activities – reducing retail costs, whilst
providing the best support for customers struggling to pay.
Minimise total costs on a sustainable basis – for example, power,
materials and property rates, which will help us to meet or
outperform our allowed totex costs.
Raise low-cost finance – helping us to outperform our allowed
finance costs, which is our main area of outperformance potential in
this period.
Deliver our operational and regulatory commitments – helping
to ensure we achieve high levels of customer service and meet
environmental standards as well as improving our ODI performance
to increase rewards / reduce penalties from Ofwat, in areas such
as reliably delivered high-quality water, and reducing pollution and
sewer flooding incidents.
Implement our hedging strategies – fixing medium-term interest
rates and power costs helps us to meet our allowance by reducing the
volatility of these costs.
Increase our production of renewable energy from waste –
protecting us from rising energy costs and reducing our
carbon footprint.
Maintain a robust supply/demand balance – providing water
resource and customer supply benefits, as well as avoiding any
penalties or unfunded expenditure requirements from our regulators.
Supporting this value generation, each of our 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.
Limittheimpactoncustomersofincreasesinoperatingcosts,suchaschemicalsandrates,bymakingcostsavingselsewherethrough
continuous improvement in the efficiency of our operations.
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
Buildonthecustomersatisfactionimprovementswehavealreadydelivered.Continuetoimprovethewayweoperate,makingbetteruseof
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 to meet tougher regulatory standards, and work with other organisations to support them in delivering
improvements to our region’s beaches.
Improve 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.
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.
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Household 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 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 return to sustained
payment behaviour. We are extending our options for assistance to hard-pressed customers, including the social tariff, and we remain
committed to contributing to the United Utilities Trust Fund, which has proven effective in helping customers in difficulty return to regular
payment.
Reduce the cost to serve our customers through systems and process improvements. 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.
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Planning 1 year
Eachfinancialyear,wedevelopabusinessplanwhichisapprovedbytheboard.Thissetsourannualtargetswhicharedesignedtohelpdeliver
further improvements and move us towards achievement of our five-year goals.
Our business plan covers a broad range of measures across the three strategic themes: The best service to customers, at the lowest sustainable
cost, in a responsible manner.
Performance monitoring
Senior management has quarterly business review meetings with the executive directors to monitor and assess our performance against these
measures, helping to ensure that we are on track to deliver our targets.
Performance measurement
At the end of every financial year, our performance is assessed against these 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 2016/17 annual bonus and vested long-term incentive plans for our executive directors are shown on pages 99 to 101
respectively within the remuneration report.
Read more about KPIs on pages 31 to 33
The diagram below shows how our strategic themes flow through each planning cycle and help us work towards our vision.
s e r v i c e t o c u s t o m e r s
T h e b e s t
At the lowest sustainable cost
In a responsible manner
25-year planning
5-year planning
1-year planning
Vision: to be the best UK water and wastewater company, providing great service to our customers
Stock Code: UU.
unitedutilities.com/corporate
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Our business model
Systems Thinking
Underpinning the improvements in our operational performance is
our drive toward Systems Thinking. This means thinking of our entire
network of assets as one big system, and managing it as such.
In this regulatory period, we are investing in our new wholesale
operating model and are progressing the roll-out of this unique
capability. Our production line model is well established, and we
opened our Integrated Control Centre (ICC) in April 2015. This has
increasingly become 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.
Watch our short video at
unitedutilities.annualreport2017.com
Business insight
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, and we have
improved asset availability.
We are using more sensors in our network and better analysing other
data, such as weather forecasting, to help reduce costs, 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.
Taking a system-wide approach to sludge treatment
We have a number of sludge treatment facilities across our wastewater production line. These facilities take the sludge produced at our
wastewatertreatmentworks,eitherdeliveredbyroadtankerorviaasludgepipenetworkthatconnectsEastManchesterandLiverpool
to our strategic facilities in Manchester and Widnes, and treat it to recover renewable energy and make the sludge safe for disposal
back to the environment, typically as a fertiliser.
Traditionally, this operation was managed in a reactive manner,
with decisions based on little data and made locally at individual
sites. Few facilities had the right tools to be able to optimise their
activities, meaning we had no capability to plan or manage our
sludge operations optimally across the region. This often led to
capacity bottlenecks and sub-optimal logistics activities.
TheRegionalSludgeOperationsManagement(RSOM)Project
has built on the existing technical capabilities available to our
Integrated Control Centre (ICC), and site operations teams,
to deliver new tools, process and skills. It has also delivered
a modelling tool that enables regional throughput and asset
utilisation to be optimised through visibility of both current
performance and availability of sludge treatment facilities. This
enables system-wide choices to be made about where sludge,
from across the region, is sent for treatment and energy recovery.
ThetechnicalcapabilitiesmeanthatourSludgeProduction
PlanningteamintheICCisabletovisualiseandunderstandthe
capacity of each of our sludge treatment facilities and the forward
looking forecast information from local operations teams. The
team then matches production forecasts with available capacity
and performance to ensure that decisions about where sludge
is sent for treatment are balanced between the costs of sludge
transportation and the cost of sludge treatment and disposal
and take into account the efficiency of specific energy recovery
methods.
Taking this system-wide approach, and optimising our regional
operations from our ICC, means we are able to maximise the
value of the sludge produced at our wastewater treatment
works whilst ensuring that we meet the strict environmental
standards for sludge disposal. It also helps maximise the amount
of renewable energy generated, an important contribution to
helping us meet our carbon reduction targets.
Pictured: dashboard showing real-time gas consumption at our
sludge treatment facilities.
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How we measure our performance
Strategic themes and outcomes
Bydeliveringourstrategytocreatesustainablevalueinboththelongandshort-term,weaimtodeliverthefollowingkeyoutcomesforour
stakeholders, in line with our strategic themes:
The best service
to customers
Provide great water
› Drinking water is safe and clean
At the lowest
sustainable cost
Value for money
› Customer bills are fair
› Customers have a reliable supply of water
› We support customers who are struggling
now and in the future
to pay
› The North West’s economy is supported
by our activities and investment
Improved efficiency
› Our services are provided in an
increasingly efficient way
› Efficienciesaredeliveredinasustainable
way taking a long-term view
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
In a responsible
manner
Protect and enhance
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
› Providesafe,secureworkingconditions
› Providecompetitiverewardstoattract
and retain employees
› We invest in the learning and
development of our employees
Provide an appropriate risk and return for investors
Our key performance indicators (KPIs)
To help measure our progress on how well we are adding value for our stakeholders and delivering the outcomes described above, we focus on
arangeoffinancialandoperationalKPIs,asdefinedonthenextpage.TheseKPIsaresetforthefive-yearplanningperiodandencompassthe
important areas of customer service and environmental performance, as well as financial indicators, taking into consideration the interests of
allourstakeholders.StrongperformanceacrosstheseKPIswouldindicatethatourstrategyisdeliveringonourtargetedoutcomes,helpingus
on our path to reaching our long-term strategic goals.
OurfinancialKPIsarethesameasforthepreviousyear,andouroperationalKPIsarethesameasforthepreviousyear,withtheexceptionof
theKPIrelatingtothenon-householdretailpartofthebusiness.Asthisisnowunderourjointventure,thenon-householdpricecontrolisno
longerwithinourconsolidatedgroupandwenolongerincludethisasoneofourKPIs.
Ourexecutivebonusesandlong-termincentivesarecloselyalignedtoourfinancialandoperationalperformanceKPIs,ashighlightedinthe
remuneration report on pages 86 to 109.
Stock Code: UU.
unitedutilities.com/corporate
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How we measure performance
Operational KPIs
These operational KPIs feed through from our three strategic themes to deliver the best service to customers, at the lowest sustainable cost, in a
responsible manner.
KPI
The best service to customers
Target
Performance
Status Linked to bonus/LTP
2016/17: £6.7 million net reward
2015/16: £2.5 million net reward
Bonus – direct
LTP – indirect
Wholesale outcome delivery incentive (ODI)
composite
Net reward/(penalty) accrued across United
Utilities’ 19 wholesale financial ODIs
Range of +£30 million
to -£50 million over
2015-20
Service incentive mechanism – qualitative
Ofwat-derived index based on quarterly customer
satisfaction surveys, measuring the absolute and
relative performance of the 18 water companies.
Each company receives a score in the range of zero
to five, with five being the highest attainable score
To move towards the
upper quartile in the
medium-term
4.42
4.27
4.24
16/17
15/16
14/15
Sector best
Sector worst
16/17
77
15/16
14/15
95
99
Sector best (see note 1)
Sector worst (see note 1)
To move towards the
upper quartile in the
medium-term
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 £300 million
target
To minimise costs
compared with
Ofwat’s revenue
allowance
2016/17: £14 million
outperformance
2015/16: £10 million
outperformance
Service incentive mechanism – quantitative
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. Each company
receives a SIM point total, where the lowest score
represents the best performance
At the 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
Household retail cost to serve
Cost to serve in our household retail business
compared with Ofwat’s revenue allowance
In a responsible manner
Leakage – average annual leakage
Average annual water leakage from our network
quantified in megalitres per day
To meet our regulatory
leakage target, as set
by Ofwat
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
To be a first quartile
performer on a
consistent basis
Dow Jones Sustainability Index rating
Independent rating awarded using sustainability
metrics covering economic, environmental, social
and governance performance
To retain ‘World Class’
rating each year
2016/17: 441Ml/d – Met target
2015/16: 463Ml/d – Met target
2014/15: 454Ml/d – Met target
2013/14: 452Ml/d – Met target
2012/13: 457Ml/d – Met target
15/16*
14/15
13/14
12/13
11/12
Joint 2nd
2nd
2nd
2nd
3rd
*2015/16 latest available assessment
2016/17: ‘World Class’
2015/16: ‘World Class’
2014/15: ‘World Class’
2013/14: ‘World Class’
2012/13: ‘World Class’
Note 1: Sector best and worst on quantitative SIM based on datashare of 13/18 water companies (using 12 month actuals).
Bonus – direct
LTP – direct
Bonus – direct
LTP – direct
Bonus – indirect
LTP – indirect
LTP – indirect
Bonus – indirect
LTP – indirect
Bonus – indirect
Bonus – indirect
Bonus – direct
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Financial KPIs
InrespectofourfinancialKPIs,weuseunderlyingprofitmeasuresastheseenablemoremeaningfulcomparisonsoftheyear-on-year
performance of our business.
KPI
Revenue £1,704 million -1.5 per cent
A definition of revenue is included within the ‘Accounting
policies’ note on page 165
Underlying operating profit £623 million +3.1 per cent
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 pages 44 to 45
Underlying earnings per share 46.0 pence -3.6 per cent
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 pages 44 to 45
Dividend per share 38.87 pence +1.1 per cent
This measure divides total dividends declared by the average
number of shares in issuance during the year
Gearing: net debt to RCV 61 per cent +1.0 per cent
Group net debt (including derivatives) divided by UUW’s
regulatory capital value (for 2016/17 this uses shadow
RCV,adjustedforactualspend,whilstprioryearsused
Ofwat’spublishedRCVinoutturnpricesasperprevious
methodology). Our target range is 55 per cent to 65 per cent
Performance
Status
16/17
15/16
14/15
13/14
12/13
16/17
15/16
14/15
13/14
12/13
16/17
15/16
14/15
13/14
12/13
16/17
15/16
14/15
13/14
12/13
16/17
15/16
14/15
13/14
12/13
£1,704m
£1,730m
£1,720m
£1,689m
£1,636m
£623m
£604m
£664m
£635m
£604m
46.0p
47.7p
51.9p
44.7p
38.7p
38.87p
38.45p
37.7p
36.04p
34.32p
61%
61%
59%
58%
60%
Feeds into bonus / LTP
Bonus–indirect
LTP–indirect
Bonus–direct
LTP–indirect
LTP–indirect
LTP–direct
Note2:ForbothourOperationalandFinancialKPIs,wherewehavedeclaredexternaltargetsweassessourperformanceagainstthesetargets.Wheretherearenoexternally
declared targets we assess our performance against our internal budget, however our internal budget is not disclosed.
Note 3: In some instances the remuneration committee has used metrics with similar names but calculation methodologies which they consider more appropriate for
executive remuneration, as set out in the remuneration report on pages 98 to 109.
Stock Code: UU.
unitedutilities.com/corporate
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Our performance in 2016/17
Operational performance
The best service to customers
Customer service – sitting at the core of everything we do, our
strong focus on customer service has helped us deliver substantial
improvements in recent years, becoming the most improved
company in the 2010-15 period with a reduction of around 75 per
cent in the overall number of customer complaints.
This year we re-energised our approach and have seen another
upturn in customer satisfaction. In 2016/17 we delivered our best
ever scores under Ofwat’s qualitative Service Incentive Mechanism
(SIM) measure, placing us above the industry average for the full year,
and ending the year as a leading company in the sector. Customer
complaints in 2016/17 were considerably lower than last year with a
27 per cent year-on-year reduction and a 55 per cent reduction in the
circumstance where an issue is not resolved at first contact.
We introduced a number of innovations over the year, setting new
benchmarksforthesector.Oneofthemostsuccessful,Priority
Services, provides more targeted support for customers experiencing
short or long-term personal or financial difficulties in their lives,
with tailored assistance for customers. Since its launch in May 2016,
we have seen more than 11,000 customers register for this service,
supplementing the wide range of initiatives we already
offer customers struggling to pay, in order to help them return to
regular payment.
Our new customer website was designed to improve accessibility and
ease of use following extensive research and customer engagement,
includes web chat services across extended hours, and is mobile-
enabled to accommodate customers’ increasing use of mobile devices
to access day-to-day online services. Additionally, we have recently
launched the first fully interactive and real-time customer app in
the sector.
Improving customer service will continue to be a key area of
focus, and our new management team has identified a range of
opportunities to deliver further benefits for our customers.
Leading North West service provider – we are consistently ranked
third out of ten leading organisations in the North West, through an
independent brand tracker survey which is undertaken quarterly.
This covers key attributes such as reputation, trustworthiness and
customerservice.WearebehindonlyMarks&SpencerandJohn
Lewis,andaheadofsevenothermajororganisationscovering
utilities, telecoms, media and banking services.
Robust water supply – our customers benefit from our robust water
supply and demand balance, along with high levels of water supply
reliability. Our overall water quality continues to be good, and
although our water quality service index has slightly deteriorated
from a very good performance in the prior year, it remains above our
historical average and we have plans in place to deliver improved
performance going forwards. We have consistently delivered a
reliable water service, although we experienced some water no-
supply incidents in 2016/17. Whilst this is disappointing, our Systems
Thinking approach is helping us to respond to these events and avoid
them in future.
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
toexperiencefloodinganddefectidentificationthroughCCTV
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.
Key performance indicators:
Outcome delivery incentives (ODIs) – we have 19 wholesale financial
ODIs and, as outlined last year, the risk is skewed to the downside
with 10 attracting a penalty only.
Whilst a number of our ODI measures are susceptible to one-off
events and, on the whole, our ODI targets get tougher each year,
our performance in the first two years of this regulatory period has
now delivered a cumulative net reward of £9.2 million, exceeding
our initial expectations. This gives us confidence to narrow our target
range for the cumulative net ODI outcome over the 2015-20 period to
between plus £30 million and minus £50 million.
In 2016/17 we have achieved another net reward of £6.7 million,
exceeding our initial expectations and demonstrating the
effectiveness of our planned acceleration of capital expenditure in
this regulatory period, alongside our Systems Thinking and innovative
approach to the way we operate.
We were particularly pleased this year with the significant
improvements made against our leakage targets and have continued
to perform well against private sewers and pollution incidents. Our
sewer flooding ODI remains challenging as the target becomes
increasingly tougher as we progress through this regulatory period.
This meant that we received a small penalty this year despite having
improved our overall performance compared with the prior year. Our
main areas of reward came through our good performance in the
areas of leakage, private sewers and pollution, with our main penalty
being on reliable water service and water quality service.
Service incentive mechanism (SIM) – last year we stated our target
was to move towards the upper quartile in the medium-term, and
we are particularly pleased with the progress we have made this
year, which saw us ending the year as a leading company in our peer
group.
Qualitative: Ofwat has undertaken the four surveys for 2016/17 and
United Utilities has improved its score to 4.42 points, compared with
4.27 points in 2015/16, putting us in joint 6th position for the year
out of the 18 water companies, and joint 3rd position out of the
10 companies providing both water and wastewater services. We
ended the year with our highest ever score of 4.56 in wave 4, which
placed us in equal 3rd position in this wave, and 2nd position out of
those providing both water and wastewater services. In particular,
customers scored us highly for our billing and wastewater services.
Quantitative: the quantitative assessment measures customer
contacts, and performance is assessed on both an absolute and
relative basis. Whilst relative performance can only be assessed
in full following the end of each full financial year when the
other companies publish their respective results, on absolute
performance for 2016/17, our score of 77 points represents a marked
improvement on our 2015/16 score of 95 points, and of the 13
companies who share data on quantitative scores for the full year,
this placed us in 4th position out of the 13 and 1st of the 8 water and
wastewater companies in this data share.
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25192.04 – 1 June 2017 4:17 PM – Proof 3Business insightPriority Services – giving extra help where it's neededWe recognise that customers, at whatever stage of life they are, may face challenges and need help and support to deal with them. It could be that they’ve suffered a life event, or have health or financial issues. While we already offered help to customers struggling to pay their bills, we acknowledged that there was more we could do to ensure support was accessible to a wider group of customers perhaps dealing with a broader set of challenges. In response, in May 2016, we launched our special assistance scheme –PriorityServices.Priortolaunchingtheservice,wespentvaluabletimeunderstanding the lessons from similar schemes already operating in the wider marketplace, to make sure we benefited from best practice and external guidance. Working closely with Age UK, MIND, The Alzheimer’s Society and CitizensAdviceBureau,todeveloptheservice,weidentifiedfourbroad categories, or possible risk factors, of vulnerability: ›physical – e.g. disability, illness or mental health issues; ›financial – suffering from financial stress or disadvantaged due to financial circumstances; ›language–Englishnotfirstlanguageorthosewithliteracyornumeracy needs; and ›life events – such as bereavement or job loss. We appreciate that customers may experience one, or a combinationofcircumstances,soourPriorityServicesschemeisdesigned to understand their particular needs in order to provide the right help.From the start, we felt this was a proposition which required the personaltouch,socustomerswhoregisterforPriorityServicesarelooked after by a specialist team.ThroughPriorityServices,wecanhelpcustomersinanumberofways: ›allow customers to nominate a carer or family member to discuss their account; ›‘knock and wait’ alert so we know that if we do call at their home, that we need to give them extra time to get to the door; ›a text relay service; ›braille, large print, talking bills; ›a password scheme; ›translation services; ›dedicated webchat for those more confident online; ›help and notification during water and wastewater network issues, such as providing bottled water for those who need it when we have water supply problems; ›support for dialysis patients; ›water meter help; and ›a range of broader financial assistance schemes. TheyearaheadwillseeuslaunchingPriorityAmbassadors,equipping our volunteer employees with training and materials to enable them to encourage more sign-ups in their own communities. We are training field-based employees and third party contractors to better spot and support those customers who need extra support.Therearenow30,000customersregisteredforPriorityServicesacross the North West.Watch our short video on priority services at unitedutilities.annualreport2017.com/strategic-report/our-performance-in-201617/operational-performance35unitedutilities.com/corporate Stock Code: UU.Strategic ReportUnited Utilities AR2017 - Strategic.indd 3501/06/2017 17:36:38 Our performance in 2016/17
We have continued the planned acceleration of our 2015-20
investment programme in order to improve services for customers
and deliver early operational and environmental benefits. Regulatory
capital investment in 2016/17, including £148 million of infrastructure
renewals expenditure, was £804 million, in line with our expectations.
This, combined with £799 million invested in 2015/16, brings our
total spend to around £1.6 billion of our planned £3.6 billion capital
investment across the 2015-20 period.
We are also driving more effective and efficient delivery of our capital
programme and applying a tougher measurement mechanism to our
Time, Cost and Quality index (TCQi) score for this regulatory period.
Despite this tougher approach, our TCQi score remains high at 93
per cent which represents a very good performance, improving from
what was already a good performance at 90 per cent in 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 minimising our cost of debt
compared to Ofwat’s industry allowed cost.
Total expenditure (totex) performance – although our totex
allowance for the 2015-2020 period is challenging, we are
implementing a range of initiatives and are confident of meeting our
target of delivering our promises to customers within the cumulative
2015-20wholesaletotexfinaldeterminationallowance.Progressin
the first two years has been good and we remain on track to meet the
five-year target.
Domestic retail cost to serve – overall, it will be very challenging to
meet the regulatory assumptions for domestic retail costs. This is
primarilyduetoOfwat’spricereviewmethodologyatPR14which
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 and, despite the challenging target, we
have delivered a good performance in 2016/17, outperforming this
year’s revenue allowance by around £14 million.
At the 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. In addition to the electricity we
generate from bioresources, we are developing other renewable
energy facilities. This is primarily in the area of solar, where we have
invested £45 million in the first two years of the 2015-20 period,
contributing towards our expected investment of over £100 million
across the five-year period. We have also substantially locked in
our power commodity costs across 2015-20, providing greater cost
certainty for the regulatory period.
Proactive network management – through our Systems Thinking
approach we are more proactive in the management of our assets
and networks. We aim to improve our predictive modelling and
forecasting through better use of sensors in our network and better
analysis of other data, such as weather forecasting, to enable us
to address more asset and network problems before they affect
customers, thereby reducing the level of reactive work and improving
our performance and 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 £5
million contribution in 2016/17. 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.
Reflecting our ongoing focus on bad debt through our new customer
facing management team and the penetration of our affordability
schemes, our household bad debt expense has reduced to 2.5 per
cent of regulated revenue from 3.0 per cent last year.
Pensions – United Utilities has taken progressive steps to de-risk its
pension provision. The group had an IFRS retirement benefit surplus
of £248 million as at 31 March 2017, compared with a surplus of £275
million as at 31 March 2016. Further details of the group’s pension
provision are provided in the pensions section on page 43.
Ongoing formal consultations continue regarding proposed changes
to the group’s pension schemes.
Capital delivery and regulatory commitments – we are strongly
focused on delivering our commitments efficiently and on time,
and have a robust commercial capital delivery framework in place.
Across the 2015-20 regulatory period, we are working with a single
engineering partner and four design and construction partners to
deliver our regulatory capital investment programme of c£3.6 billion.
We are involving our partners much earlier in project definition and
packaging projects by type, geography and timing in order to deliver
efficiencies.Projectsareallocatedonanincentiveorcompetitive
basis leading to our partners presenting a range of solutions,
innovations and pricing.
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Business insight
Design for Manufacture
and Assembly – a new
approach
United Utilities has a significant and challenging capital
programme to deliver. Our wholesale operating model/Systems
Thinking approach is a radically different way of working and
involves investment in a comprehensive set of operating
capabilities.
Day 1
New thinking is not just limited to the way we run our business,
it extends to how we design and build our assets, embracing the
innovation available from the supply chain.
Day 2
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Traditional on-site manufacturing can be noisy and disruptive
for our customers and neighbours and it can be expensive
to remove the inherent safety risks with being on busy
construction sites. Designing and building off-site in a factory
reduces our customer disruption and reduces the on-site safety
risk.
One innovation from the supply chain is Design for Manufacture
and Assembly (DfMA). DfMA is a new way of thinking about how
we design and build new assets. It involves the digital design
and prefabrication of a significant proportion of a project off-
site. We selected partners that had invested in these techniques
and our target is for more than 75 per cent of our projects in
AMP6toemploythisapproach–aimingtosave10percentover
traditional costs.
DfMA delivers improvements in safety, quality and maintenance.
It eliminates resource waste and reduces on-site build time.
We are targeting a total saving of 15,000 man days over this
five-year period, and have used DfMA across many areas – from
stairways to service reservoirs and from tanks to treatment
processes. All have been designed digitally, built in a safer
factory environment and delivered and assembled on-site.
DfMA supports product standardisation and we are increasingly
using common designs across our asset base, saving duplicated
design costs and offering production and maintenance
efficiencies. We are developing industry-leading standard
products accessible through a digital library for our supply chain
partners so we guarantee consistency and standardisation.
Other water companies are using DfMA and we compare
favourably to them in our DfMA strategy, ambition and
performance. Whilst we are encouraging the use of DfMA
on the majority of our projects, our showcase DfMA project
is our £200 million modernisation programme at our biggest
wastewatertreatmentworks,DavyhulmeinManchester.Here,
35 per cent of the construction project spend is in DfMA –
including 4,000 pre-cast panels assembled on site, halving the
duration compared to the traditional approach.
Day 3
Day 4
Pictured: After constructing the base of the settlement tank at
Davyhulme, the pre-cast panels go up in only four days. This
has halved the typical site construction schedule.
Stock Code: UU.
unitedutilities.com/corporate
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Our performance in 2016/17
In a 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
hasreceivedexternalrecognition.Earlierinthe2016/17financial
year, United Utilities retained its World Class rating in the Dow Jones
Sustainability Index for the ninth 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 Finance for the Future
Awards in October 2016, United Utilities won the international
Communicating Integrated Thinking award, following on from the
PwC2015BuildingPublicTrustAwardsinwhichUnitedUtilitieswas
selectedasjointwinnerforExcellenceinReportingintheFTSE100.
Leakage – we have a 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. This delivered a particularly good performance against
our leakage targets in 2016/17, delivering our largest ODI reward in
this area.
Environmental performance – this is a high priority for United
Utilities and we were encouraged to have been awarded Industry
LeadingCompanystatusintheEnvironmentAgency’slatest
performancemetrics,asdescribedintheKPIssectionbelow.
Carbon footprint – we are committed to reducing our carbon
footprint and increasing our generation of renewable energy.
Our carbon footprint has reduced by 22 per cent over the last 10
years. Our renewable energy production in 2016/17 was 149 GWh,
representing 18 per cent of our electricity consumption in the year.
This represents good progress over the last few years, up from 13
per cent in 2012/13, and we are implementing plans to significantly
increase self-generation over the next few years.
Employees – we continue to work hard to engage all of our
employees in the transformation of the group’s performance.
Employeeengagementwashighat89percentthisyear,broadlyin
line with last year on a normalised basis as we amended the question
structure slightly. 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
2016/17. We now have a total of 64 graduates and 119 apprentices
across the business. Our investment in recruiting graduates and
apprentices is already benefiting the company, with 122 of them now
having secured permanent roles across our business.
Over the last year, we have continued our sustained focus on health,
safety and wellbeing. In this period we retained our Gold award status
withtheRoyalSocietyforthePreventionofAccidentsaswellasthe
top place ranking on the Dow Jones Sustainability Index. Following a
four-day audit, we were also awarded the UK Workplace Wellbeing
Charter. Our contractor accident frequency rate is at its lowest ever
at 0.087 accidents per 100,000 hours. For the same period, our
employee accident frequency rate has increased to 0.196 accidents
per 100,000 hours, compared with a rate of 0.104 in 2015/16. We
recognise that we still have more to do, and 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. Our Catchment Wise
programme helps to tackle water quality issues in lakes, rivers and
coastalwatersacrosstheNorthWest,andourBeachcareemployee
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.
Pictured:Employeevolunteering,suchashelpingwithlocalclean-
ups, is an important part of how we support our communities.
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 an excellent performance
in 2016/17 and have again met our regulatory leakage target of 463
megalitres per day.
Environmental performance–ontheEnvironmentAgency’slatest
annual assessment, published in July 2016, we were awarded
IndustryLeadingCompanystatusacrosstherangeofoperational
metrics. This indicates we were in second position amongst the ten
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 2016/17, United Utilities retained its World
Class rating for the ninth consecutive year.
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Business insight
Adapting to climate change
The water sector is one of the most impacted by climate change
and this presents both risks and opportunities in the short,
medium and long-term.
Consequently, it features predominantly in our strategic thinking
and plans. Its impacts, whether relating to water resources or
flooding, are considered carefully by the board as highlighted
in the corporate governance report, on pages 82 to 84, and
management teams as highlighted in the planning section on
pages 26 to 29.
Throughout this report, we comment on what climate change
means to us and how we are responding. We have a well-
established framework for risk management – climate change is
one of many risks to our business so it is managed in the same
way as any other; see pages 46 to 49 for our risk management
approach. Comprehensive details can be found in our annual
disclosuretotheCDP and our 2015 adaptation report to
government where we disclose our climate-related risks and
managementplans.Bothofthesecanbefoundat:
unitedutilities.com/corporate
Predictedchangestorainfallpatternsaffectingwaterquantityand
increasing flooding risk from sewers are factored into our strategic
planning processes.
Our 25-year water resource management planning takes into
account the latest climate change models, including those which
contain scenarios for 2°C of global warming. This process means
we invest appropriately to ensure the resilience of water supplies,
balancing customer demand with the environmental impact
of abstraction. And, for times of rainfall shortage, we have a
comprehensive drought plan.
To manage situations of too much water, we’ve changed the
operation of some reservoirs to store increased volumes of
rainfall. We are also piloting predictive ways to manage our
wastewater network as highlighted on page 30. When severe
rainfall events are predicted, our aim is to proactively reconfigure
asset operation to handle the additional volume of water, either
eliminating or reducing the impact to our customers and assets.
We continue to focus on climate change mitigation, targeting an
emissions reduction of 50 per cent by 2020 from a 2006 baseline.
Our self-generation of renewable energy is now at 18 per cent
with a target to increase this to 35 per cent by 2020, subject to
good projected returns. This enhances security of energy supply,
provides a new income stream and reduces energy bills.
Effortscontinuetoreduceouroverallenergyconsumptiongiven
c70 per cent of carbon emissions come from electricity used,
primarily to power treatment works, where a further 20 per cent
of emissions arise from treatment processes. More information
can be found within our Carbon section on page 111. In addition,
we have embraced innovative practices such as dynamic demand,
being the first water company to sign up for National Grid’s
system to switch equipment off and on in response to changes in
electricity supply and demand nationwide, receiving payment for
doing so.
The response to climate change is a shared problem requiring
sharedsolutions.Thatiswhy,forexample,wefoundedBusiness
in the Community’s Water Taskforce, using an existing business
network to encourage organisations to take action to address
the water management challenges of too much, too little and
water of the right quality. For more information on the Taskforce
visit bitc.org.uk
Eachyear,wereportperformanceagainstasetofclimatechange
metrics covering carbon targets, water supply security and
flooding. These can be found in this report and on our corporate
responsibility webpages. Our belief is that in reporting what
we are doing to address both climate change mitigation and
adaptation, and by sharing our progress, we can encourage others
to work with us to act responsibly and take action.
Details of our 25-year water resource plan and corporate
responsibility can be found at
corporate.unitedutilities.com/corporate-responsibility
Pictured: Flooding at our water treatment works in Keswick following Storm Desmond.
Stock Code: UU.
unitedutilities.com/corporate
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Our performance in 2016/17
Financial performance
Highlights
Continuing operations
Revenue
Underlying operating profit(1)
Operating profit
Total dividend per ordinary share (pence)
RCVgearing(2)
Year ended
31 March
2017
£1,704.0m
£622.9m
£605.5m
38.87p
61%
31 March
2016
£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 pages 44 to 45.
(2) RegulatorycapitalvalueorRCVgearingcalculatedasgroupnetdebt/UnitedUtilitiesWater’sRCV(outturnprices).
Revenue
Revenue was down £26 million, at £1,704 million, reflecting the impact
ofourWaterPlusJV,whichcompletedonthe1June2016,partlyoffset
by our allowed regulatory revenue changes.
ThehigherRPIinflationchargecomparedwithlastyearcontributedto
the group’s average underlying interest rate of 3.8 per cent being higher
than the rate of 3.4 per cent for the year ended 31 March 2016. The
average underlying interest rate represents the underlying net finance
expense divided by average debt.
With regard to Ofwat’s revenue correction mechanism, relating to the
2014/15 financial year, we have £9.5 million to return to customers. As
we have previously indicated, we propose to return the £9.5 million to
customers through revenue reductions of c£3 million in 2017/18, c£3
million in 2018/19 and c£3 million in 2019/20 to help aid a smoother
bill profile.
Separately, consistent with Ofwat’s annual wholesale revenue
forecasting incentive mechanism (WRFIM), we will also be reducing
2017/18 revenue by £7 million as actual volumes in 2015/16 were
higher than our assumptions, increasing revenue by 0.4 per cent.
Operating profit
Underlying operating profit at £623 million was £19 million higher
than last year. This reflects our allowed regulatory revenue changes,
a reduction in infrastructure renewals expenditure, an improvement
in our bad debt charges and a small reduction in the remaining cost
base,partlyoffsetbytheaccountingimpactofourWaterPlusJV.The
JVcompletedon1June2016and,fromthatdate,itscontributionisno
longer included within operating profit and is, instead, included within
the share of profits of joint ventures line in the income statement.
However,asexpected,duetostart-upcosts,ourshareof2016/17
lossesoftheWaterPlusJVwasaround£2million.
Reported operating profit increased by £38 million, to £606 million,
reflecting the increase in underlying operating profit, along with a
reduction in adjusted items. Adjusted items for 2016/17 amounted
to £17 million, £10 million of which related to restructuring costs.
Adjusted items in the prior year amounted to £36 million, £25 million of
which related to the water quality incident in summer 2015.
Investment income and finance expense
The underlying net finance expense of £237 million was £36 million
higherthanlastyear,mainlyduetotheimpactofhigherRPIinflation
on the group’s index-linked debt, particularly on the portion of index-
linked debt with a three-month lag. Interest on non index-linked debt of
£108 million was £4 million lower than last year, due to the lower rates
locked in on our interest rate swaps. The indexation of the principal
on our index-linked debt amounted to a net charge in the income
statement of £81 million, compared with a net charge of £38 million last
year. As at 31 March 2017, the group had approximately £3.6 billion of
index-linked debt at an average real rate of 1.3 per cent.
Reported net finance expense of £189 million was lower than the
£219 million expense in 2015/16. This £30 million decrease principally
reflects a change in the fair value gains and losses on debt and
derivative instruments, from a £26 million loss in 2015/16 to a £24
million gain in 2016/17. The fair value gain in the current year is due to
the net receipts on swaps and debt under fair value option and gains
on our electricity swap portfolio due to an increase in the market price
ofelectricity.Lossesintheprioryearwerelargelyduetoadecrease
in medium-term interest rates, which impact our derivatives hedging
interest rates. 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 Ofwat at each price review. The group has fixed
the substantial majority of its non index-linked debt for the 2015-20
regulatory period.
Profit before tax
Underlying profit before tax was £389 million, £19 million lower than
last year, as the £19 million increase in underlying operating profit was
more than offset by the £36 million increase in underlying net finance
expense. This underlying measure reflects the adjusting items, 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 pages 44 to 45.
Reported profit before tax significantly increased by £89 million to £442
million, due in most part to fair value movements and the increase in
reported operating profit, as well as a £22 million profit on disposal of
the non-household retail business.
Tax
In addition to corporation tax, the group pays and bears further annual
economic contributions, typically of around £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.
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In 2016/17, we paid corporation tax of £42 million, which represents an
effective cash tax rate on underlying profits of 11 per cent, which is 9
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 capital investment. We have expressed
the effective cash tax rate in terms of underlying profits as this measure
excludes 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 £54 million in 2016/17, compared with
£53 million in the previous year. There were current tax credits of £23
million in 2016/17 and £9 million in 2015/16, following agreement of
prior years’ tax matters; in addition to UK tax, the current year figure
also included the release of a provision in relation to agreed historic
overseas tax matters.
For 2016/17, the group recognised a deferred tax charge of £28 million,
compared with a charge of £19 million for 2015/16. In addition, in
2016/17 the group recognised a deferred tax charge of £7 million
relating to prior years’ tax matters, compared with a charge of £6
million in 2015/16. In 2016/17, the group also recognised a deferred tax
credit of £58 million relating to the enacted reduction in the headline
rate of corporation tax from 18 per cent to 17 per cent from 1 April
2020. This compares to a deferred tax credit of £112 million in 2015/16
when the enacted reduction in the headline rate of corporation tax
from 1 April 2020 was reduced from 20 per cent to 18 per cent.
The total tax charge for 2016/17 was £9 million as compared to a total
tax credit of £44 million for 2015/16, the main difference being the £54
million reduction in the deferred tax credit 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.
Profit after tax
Underlying profit after tax of £313 million was £12 million lower than
last year, principally reflecting the £19 million decrease in underlying
profit before tax partly offset by lower underlying tax on lower profits.
Reported profit after tax was higher at £434 million, compared with
£398 million in the previous year, as the £89 million increase in the
reported profit before tax was partly offset by the £53 million higher
tax charge.
Summary of net debt movement
Earnings per share
Underlying earnings per share decreased from 47.7 pence to 46.0
pence. This underlying measure is derived from underlying profit after
tax. Basic earnings per share increased from 58.3 pence to 63.6 pence,
for the same reasons that increased profit after tax.
Dividend per share
The board has proposed a final dividend of 25.92 pence per ordinary
share in respect of the year ended 31 March 2017. Taken together
with the interim dividend of 12.95 pence per ordinary share, paid in
February, this produces a total dividend per ordinary share for 2016/17
of 38.87 pence. This is an increase of 1.1 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 1.1 per cent is based on the RPI
element included within the allowed regulated revenue increase for the
2016/17 financial year (i.e. the movement in RPI between November
2014 and November 2015).
The final dividend is expected to be paid on 4 August 2017 to
shareholders on the register at the close of business on 23 June 2017.
The ex-dividend date is 22 June 2017.
In light of the Financial Reporting Lab’s report entitled ‘Disclosure of
dividends – policy and practice’, which provided best practice guidance,
we enhance 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.
Policy approval process – the dividend policy was considered and
approved by the United Utilities group 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 2017, the company had
distributable reserves of £3,184 million. The total external dividends
relating to the 2016/17 financial year amounted to £265 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.
£m
7,000
6,500
6,000
5,500
5,000
4,500
Stock Code: UU.
6,260.5
1,018.1
691.7
109.0
80.7
4.4
6,578.7
156.1
41.2
263.1
9.9
Net debt
at 31.03.16
Operating
cash flow
Fair value
movements
Dividends
Interest
Tax
Net
capex
Loans to joint
ventures
Inflation
uplift on
index-linked
debt
Other
Net debt
at 31.03.17
unitedutilities.com/corporate
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Our performance in 2016/17
Cash flows from subsidiaries – the directors consider that the group’s
principal operating subsidiary, United Utilities Water Limited (UUW),
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.
regulated water and wastewater investment programmes. This excludes
infrastructure renewals expenditure which is treated as an operating
cost under IFRS. Cash flow capex differs from regulatory capex, since
regulatory capex is based on capital work done in the period, rather
than actual cash spent.
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 for UUW with Moody’s. RCV gearing at 31 March 2017 was 61
per cent and the movement in net debt is outlined in the cash flow
section below.
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 (contained within the group’s annual
report and financial statements). 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; the contingent
liabilities of the group; and the key risks of the group together with the
associated mitigating actions.
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.
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 2020-25 period will be formulated after
Ofwat announces the outcome of the regulatory price review
(currently expected in December 2019)
Cash flow
Net cash generated from continuing operating activities for the year
ended 31 March 2017 was £821 million, compared with £686 million
in the previous year. This increase mainly reflects a switch between
cash generated from operating activities and cash used in investing
activities largely due to the accounting treatment of our Water Plus JV.
The group’s net capital expenditure was £692 million, principally in the
Net debt including derivatives at 31 March 2017 was £6,579 million,
compared with £6,261 million at 31 March 2016. This increase reflects
accelerated regulatory capital expenditure, payments of dividends,
interest and tax, the inflationary uplift on index-linked debt and loans to
joint ventures, partly offset by operating cash flows.
Fair value of debt
The group’s gross borrowings at 31 March 2017 had a carrying value of
£7,385 million. The fair value of these borrowings was £8,603 million.
This £1,218 million difference principally reflects the significant fall in
real interest rates, compared with the rates at the time we raised a
portion of the group’s index-linked debt. This difference has increased
from £483 million at 31 March 2016, due primarily to a decrease in
credit spreads.
Gross debt – total carrying value £7,384.5m
Yankee bonds (USD)
875.0
Euro bonds (EUR)
564.2
GBP bonds
1,296.5
GBP RPI-linked bonds
1,959.3
GBP CPI-linked bonds 99.6
EIB and other RPI-linked bonds 1,543.4
Other EIB loans
489.1
Other borrowings
557.4
Debt financing and interest rate
management
Gearing, measured as group net debt divided by UUW’s shadow
(adjusted for actual spend) regulatory capital value, was 61 per cent
at 31 March 2017. This is the same gearing as at 31 March 2016 and
remains 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 (UU 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 (EMTN) programme. 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 2017 amounted to £248
million. Over 2015-20 we have financing requirements totalling around
£2.5 billion to cover refinancing and incremental debt, supporting our
five-year investment programme, and we have now raised over £1.7
billion of this requirement.
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. As at 31 March 2017, £75 million had been drawn down.
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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£500millionfundingpackageforAMP6fromtheEIB,with
the second tranche expected to be made available for signature later in
theAMP.
In June 2016, UUW’s financing subsidiary, United Utilities Water Finance
PLC(UUWF),raisedc£76millionoftermfunding,viatheissueof€30
millionandHKD600millionprivateplacementnotes,bothwitha15-
yearmaturity,offourEMTNprogramme.InSeptember2016,UUWF
raised c£53 million of term funding, via the issue of 12-year and 20-year
privateplacementnotes,inRPI-linkedform,offthegroup’sEMTN
programme, at the group’s best ever real interest rates. In the second
half of 2016/17, UUWF raised a further c£172 million, via the issue of
15-year and 20-year private placement notes, in index-linked form, off
ourEMTNprogramme.InresponsetoOfwat’sdecisiontotransition
awayfromRPIinflationlinkage,£100millionofthisindex-linkedfunding
wasCPI-linked,thesebeingthefirsteverCPI-linkednotesissuedbya
UK utility.
In addition, since September 2016, the group has agreed £100 million
of new or replacement five-year committed bank facilities and extended
a further £100 million for an initial term of five years. The group has
headroom to cover its financing needs into 2019.
Long-termborrowingsarestructuredorhedgedtomatchassets
and earnings, which are largely in sterling, indexed to UK retail price
inflation and subject to regulatory price reviews every five years.
Long-termsterlinginflationindex-linkeddebtprovidesanaturalhedge
to assets and earnings. At 31 March 2017, 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 1.3 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.
Term debt maturity per regulatory period*
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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 3.6 per cent (inclusive of credit spreads).
Liquidity
Short-term liquidity requirements are met from the group’s normal
operating cash flow and its short-term bank deposits and supported by
committedbutundrawncreditfacilities.Thegroup’s€7billionEMTN
programme provides further support.
Available headroom at 31 March 2017 was £699 million based on cash,
short-term deposits, committed bank facilities and the undrawn portion
ofthesignedEIBtermloanfacilities,netofshort-termdebtaswellas
committed facilities and term debt falling due within 12 months.
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 2017, the group had an IAS 19 net pension surplus of
£248 million, compared with a net pension surplus of £275 million at 31
March 2016. This £28 million reduction mainly reflects the impact of
a decrease in credit spreads. 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 a blend of the
inflation market hedge and 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 condensed consolidated financial statements.
3,000
2,000
m
£
1,000
0
To 31 Mar
2020
2020-25
2025-30
2030-35
2035-40
Years
2040-45
2045-50
2050-55
2055-60
*Futurerepaymentsofindex-linkeddebtincludeinflationbasedonanaverageannualRPIrateof3%andanaverageannualCPIrateof2%.
Stock Code: UU.
unitedutilities.com/corporate
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Our performance in 2016/17
Guide to Alternative Performance Measures (APMs)
Theunderlyingprofitmeasuresinthetableoppositerepresentthegroup'salternativeperformancemeasures(APMs)underthedefinition
givenbytheEuropeanSecuritiesandMarketsAuthority(ESMA).Thesemeasuresarelinkedtothegroup’sfinancialperformanceasreported
underInternationalFinancialReportingStandards(IFRSs)asadoptedbytheEuropeanUnioninthegroup’sconsolidatedincomestatement,
whichcanbefoundonpage124.Assuch,theyrepresentnon-GAAPmeasures.
TheseAPMsarereviewedinternallybymanagementandreportedtotheboard,andhavebeenpresentedinordertoprovideamore
representative view of business performance. The group determines adjusted items in the calculation of its underlying measures against a
framework which considers significance by reference to profit before tax, in addition to other qualitative factors such as whether the item is
deemed to be within the normal course of business, its assessed frequency of reoccurrence and its volatility which is either outside the control
of management and/or not representative of current year performance.
Alternative performance measure
Water quality incident
Flooding incidents
Non-household retail
market reform
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
Profit on disposal of business
A significant water quality incident occurred in the year ended 31 March 2016, the likes of which
management would not expect to occur on a frequent basis. As such, this was not considered part of the
normal course of business.
Two significant flooding incidents in the year ended 31 March 2016 caused extensive damage to
localised parts of our infrastructure, resulting in significant levels of remedial operating expenditure and
a large claim under the group’s insurance cover. Management’s view is that these were significant and
infrequent events and as such, were not part of the normal course of business.
The group has incurred significant costs since the year ended 31 March 2015 in preparation of the non-
household retail market opening to competition in April 2017. This represents a one-off event and as
such, is not considered part of the normal course of business.
The group has incurred restructuring costs in the past in relation to a number of discrete underlying
events which can cause volatility in the reported results. Management adjusts internally for these costs
to provide an underlying view of performance which it views as being more representative of the normal
course of business and more comparable period to period.
Fair value movements on debt and derivatives can be both very significant and volatile from one period
to the next. These movements are determined by macro economic factors which are outside the control
of management and these instruments are purely held for funding and hedging purposes (not for trading
purposes). Taking these factors into account, management believes it is useful to adjust for this to
provide a more representative view of performance.
Net fair value losses on debt and derivative instruments includes interest on swaps and debt under fair
value option. In adjusting for the former, it is appropriate to add back interest on swaps and debt under
fair value option to provide a view of the group’s cost of debt which is better aligned to the return on
capital it earns through revenue.
This item can be very volatile from one period to the next and it is a direct function of the extent to
which the pension scheme is in an accounting deficit or surplus position. Management believes it is
useful to adjust for this to provide a more representative view of performance which is better aligned to
the return on capital it earns through revenue.
The accounting standards allow for the capitalisation of borrowing costs in the cost of qualifying assets.
Management believes it is appropriate to adjust for these significant costs to provide a representative
cost of borrowings and current year performance which is better aligned to the return on capital it earns
through revenue.
This relates to the disposal of the group’s non-household retail business during the year ended 31 March
2017 which represents a significant one-off event and as such is not considered part of the normal course
of business.
Deferred tax credit-change
in tax rate
ThedeferredtaximpactfromchangestothecorporationtaxrateannouncedbyHMRCrepresentboth
significant and volatile impacts which are outside the control of management. Management adjusts for
this to provide a more representative view of current year performance.
Agreement of prior
years’ tax matters
The agreement of prior years’ tax matters can be significant, volatile and often related to the
final settlement of numerous prior year periods. Management adjusts for this to provide a more
representative view of current year performance.
Tax in respect of adjustments to
underlying profit before tax
Management adjusts for the tax impacts of the above adjusted items to provide a more representative
view of current year performance.
44
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Underlying profit
Operating profit
Operating profit per published results
Water quality incident
Flooding incidents (net of expected insurance proceeds)
Businessretailmarketreform(1)
Restructuring costs
Underlying operating profit
Net finance expense
Finance expense
Investment income
Net finance expense per published results
Adjustments:
Net fair value (gains)/losses on debt and derivative instruments
Interest on swaps and debt under fair value option
Net pension interest income
Adjustment for 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
Businessretailmarketreform(1)
Restructuring costs
Net fair value (gains)/losses on debt and derivative instruments
Interest on swaps and debt under fair value option
Net pension interest income
Capitalised borrowing costs
Profitondisposalofbusiness
Underlying profit before tax
Profit after tax
Underlying profit before tax
Reported tax (charge)/credit
Deferred tax credit – change in tax rate
Agreement of prior years’ tax matters
Tax in respect of adjustments to underlying profit before tax
Underlying profit after tax
Earnings per share
Profitaftertaxperpublishedresults(a)
Underlying profit after tax (b)
Weighted average number of shares in issue, in millions (c)
Earningspershareperpublishedresults,inpence(a/c)
Underlying earnings per share, in pence (b/c)
Dividend per share
Year ended
31 March
2017
£m
605.5
-
1.5
5.8
10.1
622.9
Year ended
31 March
2016
£m
567.9
24.8
(0.6)
11.1
0.9
604.1
t
r
o
p
e
R
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g
e
t
a
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£m
(202.7)
13.7
(189.0)
(24.3)
15.4
(10.2)
(29.2)
(237.3)
£m
3.8
442.4
-
1.5
5.8
10.1
(24.3)
15.4
(10.2)
(29.2)
(22.1)
389.4
£m
389.4
(8.5)
(58.2)
(15.5)
6.2
313.4
£m
433.9
313.4
681.9m
63.6p
46.0p
38.87p
£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
397.5
325.3
681.9m
58.3p
47.7p
38.45p
(1) Relates to market reform restructuring costs incurred preparing the business for open competition in the business retail market.
Stock Code: UU.
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How we manage risk
Principal risks and uncertainties
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 &
Group Audit &
Risk Board
Risk Board
Reviews governance, risk
Reviews governance, risk
and compliance-related
and compliance-related
matters
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
Figure 1: Governance and reporting process
Our risk management approach supports
our focus on customer service, resilience,
reputation and shareholder value.
Our strategy is to create sustainable value by delivering the best
service to customers, at the lowest sustainable cost and in a
responsible manner. In doing this, the group is exposed to a range of
internal and external risks of varying types which can impact upon
us and the delivery of our objectives and operations. To understand
and manage these risks, we maintain a risk management framework
which includes:
› an enterprise-wide approach to risk management;
› a well-established governance and reporting structure
(see figure 1);
› a risk assessment and management process which is aligned to ISO
31000:2009 (see figure 2 opposite); and
› a suite of tools, guidance material and training packages to support
consistency of approach.
Businessareasandfunctionsareresponsiblefortheidentification,
analysis, evaluation and management of risk relative to their business
environment including new and emerging circumstances. All event
types (including regulatory, legal, core operations, service and
hazard) are considered for their likelihood of occurrence and both
thefinancialandreputationalimpactshouldthateventoccur.Each
assessment takes into account a gross position (assuming no controls
or that all controls fail), a current position benefiting from an analysis
of the type and effectiveness of existing controls and a targeted
position where further mitigation may be required if the current
position is evaluated as not meeting our objectives or obligations.
The nature and extent of the risk profile culminating from this
structured approach is reported to the group board twice a year,
illustrating individual event-based risks that underpin 10 inherent
risk categories that are regarded as the principal risks (see pages 48
and 49). From this initial overview, the report then focuses on two
categories of risk: i) the most significant group-wide business risks
and ii) wholesale operational risks. These are represented by the 10
highest ranked risks (based on likelihood x 'full life' financial impact)
for each of the two categories and a further five risks with potentially
very high impact severity in their current state (net of control
effectiveness) with reputational impact noted for awareness and
management. The report also highlights risks that fall outside these
categories but are included due to potential reputational impact or
because they are notable new/emerging circumstances.
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 73); and
› monitor risk management and internal control systems and review
their effectiveness.
46
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
United Utilities AR2017 - Strategic.indd 46
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Figure 2: Assessment and management
process adapted from ISO 31000:2009
Identify &
assess
Monitor &
review
Consult &
communicate
Control &
mitigate
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Record &
update
Our risk profile currently consists of around 120 event-based risks.
Bytheirnature,thesewillincludeallcombinationsofhightolow
likelihoodandhightolowimpact.Heatmapsaretypicallyused
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.
Key features and developments
Our risk profile shows that, for each set of the 10 highest ranked risks
(one set for each of group-wide business risks and wholesale operational
risks),themajorityfallintotheprincipalriskareas‘Politicalandregulatory’,
‘Water service’ and ‘Wastewater service’. Operationally, the dominance of
the penalty element of the outcome delivery incentive mechanism and the
effectfollowingchangestotheEnvironmentalSentencingGuidelinesare
key features of this exposure. Reputationally, our core operations/service
provision (notably water service) and health, safety and environmental risks
have the highest focus for monitoring and reviewing control effectiveness
based on the potential impact should the risk event occur.
We aim for continuous improvement in both our governance and approach
to managing risk. Changes this year include the introduction of a core risk
team and additional sign-off processes relating to operational risk. We have
also developed a programme focused on long-term resilience of assets,
overseen by the newly formed wholesale resilience board. Associated with
this is a focus on asset health and operational hazard risk assessment in
advance of and beyond the 2015-20 regulatory period. This should ensure
that we fully understand the long-term risk profile of our asset base and
improve our capability to deliver the most cost-effective and proportionate
risk management response. Other developments include: an ongoing
transformation programme (with the Drinking Water Inspectorate) to
addresssomeareasofconcernarisingfromtheLancashireincidentin
2015; system optimisation in wastewater services through a remote
monitoring and control transformation project; and in domestic retail,
a customer service improvement plan underpinned by a clear strategy,
improved complaints handling, accurate data and cultural change.
The introduction of non-household retail competition required significant
preparation.Ensuringwecontinuetooperatecompliantlyandin
accordance with ‘level playing field’ requirements remains a key area
of focus.
Whilst most of our operations are in the UK, the potential effects of
'Brexit'havebeenconsidered,assessedandreportedtothegroupboard.
Likemanycompanies,akeyissueisthelevelofuncertaintythatexists.
Our assessment included sources of funds, costs of goods and services,
our ability to collect cash in the event of an economic downturn and the
effect of any potential inflationary shift over current predictions. This area
remains under review.
Lookingfurtherahead,theexpectedintroductionofcompetitioninrelation
to certain wholesale activities and the possible introduction of competition
in the provision of household retail activities at some future date all place
risk on the group.
It is also important to acknowledge other potential significant change in
environment and societal conditions. Climate change is expected to be
one of the sector’s biggest challenges, having significant and permanent
implications on the water cycle and the long-term sustainability of water
and wastewater services including water abstraction, supply and treatment
capability, drainage, sewer capacity, wastewater treatment and discharge
efficiency and effectiveness.
Material litigation
The group robustly defends litigation where appropriate and seeks to
minimise its exposure by establishing provisions and seeking recovery
whereverpossible.Litigationofamaterialnatureisregularlyreportedto
the group board. Two cases of particular note are as follows, 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.
›
›
InFebruary2009,UnitedUtilitiesInternationalLimited(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
EléctricadeBuenosAiresS.A.(IEBA),anArgentineprojectcompanyset
up to purchase one of the Argentine electricity distribution networks
whichwasprivatisedin1997.UUILhada45percentshareholdingin
IEBAwhichitsoldin2005.Theclaimisforanon-quantifiedamount
of unspecified damages and purports to be pursued on behalf of
unidentifiedconsumerbondholdersinIEBA.UUILhasfiledadefence
to the action and will vigorously resist the proceedings given the robust
defencesthatUUILhasbeenadvisedthatithasonproceduraland
substantive grounds.
In March 2010, Manchester Ship Canal Company (MSCC) issued
proceedings seeking, amongst other relief, damages alleging trespass
againstUnitedUtilitiesWaterLimited(UUW)inrespectofdischarges
of water and treated effluent into the canal. Whilst the matter has not
reached a final conclusion, the Supreme Court has found substantively
inUUW’sfavouronasignificantelementoftheclaimandtheHighCourt
has upheld UUW's position on the remainder of the proceedings. MSCC
have now instigated further heads of claim against UUW in order that
they may continue to challenge UUW’s rights to discharge water and
treated effluent into the canal.
Stock Code: UU.
unitedutilities.com/corporate
47
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How we manage risk
Principal risks and uncertainties
Principal risks
The principal risks (aggregated clusters of event-based risks), which have been set out in the table below 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.
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Risk description
Political and regulatory risk
Potentialchangeinthepolitical
and regulatory environment and/or
frameworks
Compliance risk
The potential failure to meet all legal and
regulatory obligations and responsibilities
Water service risk
Potentialfailureofwateroperational
processes or assets
Wastewater service risk
Potentialfailureofwastewater
operational processes or assets
Retail and commercial risk
Potentialinabilitytoprovidegoodand
fair service to domestic customers and
third party retailers
Financial risk
Potentialinabilitytoappropriately
finance the business
Programme delivery risk
Potentialineffectivedeliveryofcapital,
operational and change programmes/
processes
Resource risk
The potential inability to provide
appropriate resource (human, system,
technological or physical) required to
support business activity
Security risk
The potential inability to protect
people, information, infrastructure and
non-infrastructure from malicious or
accidental activity
Strategic
objective
Potential impact
Changes to regulation and the regulatory regime (either through political or regulatory events, for example
followingBrexit)mayincreasecostsofadministration,reduceincomeandmarginandleadtogreater
variability of returns.
Current key risks, issues or areas
of uncertainty include
Risk
exposure Management and mitigation
— Market reform including non-household and upstream
competition and, further ahead, the potential for the
introduction of household competition
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
— ApossiblechangefromusingtheRetailPricesIndextothe
mitigating risks where appropriate.
Reputational, brand and general damage arising from 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 a failure to provide a secure supply
of clean, safe drinking water or an inability to remove, treat and return water to the environment. This can
cause public health, community and environmental impacts, 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.
Poorservicetocustomerscanresultinfinancialpenaltiesandanimpactonregulatoryreputation.The
openingofthemarketforretailservicestoallnon-householdcustomersinEnglandinApril2017has
generated both opportunities and risk for the group and its associated business retail function in respect of
income,marginanddebt.Breachesoflegalandregulatoryrequirementscouldleadtofines,penaltiesand
reputational damage. Uncertainty remains in respect of potential upstream reform from 2020.
The failure of financial counterparties could result in additional financing cost, an adverse impact on the
incomestatementandpotentialreputationaldamage.Variabilityininflation(asmeasuredbytheUKRetail
PricesIndex)andchangesininterestrates,fundingcostsandothermarketriskscouldadverselyimpactthe
economicreturnontheRegulatoryCapitalValue.Increasedpensionschemedeficitcouldleadto
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, failure of
legal or regulatory obligations and subsequent penalties. This could lead to negative reputational impact with
customers and regulators.
The capacity or capability associated with human, technological and physical resource (including information,
operational technology, skill sets, systems and telecommunications) can lead to poor efficiency and
effectiveness of business activity, the inability 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.
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. In addition, commercial or sensitive
information could be lost.
Health, safety and environmental
Potentialforoperationalornatural
hazards to affect employees, contractors,
the public or the environment
Working with and around water, sewage, construction and excavation sites, plant and equipment exposes people
and the environment to man-made and naturally occurring hazards. This could result in harm to people, wildlife and
natural habitats and lead to increased work down time and additional operational costs, for example environmental
clean-up. Depending on the circumstances, the group could be fined heavily for breaches of statutory obligations, be
held liable to compensate third parties and sustain severe reputational damage.
— Stability of financial institutions and the world economy
Refinancing is long-term with staggered maturity dates to minimise the effect of short-term downturns.
ConsumerPricesIndexforregulatoryindexation
— Brexit
— Competition law and regulatory compliance whilst preparing
for and operating within a changing competitive market
— Levelplayingfieldrequirementsinrelationtonon-
household retail
— Current material litigation
— New higher fine levels for environmental offences
— Water quality
— Interruption to supply
— Structural integrity of major assets
— Pollution
— Populationgrowth
— Climate change
— Meeting infrastructure investment requirements
— Expectedchangetotheabstractionlicensingregime
— 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
— Market reform and the ability to treat other participants
equally
— Economicuncertainty
— Inflation/deflation
— Financial market conditions, interest rates and funding costs
— 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
— Delivering required employee engagement
— Personaldevelopmentandtalentmanagement
— Technological innovation
— Asset management
— Ownership and operation of National Infrastructure and
Critical National Infrastructure
— Cybercrime
— Terrorism
— Extremeweatherconditions
— Excavation,tunnellingandconstructionwork
— Working with substances hazardous to human health
— Working with water and wastewater
— Driving and vehicle movement
Legislativeandregulatorydevelopmentsarecontinuallymonitored.Risk-basedtrainingofemployeesis
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
provisionandmeasuresofsuccesshavebeendevelopedtomonitorperformance.FollowingtheLancashirewater
quality incident in 2015 we are further enhancing our approach to operational risk and resilience.
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 looked to retain existing and acquire new commercial customers by striving to meet their
needs more effectively. We monitored competitor activity and targeted 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 have been delivered. 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.
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.
Developing our people with the right skills and knowledge, combined with delivering effective technology, are
importantenablerstosupportthebusinesstomeetitsobjectives.Employeesarekeptinformedregarding
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.
Physicalandtechnologicalsecuritymeasurescombinedwithstronggovernanceandinspectionregimesaim
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.
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
andprocedureswhicharecertifiedtoOHSAS18001andISO14001.
48
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
United Utilities AR2017 - Strategic.indd 48
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Strategic
objective
Potential impact
Changes to regulation and the regulatory regime (either through political or regulatory events, for example
followingBrexit)mayincreasecostsofadministration,reduceincomeandmarginandleadtogreater
variability of returns.
Reputational, brand and general damage arising from 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 a failure to provide a secure supply
of clean, safe drinking water or an inability to remove, treat and return water to the environment. This can
cause public health, community and environmental impacts, 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.
Poorservicetocustomerscanresultinfinancialpenaltiesandanimpactonregulatoryreputation.The
openingofthemarketforretailservicestoallnon-householdcustomersinEnglandinApril2017has
generated both opportunities and risk for the group and its associated business retail function in respect of
income,marginanddebt.Breachesoflegalandregulatoryrequirementscouldleadtofines,penaltiesand
reputational damage. Uncertainty remains in respect of potential upstream reform from 2020.
The failure of financial counterparties could result in additional financing cost, an adverse impact on the
incomestatementandpotentialreputationaldamage.Variabilityininflation(asmeasuredbytheUKRetail
PricesIndex)andchangesininterestrates,fundingcostsandothermarketriskscouldadverselyimpactthe
economicreturnontheRegulatoryCapitalValue.Increasedpensionschemedeficitcouldleadto
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, failure of
legal or regulatory obligations and subsequent penalties. This could lead to negative reputational impact with
customers and regulators.
The capacity or capability associated with human, technological and physical resource (including information,
operational technology, skill sets, systems and telecommunications) can lead to poor efficiency and
effectiveness of business activity, the inability 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.
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. In addition, commercial or sensitive
information could be lost.
Risk description
Political and regulatory risk
Potentialchangeinthepolitical
and regulatory environment and/or
frameworks
Compliance risk
The potential failure to meet all legal and
regulatory obligations and responsibilities
Water service risk
Potentialfailureofwateroperational
processes or assets
Wastewater service risk
Potentialfailureofwastewater
operational processes or assets
Retail and commercial risk
Potentialinabilitytoprovidegoodand
fair service to domestic customers and
third party retailers
Financial risk
Potentialinabilitytoappropriately
finance the business
Programme delivery risk
Potentialineffectivedeliveryofcapital,
operational and change programmes/
processes
Resource risk
The potential inability to provide
appropriate resource (human, system,
technological or physical) required to
support business activity
Security risk
The potential inability to protect
people, information, infrastructure and
non-infrastructure from malicious or
accidental activity
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Health, safety and environmental
Potentialforoperationalornatural
hazards to affect employees, contractors,
the public or the environment
Working with and around water, sewage, construction and excavation sites, plant and equipment exposes people
and the environment to man-made and naturally occurring hazards. This could result in harm to people, wildlife and
natural habitats and lead to increased work down time and additional operational costs, for example environmental
clean-up. Depending on the circumstances, the group could be fined heavily for breaches of statutory obligations, be
held liable to compensate third parties and sustain severe reputational damage.
Strategic objectives
The best service to customers
At the lowest sustainable cost
In a Responsible manner
Risk
exposure Management and mitigation
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
t
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R
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t
a
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t
S
i
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.
Legislativeandregulatorydevelopmentsarecontinuallymonitored.Risk-basedtrainingofemployeesis
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
provisionandmeasuresofsuccesshavebeendevelopedtomonitorperformance.FollowingtheLancashirewater
quality incident in 2015 we are further enhancing our approach to operational risk and resilience.
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 looked to retain existing and acquire new commercial customers by striving to meet their
needs more effectively. We monitored competitor activity and targeted 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 have been delivered. 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.
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.
Developing our people with the right skills and knowledge, combined with delivering effective technology, are
importantenablerstosupportthebusinesstomeetitsobjectives.Employeesarekeptinformedregarding
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.
Physicalandtechnologicalsecuritymeasurescombinedwithstronggovernanceandinspectionregimesaim
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.
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
andprocedureswhicharecertifiedtoOHSAS18001andISO14001.
Current key risks, issues or areas
of uncertainty include
— Market reform including non-household and upstream
competition and, further ahead, the potential for the
introduction of household competition
— ApossiblechangefromusingtheRetailPricesIndextothe
ConsumerPricesIndexforregulatoryindexation
— Brexit
— Competition law and regulatory compliance whilst preparing
for and operating within a changing competitive market
— Levelplayingfieldrequirementsinrelationtonon-
household retail
— Current material litigation
— New higher fine levels for environmental offences
— Water quality
— Interruption to supply
— Structural integrity of major assets
— Pollution
— Populationgrowth
— Climate change
— Meeting infrastructure investment requirements
— Expectedchangetotheabstractionlicensingregime
— 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
— Market reform and the ability to treat other participants
equally
— Stability of financial institutions and the world economy
— Economicuncertainty
— Inflation/deflation
— Financial market conditions, interest rates and funding costs
— 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
— Delivering required employee engagement
— Personaldevelopmentandtalentmanagement
— Technological innovation
— Asset management
— Ownership and operation of National Infrastructure and
Critical National Infrastructure
— Cybercrime
— Terrorism
— Extremeweatherconditions
— Excavation,tunnellingandconstructionwork
— Working with substances hazardous to human health
— Working with water and wastewater
— Driving and vehicle movement
Stock Code: UU.
unitedutilities.com/corporate
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25192.04 – 1 June 2017 5:03 PM – proof 3sluglineEnsuring the long-term success of the company and the groupUnited Utilities AR2017 - Governance.indd 5001/06/2017 17:37:22 25192.04 – 1 June 2017 5:03 PM – proof 3sluglineGovernanceThe 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.Corporate governance report Board of directors52 Letter from the Chairman56 Nomination committee report66 Audit committee report74 Corporate responsibility committee report82 Remuneration committee report86Tax policies and objectives110Directors' report111Statement of directors' responsibilities117Ensuring the long-term success of the company and the groupUnited Utilities AR2017 - Governance.indd 5101/06/2017 17:37:23 25192.04 – 1 June 2017 5:03 PM – proof 3Corporate governance reportBoard of directors Russ Houlden Chief Financial Officer (CFO)Steve Mogford 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 18 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 and across different sectors, John has a wealth of past and current 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. He stepped down from the role of senior independent director at J Sainsbury plc in July 2016 and as a non-executive director of Rolls-Royce Holdings plc in May 2017.Current directorships/business interests: Chairman of Rentokil Initial plc and senior independent director of Electra Private Equity 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 financial affairs and to contribute to the management of the group’s business and to the implementation of the strategy and policies approved by the board. 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 in pursuing its strategy to drive for improvements in customer service and in providing our services at the lowest sustainable cost.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 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 driven forwards the board’s strategy of improving customer service and operational performance at United Utilities, and his perspective of the construction and infrastructure sector provides valuable experience and insight to support 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 from the board at Carillion PLC in December 2015 where he had served as the senior independent director until September 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.Dr John McAdam Chairman52UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017United Utilities AR2017 - Governance.indd 5201/06/2017 17:37:27 e
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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 and remuneration.
Skills and experience: In his roles at British Gas and BAA Mark has a strong background
operating within regulated environments. His extensive knowledge of customer-facing
businesses is particularly valuable for United Utilities with the implementation of greater
competition in the industry and in pursuit of its strategy to improve customer service.
Career experience: Mark retired from his position as 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 was also a non-executive director of BAA
plc, the airports operator.
Current directorships/business interests: He was appointed non-executive chairman
of Grainger plc in February 2017 and as the senior independent director of Ladbrokes
Coral PLC in September 2016. He is also a non-executive director of Premier Marinas
Holdings Limited. 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 agenda on acting responsibly as a business.
Qualifications: Bachelor of Law.
Appointment to the board: September 2014.
Committee membership: Nomination, audit and corporate responsibility (chair).
Skills and experience: As the chief executive officer of a FTSE listed company, Stephen
brings current operational experience to the board. His public sector experience provides
additional insights to the board regarding regulation and government relations, and his
experience in the media and technology industries provides additional perspective for the
board’s discussions.
Career experience: Group chief executive at Informa plc, having previously served on the
board of the Informa Group as a non-executive director and member of the audit committee.
Previous executive roles include president/managing director, Europe, Middle East and
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 non-
executive director of the Department for Business, Energy and Industrial Strategy. 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.
Qualifications: BSc (Hons) Mathematical Physics, MEng Petroleum Engineering.
Appointment to the board: August 2016.
Committee membership: Nomination, audit (relinquished with effect from 1 July 2017),
remuneration and corporate responsibility.
Skills and experience: Alison has strong technical and capital project management skills,
having been involved in large projects and the production side of Royal Dutch Shell’s
business. This experience of engineering and industrial sectors provides the board with
additional insight into delivering United Utilities’ capital investment programme.
Career experience: From 2006 to 2015, Alison 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 with Schlumberger, an international
supplier of technology, integrated project management and information solutions to the
oil and gas industry.
Current directorships/business interests: She is a non-executive director of Meggitt PLC
and was appointed as part-time executive chair of Silixa Ltd in August 2016. She is also
an independent non-executive director of United Utilities Water Limited.
Mark Clare
Senior independent non-executive director
Stephen Carter
Independent non-executive director
Alison Goligher
Independent non-executive director
Stock Code: UU.
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25192.04 – 1 June 2017 5:03 PM – proof 3Responsibilities: To challenge constructively the executive directors and monitor the delivery of the strategy within the risk and control framework set by the board.Qualifications: MSc Mechanical Engineering and Management, MBA. Appointment to the board: 1 July 2017. Committee membership: Nomination and audit.Skills and experience: Paulette has spent most of her career in the regulated finance industry which will provide the board with additional perspective and first hand regulatory experience. Her experience of technology driven transformation will contribute to United Utilities' customer experience programme and Systems Thinking approach. Career experience: Paulette is managing director, Global Payments Acceptance at Barclaycard. Prior to joining Barclays, she was strategy director at NBNK Investments plc and before which she was commercial and marketing director at Tesco Personal Finance. She spent seven years at the Royal Bank of Scotland, where her roles included chief executive European Consumer Finance and managing director, NatWest Retail Banking. She has served on the board of the Prince's Youth Business Trust and as a trustee for Community Service Volunteers.Current directorships/business interests: She is non-executive chair of the Mayor's Fund for London. She is also an independent non-executive director of United Utilities Water Limited.Corporate governance reportBoard of directorsNotes: Dr Catherine Bell stepped down from the board on 22 July 2016.All our directors are seeking reappointment/election at the 2017 AGM. Details of the percentage of votes cast in favour of their appointment at the 2016 AGM are given on page 71.Sara Weller Independent non-executive directorResponsibilities: 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, provides the board with valuable perspective as the company responds to the increased competition in the sector and improves its service to customers.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. She was the former lead non-executive director for the Department for Communities and Local Government.Current directorships/business interests: Non-executive director of Lloyds Banking Group plc. Sara is chair of the Planning Inspectorate (an executive agency of the Department of Communities and Local Government), lead non-executive director for the Department of Work and Pensions, 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.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) and remuneration (with effect from May 2017).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.Paulette RoweIndependent non-executive directorBrian May Independent non-executive director54UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017United Utilities AR2017 - Governance.indd 5401/06/2017 17:37:34 e
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Pictured: Board visit to Liverpool
wastewater treatment works
Stock Code: UU.
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Corporate governance report
Letter from the Chairman
Our core values of acting with integrity and focusing on our
customers provides the framework for both our business
culture and the way in which our employees go about their
daily work. 'Acting responsibly' has been part of the United
Utilities ethos for a number of years.
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, six out of the remaining
eight 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
Annual general meeting (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, as they
will be doing in respect of their individual shareholdings
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
Dear Shareholder
Our year
We have seen strong performance contributing towards achieving our
strategic targets during 2016/17 as demonstrated by progress in meeting
our customer, environmental and financial targets. The annual investment
of around £800 million in building water and wastewater assets has been
completed according to our plan.
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 our 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 10 to 49.
Our governance structure
We held eight scheduled board meetings during the year; in addition
there were a number of other board meetings held which directors
attended either in person or via telephone conferencing facilities. A
diagram showing the inter-relationships of the various board committees
can be found on page 59, 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
You may recall that we reported in our 2016 annual report that Catherine
Bell, after nine years’ service, was stepping down at the annual general
meeting in July 2016, and that Alison Goligher would join the board as
an independent non-executive director with effect from 1 August 2016.
We recently announced that Paulette Rowe would be appointed as an
independent non-executive director joining the board on 1 July 2017.
More information about Paulette's appointment can be found in the
nomination committee report on page 68.
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 and regulated businesses. 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. Looking ahead,
the board considered the forthcoming 2016 Code requirement, that the
‘audit committee as a whole shall have competence relevant to the sector
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Pictured: Dr John McAdam, Chairman
in which the company operates’ and concluded that when taking into
account the skills, knowledge, experience and professional qualifications
of committee members (see the directors’ biographies on pages 52 to 54)
this 2016 Code requirement was fulfilled. Furthermore, all members of
the audit committee are independent non-executive directors.
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 normally limited to one
other directorship in a company which does not conflict with United
Utilities’ business.
At the time this report was approved, 38 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. Our current talent programme at a senior level is
well embedded and 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 graduate and
apprentice programmes are thriving and we are focusing more effectively
on middle/junior management succession.
Our values and culture
Our aim is to act as a responsible business, and our business principles
can be found on our website (see page 65). Our core values of acting with
integrity and focusing on our customers provides both the framework
for our business culture and the way in which our employees go about
their daily work. ‘Acting responsibly’ has been part of the United Utilities
ethos for a number of years. One of the key responsibilities of the board
is to appoint the CEO. Steve Mogford is a passionate supporter of the
company’s agenda to act as a responsible business.
In accordance with our aim of acting as a responsible business, the
company has complied fully with the main and subsidiary principles
and provisions of 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 2017.
Our approach to risk
Our approach 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. 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 who are readily available to address investors'
queries. Mark Clare, senior independent director and myself are also
available, and the company secretary and I had the opportunity to meet
with several investors during the year.
Ensuring that the 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 directors' remuneration policy, last approved by shareholders at
the 2014 AGM, is again on the 2017 annual general meeting agenda.
This reflects the Companies Act 2006 requirement that a company's
remuneration policy must be approved by shareholders every three
years. The new directors' remuneration policy can be found on pages 91
to 97 and is intended to apply until the 2020 AGM. The remuneration
committee under Sara Weller’s leadership has again engaged with a
number of the company’s large investors to ensure that we are aligned
with their views. Although only advisory, at the AGM in 2014, and the
subsequent two AGMs, 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
Dr John McAdam
Chairman
Stock Code: UU.
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Corporate governance report
Code principles
Leadership
Read more about Leadership on page 58
Effectiveness
Read more about Effectiveness on page 62
Relations with shareholders
Read more about Relations with shareholders on page 71
Accountability
Read more about Accountability on page 72
Remuneration
Read more about Remuneration on page 73
Code principle – Leadership
Introduction by Dr John McAdam
“There is renewed focus on how boards discharge their duties,
having regard to the long-term success of the company for its
members and wider stakeholders. I hope, when you have read our
strategic report (on pages 10 to 49) and this corporate governance
report, you will be left with an understanding of how we operate
our business on a day-to-day basis, whilst looking to the future to
ensure we continually focus on our strategy of delivering the best
service to customers, at the lowest sustainable cost while acting in a
responsible manner.”
Overview of the board’s responsibilities
› 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
› 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
› 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 72 for more detail
› 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
› 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
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 opposite. 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 Chief Executive Officer (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 opposite 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 Chief Financial Officer (CFO) at
every scheduled board meeting, providing the board with an updated
overview of the business and its financial performance and position.
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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
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Principal board committees
Principal management committees
Audit committee
Chair: Brian May
Read more on
pages 74 to 81
Remuneration committee
Chair: Sara Weller
Read more on
pages 86 to 109
Nomination committee
Chair: Dr John McAdam
Read more on
pages 66 to 70
Corporate responsibility
committee
Chair: Stephen Carter
Read more on
pages 82 to 84
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 80
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.
Capital investment committee
Chair: Steve Mogford, CEO
The committee is responsible for authorising expenditure
relating to the capital investment programme.
Key:
The best service to customers At the lowest sustainable cost In a responsible manner
Stock Code: UU.
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Corporate governance report
Summary of board activity in 2016/17
Cross reference
Link to strategic
objectives
Leadership and employees
— Regular review of health and safety incidents of employees and contractors reflecting the
See page 38
company’s belief that ‘nothing we do is worth getting hurt for’
— Considered board succession planning and the appointment of a new non-executive director
See page 68
— Reviewed and discussed executive succession plans and the needs of the business; the potential
See page 66
changes arising out of market reform; and received an update on the activities to develop
talented employees in the senior leadership team but also extending this focus to middle
management and further increasing diversity, given the strong progress already made in the
apprentice and graduate programmes
— Discussed the results of the annual employee engagement survey
Strategy
— Reviewed the group’s corporate responsibility activities focusing on reputation management,
particularly in our communication with stakeholders
— Received regular updates at each meeting of items with strategic component, such as emerging
changes to regulation, major capital expenditure and business structuring decisions
See page 38
See page 84
— Held the annual full day strategy session debating and discussing the context of the next price
review, the key issues to be addressed and considered the expectations of our key stakeholders
See page 5
Governance
— Reviewed and debated the risk profile of the group and in particular the principal risks which
See page 46
included greater visibility of operational risks following a change in the underlying risk assessment
process
— Reviewed the effectiveness of the risk management systems, including financial, operational and
See page 72
compliance controls and reviewed the effectiveness of the internal control systems
— Reviewed and discussed developments in cybercrime and the activities undertaken to enhance
See page 23
the effectiveness of the group’s security controls and work with various government agencies and
a number of other water companies to define cyber security guiding principles for use across the
industry
— 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
See page 64
implementation of any changes required
— Reviewed and discussed the annual evaluation of the board, its committees and individual
See page 63
directors and conflicts of interest
— Reviewed the performance of the external auditor and recommendation for reappointment
— Reviewed the approach, background work and progress of work to identify areas where there is
any risk of modern slavery occurring in our supply chain contributing to the development of and
approval of the slavery and human trafficking statement
See page 76
See page 115
Key:
The best service to customers At the lowest sustainable cost In a responsible manner
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Summary of board activity in 2016/17
Cross reference
Link to strategic
objectives
United Utilities Water Limited (UUW) regulated business
— Reviewed the progress with the implementation of the recommendations of the internal
See page 72
investigation undertaken by Mark Clare, senior independent director, in relation to the August
2015 Lancashire water quality incident and lessons learnt
— Regular updates on the progress of our preparations (supported by independent assurance,
See page 4
particularly in relation to systems readiness), on the transfer of the commercial customer base
to Water Plus (the group’s joint venture with Severn Trent) prior to the opening of the market for
commercial customers on 1 April 2017 along with monitoring the changes to our own systems
and processes supporting our role as a wholesaler of water and wastewater services
— Monitored progress of the implementation of the customer experience programme to improve
See page 35
customer service including new initiatives such as ‘Priority Services’ and ‘Moving Home’,
improved training for employees handling customer calls and systems improvements
— Received regular updates on developments by Ofwat’s view of the next five-year asset
management period (known as ‘Water 2020’) and its approach to the Price Review in 2019
Other group business
— Reviewed progress on the group’s renewable energy generation capabilities and opportunities for
expansion and innovation including developing our plans around battery storage of power for use
overnight when solar panels are not generating
See page 5
See page 23
— Regular updates on the progress of the joint venture Water Plus’ preparedness prior to the
See page 4
opening of the market for commercial customers on 1 April 2017
Shareholder relations
— Received and discussed a presentation by Makinson Cowell (in May 2016) on investors’ views
See page 71
and perceptions (after a tender process Rothschild Investor Advisory were appointed as investor
relations advisers with effect from 1 April 2017)
— Received and discussed feedback from roadshows/presentations to investors by the CEO and/or
See page 71
the CFO and communications from large investors
Financial
— Reviewed the 2016-20 business plan and approved the 2017/18 budget
— 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, the group’s funding requirements for the
year and the potential sources to meeting these funding requirements (including the first issue of
consumer price index-linked debt) and managing the group’s interest rate and other market risk
exposures including the impact of Brexit
See page 110
See page 42
— Reviewed progress with material litigation involving the group
— Reviewed and discussed pensions and proposals in relation to the United Utilities defined benefit
See page 47
pension scheme and related discussions with the trade unions
Stock Code: UU.
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The boardroom table
Chairman
Execu�ve director
Senior independent non-execu�ve director
Independent non-execu�ve director
Company secretary
Attendance at board
and committee meetings
Eight scheduled board meetings were planned and held during the
year (2016: 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 Bell1
Stephen Carter
Mark Clare
Alison Goligher
Brian May
Sara Weller
Board
meetings
8/8
Audit
committee
–
Remuneration
committee
–
Nomination
committee
4/4
Corporate
responsibility
committee
–
Treasury
committee
–
8/8
8/8
4/4
8/8
8/8
4/4
8/8
8/8
–
–
1/1
4/4
–
3/3
4/4
–
–
–
3/3
–
6/6
3/3
–
6/6
–
–
2/2
32/4
4/4
2/2
4/4
4/4
2/2
–
–
2/2
–
2/2
–
–
–
4/4
–
–
–
–
4/4
–
Actual number of meetings attended/maximum number of scheduled meetings which the directors could have attended during 2016/17.
Excludes Paulette Rowe who was not appointed until 1 July 2017.
(1) Dr Catherine Bell stepped down from the board on 22 July 2016.
(2) Stephen Carter was unable to attend a meeting of the nomination committee due to a conflicting commitment.
Code principle – Effectiveness
Introduction by Dr John McAdam
“Board colleagues have approached the evaluation process with
resolve this year, underpinned by the forthcoming challenges of
competition and the lessons learnt from the 2015 Lancashire water
quality incident.”
Board evaluation
Our board evaluation was again conducted internally this year; our
last external evaluation was conducted by Lintstock consultants
in 2015.
The internal evaluation process was facilitated by the company
secretary and his team. It was based on the completion of
questionnaires (including questions to be scored and free text
questions) 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. Board
members were also asked to provide a view on how well the actions
identified in the 2015/16 evaluation had been addressed.
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 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.
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A summary of the analysis of the 2016/17 evaluation is as follows:
2016/17 areas of assessment
Commentary and actions
Board composition and
expertise
Board agenda
Board support
Wider strategic oversight
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Board members’ skills and expertise were felt to be appropriate and the board was felt to be balanced
in terms of composition. Board meetings were conducted in an atmosphere where open communication
was encouraged to facilitate the proper resolution of issues.
The board was well informed about the regulatory environment the company operates within and had
a good understanding of the views of investors, but would benefit from more opportunities to gain a
better understanding of the views of customers and on service delivery and technical innovations for
customers.
The timeliness of the distribution of board documentation was appropriate. A number of suggestions
were made to the content, format and length of papers, and board time was being better used in
discussion of the issues rather than merely receiving presentations. The support and training needs
of board members continued to be addressed and there was considerable support amongst board
members for directors individually to pursue opportunities to get a closer view of aspects of the
business of particular interest to them.
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 and to its systems of internal control were considered
to be appropriate. The information received relating to risk management, in particular operational and
reputational risks, was much improved.
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 succession plans and board
succession planning matrix for the appointments to the board and senior management had been
developed and had gained a greater level of detail, particularly in relation to developing more
granularity on timescales for key board positions. There had been improvements to the visibility of
potential internal candidates for succession to the executive team and to their direct reports.
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: ensure the focus on senior board succession was maintained over the next 12
months, but also ensure that there was thought given to the skills needed around the board over the
next five years;
Remuneration committee: to consider the timetable for the review of the committee's external advisers;
Audit committee: continue the progress made during the year on making papers more concise; and
Corporate responsibility committee: increase the committee’s engagement with customer priorities.
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) concluded he
continued to demonstrate an effective and independent perspective, fulfil the expected commitment
to the role and was an effective leader of the board. All directors would be offering themselves for
reappointment/election at the 2017 AGM.
Stock Code: UU.
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2015/16 evaluation recommendations
Strengthen the board with additional skills/experience from an
engineering/industrial background.
The board should allow time to consider the customer experience,
and the key strategic issues of market reform and competition in
the sector.
Continued focus on improvements to keeping board papers concise.
Allow more time for the discussion of key strategic topics at the
board strategy away day.
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.
Corporate responsibility committee: review the analysis of
reputational risk to ensure alignment with the audit committee.
Actions taken during 2016/17
Alison Goligher was appointed on 1 August 2016 (see page 53).
The board received a paper and presentation on the customer
experience programme along with updates on progress.
Furthermore, regular updates were provided throughout the year
on the group’s progress and readiness for market reform and the
opening of the industrial market to competition on 1 April 2017.
Content, format and length of board papers had improved but the
focus for continued improvement should be maintained.
Improvements had been made to the timetable for the board
strategy away day to allow more time for discussion of the group’s
strategic priorities.
The succession plans and board succession planning matrix for
the appointments to the board and senior management had been
developed and had gained a greater level of detail, particularly in
relation to developing more granularity on timescales for key board
positions.
The remuneration committee considered succession planning
during the nomination process for the Long Term Plan awards made
in 2016. In the coming year, as the talent programme at the senior
level progresses, the committee will further review the alignment of
remuneration to the outcomes of the programme.
Regular updates have been provided to the audit committee
(and the board) on the implementation of actions identified by
Mark Clare, senior independent director, in his review of the 2015
Lancashire water quality incident.
Changes have been made to risk reporting to improve the
presentation of the reputational aspects of risks as appropriate
and these are considered at both the audit committee and the
corporate responsibility committee.
Board development
Board directors regularly receive updates to improve their
understanding and knowledge about the business and in particular its
regulatory environment. As part of the individual directors element
of the board evaluation exercise (see page 63) directors are asked to
identify any skills or knowledge gaps they would like to address.
Consideration of environmental and social issues are fundamental
to the way in which we operate as a responsible business at United
Utilities; such matters are central to board discussions (see the
summary of board activity on pages 60 to 61). The board’s approach
to these matters is reflected in our strategic objective of acting in a
responsible manner, and information relating to this can be found
throughout the strategic report. Board awareness of in-region
environmental and social matters has also been raised during the year
by the independent customer challenge group, known as ‘YourVoice’.
In addition to this less formal approach to board development, during
the year the board also received briefings from both Slaughter and
May (legal and governance matters) and KPMG (governance changes
relating to the audit committee and audit reform) along with a
number of other advisers.
Our non-executive directors are conscious of the need to keep
themselves properly briefed and informed about current issues and
to deepen their understanding of the business. During the year,
Sara Weller visited both the Lingley Mere offices and the Water Plus
offices in Stoke-on-Trent, to meet with management and discuss
customer treatment, competition and capital programmes. She
also attended sessions run by Ofwat and received independent
remuneration briefings from external sources. Brian May spent a
day at the group's Lingley Mere offices where he met with a number
of members of the senior management team and had discussions
relating to internal audit and risk management, progress with the
customer experience, and in relation to Systems Thinking and our
approach to the wholesale operations. He also met with our business
development director and our IT director. Mark Clare also spent a day
visiting the customer operations team based at Lingley Mere.
Following appointment each director will have an induction
programme arranged for them in order to help them gain an
understanding of the business and the key issues and to provide
them with information that will help them to be effective and make a
contribution to board debates. Details of Alison Goligher’s induction
are given on page 70.
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Values and culture
The values identified by the board (see page 57) underpin our strategic objectives:
The best service for customers
At the lowest sustainable cost
In a responsible manner
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Core value:
Customer
focus
Core value:
Innovation
Core value:
Integrity
Everything we do will be
about our customers, not us.
We will innovate to make our
services better, safer, faster and
cheaper for our customers.
We will make promises
knowingly and keep them.
The United Utilities way of doing things is to act as a responsible
business and is set out in our ‘Business Principles’ document. A copy
can be found at:
corporate.unitedutilities.com/united-utilities-business-principles
In July 2016, the FRC published a report of its observations on
‘Corporate Culture and the Role of Boards’. This report defined culture
in a corporate context ‘as a combination of the values, attitudes and
behaviours manifested by a company in its operations and relations
with its stakeholders. These stakeholders include shareholders,
employees, customers, suppliers and the wider community and
environment which are affected by a company’s conduct.’
The board’s aim is to lead by example and set the standard of behaviour
we expect from our employees. By treating our board colleagues
with respect we aim to foster an environment of trust and one that
is conducive to open and frank discussions. This approach is in the
best interests of our business and all our stakeholders. Furthermore,
culture in its various forms/guises is treated as business as usual.
Cultural indicators such as customer service, employee matters and
risk management form part of the board’s regular discussions and
further contribute towards our objective of acting responsibly (see the
summary of board activity on pages 60 to 61). Our CEO is responsible
for cascading our culture and behaviour of acting responsibly
throughout the business and he is supported and facilitated in this by
the executive and wider management team. As part of their role, we
expect our employees to live the values of customer focus, integrity
and innovation. More information can be found on our website at:
corporate.unitedutilities.com/cr-our-values
In the table below are examples of how we aim to act responsibly towards our different stakeholders:
How we act responsibly towards our
customers
We offer ‘Priority Services’ that customers
can register for if they require extra support
due to such things as ill health, age related
issues, disability, mental health problems,
financial worries or language barriers.
Our ‘Moving Home’ services are available to
those moving house in our region.
We are making improvements to our written
communications with customers to make
them easier to understand and remove
technical jargon along with launching a new
customer website and mobile app.
How we act responsibly towards our
employees
Our offering to employees includes: a
competitive base salary; an employee
benefits offering; family friendly policies
that go beyond the statutory minimum;
the opportunity to express their views
about the company in the annual employee
survey; an employee assistance support
helpline; company paid healthcare and
the opportunity to join our share incentive
plan. Our whistleblowing helpline allows
employees to raise any concerns they may
have.
How we act responsibly towards our other
stakeholders (shareholders, environment,
communities, and regulators)
Our investor relations team provides a
point of contact for investor queries; our
sustainability team champions sustainability
issues with the business; our stakeholder
teams provide support in areas where we
are undertaking major capital projects; our
communications teams raise awareness and
respond to press and media queries; our
corporate affairs team provides information
to public organisations; and our regulatory
team is in constant communication with our
various regulators.
We have made significant progress in improving the customer experience and embedding a customer service orientated culture in recent years.
On page 32 of the strategic report, details of the KPIs used to monitor customer service can be found. Our employee survey (see page 38 of the
strategic report) shows employee engagement at 89 per cent. The management team is working hard to embed these values in our business.
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.
Stock Code: UU.
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Corporate governance report
Nomination committee
To ensure that board members and senior management have
the appropriate balance of skills and experience to support
the group’s strategic objectives.
Quick facts
— All members of the committee are independent, thus
exceeding the Code requirement 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
advisers
— 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
(stepped down 22 July 2016)
Stephen Carter
Alison Goligher
(appointed 1 August 2016)
Brian May
Paulette Rowe
(appointed with effect from 1
July 2017)
Mark Clare
Sara Weller
Read the Board of directors
on pages 52 to 54
Dear Shareholder
We have made considerable progress during the year in developing
our board succession plans, and we have tried in this report to
provide an informative explanation of our succession planning
activities that will reassure our stakeholders that these matters are
being properly addressed. 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.
We therefore have the benefit of the views and experience of all
board members to contribute to the debate. During the year the
board has reviewed the people and organisational capability plan
twice, in June and in November. The review examined the changing
nature of the organisation and move towards digitalisation both
internally and externally, and the progress being made to understand
the skills and capabilities we need going forwards. In our succession
planning we aim to ensure both our board directors and members
of the executive team and other senior managers, who are potential
successors to the executive team or board, are well equipped with
the right skills and experience to address the challenges of our
business and, where necessary, address any developmental needs.
They also need to be in tune with the culture of the company.
In support of these board discussions, the nomination committee
has responsibility for considering the detailed recruitment process
for executive and non-executive board appointments and members
of the executive team. All the non-executive directors are members
of the nomination committee and participate in meetings and in
the recruitment process. The nomination committee is supported in
the recruitment process by Sally Cabrini, business services director,
as part of her human resources responsibilities. The committee
has met four times during the year. The meetings discussed and
developed our board and executive level succession plans, which
address both contingency planning needs and requirements in the
short to medium-term. These plans now include more granularity
on timescales for key board positions. Additionally, the committee
oversaw the appointment process of a new non-executive director.
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Pictured: Dr John McAdam, chairman of the nomination committee
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 in recent years by
one appointment on an annual basis, along with ensuring a high
degree of continuity. 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. As reported last year,
Alison Goligher was appointed on 1 August 2016, succeeding Dr
Catherine Bell who stepped down at the AGM in 2016. I am pleased
to report that Alison has been very proactive in learning about the
business and is making a valuable contribution in board meetings.
We also recently announced the appointment of Paulette Rowe to
join the board with effect from 1 July 2017 as an independent non-
executive director. Paulette's first hand regulatory experience will
provide additional perspective in this important area for the group,
and her experience of technology driven business transformation
will contribute to our operation, through the customer experience
programme and our Systems Thinking approach.
Our board diversity policy (see page 69) 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. We have revised our target
for gender diversity in our board diversity policy, which shall be
to maintain at least 25 per cent, and aspire to 33 per cent female
representation on our board by 2020.
Dr John McAdam
Chair of the nomination committee
Main responsibilities of the committee
› Lead the process for board appointments and make
› Review directors’ conflict authorisations
recommendations to the board about filling vacancies on the
board, including the company secretary
› Consider the succession planning of directors and members of the
executive team
› Make recommendations to the board on refreshing the
membership of the board’s principal committees
› Consider the request from executive directors for election to the
boards of other companies and make a recommendation to the
board
› Consider requests from non-executive directors for the election to
the boards of other companies; this role has been delegated to the
Chairman (other than in respect of his own position)
Stock Code: UU.
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Nomination committee
Directors' tenure as at 31 March 2017*
Age profile
Dr John McAdam
Steve Mogford
Russ Houlden
Stephen Carter
Mark Clare
Alison Goligher
Brian May
Sara Weller
9yrs 2m
6yrs 3m
6yrs 6m
2yr 7m
3yrs 5m
8m
4yrs 7m
5yrs 1m
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
7
1
0
2
h
c
r
a
M
1
3
*Excludes Paulette Rowe who was not appointed until 1 July 2017
What has been on the committee’s
agenda during the year
Board succession
The committee has further developed the board succession plans
during the year, taking into account more granularity around
timescales for key board positions, the likely evolution of the
business and the changing shape and increasingly competitive
nature of the industry expected from 2020 onwards. A succession
planning matrix tool (incorporating the skills matrix, see opposite)
for board directors is used to support the planning process for board
appointments. The succession planning matrix highlights the Code
governance requirements; existing directors’ terms of appointment
and a forecast/anticipated timeframe for when they might leave
the business; the projected strategic needs of the business and the
resulting preferred experience of any potential new board member;
and existing potential internal successors to a role (where identified)
and those who could act as an interim should the need arise. A
candidate suitable for the role of CEO would need to demonstrate
that their management approach would fit with the company’s
culture of acting responsibly. The committee would seek to consult
with the incumbent CEO, given their unique knowledge and
perspective of the group, on his view of the needs of the business
going forwards. The CEO would not be involved in the appointment
process of his successor, nor would the Chairman be involved in the
appointment of his successor.
Board appointment process
Typically, following board discussions, the nomination committee
will be responsible for drafting a brief, setting out the attributes
and experience of a preferred candidate supported by the director
of business services as part of the human resources function of
the role. The brief would be shared with a number of executive
search agencies (all of which would be signatories to the voluntary
code of conduct on gender diversity for executive search firms)
who would be invited to present their understanding of the role
50-55
56%
56-60
33%
66-70
11%
and attributes required. One of these firms would be engaged to
conduct the search. Russell Reynolds were involved in Paulette
Rowe's recruitment, as they demonstrated the best understanding
of the role. Other than providing executive search services on
previous occasions, Russell Reynolds has no other connection with
the company. A long-list of candidates would then be reviewed by
the nomination committee and those identified for a short-list would
be invited for interview, initially with the Chairman, the CEO and
the business services director. Thereafter, a number of candidates
would be invited to meet other non-executive directors and the
CFO. Following the interview process, the nomination committee
would meet to review and discuss the candidates (with the support
of the business services director) taking into account the views of
the CEO/CFO and assess the ‘best-fit’ with the succession planning
and skills matrix and then make a recommendation to the board.
References would be sought and reviewed by the Chairman prior to
an appointment being taken up. A preferred candidate would also
meet with representatives of Ofwat.
Reviewing membership of
the principal board committees
The committee considered the membership of the principal board
committees, and concluded that, given his financial expertise,
it would be beneficial for Brian May to join the remuneration
committee to provide a mutual benefit to both the remuneration and
audit committees. Paulette Rowe would join the audit committee,
where it was felt her experience of regulated services, and the
importance of risk and reputation, would be of most benefit to the
board. On her appointment, Alison Goligher had been appointed
to all the principal board committees. This was unusual at United
Utilities but had been done to provide Alison with a window into
all the activities of the board. On Paulette joining the board and
providing additional resource, it was agreed that Alison should
relinquish her responsibilities as a member of the audit committee.
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Skills matrix of board directors
Finance/
accounting
Dr John McAdam
Steve Mogford
Russ Houlden
Paulette Rowe
Stephen Carter
Mark Clare
Alison Goligher
Brian May
Sara Weller
✓
✓
✓
Utilities
✓
✓
✓
✓
✓
Regulation Government
Construction/
engineering
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Industrial
✓
✓
✓
✓
Customer
facing
✓
✓
✓
✓
✓
✓
✓
✓
FTSE
companies
✓
✓
✓
✓
✓
✓
✓
✓
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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’. As stated by the policy, the board is looking for
new directors to bring something different to the board table, be it in
terms of experience, skills, perspective or interests.
During the year, we have revised the gender target in our board
diversity policy, which is now to maintain our target of at least 25 per
cent, and aspire to 33 per cent female representation on the board
by 2020.
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 (see page 70). 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.
Conflicts of interest and time commitment
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 or potential
new appointment or directorship, and the board reviews the position
of each director annually. No changes were recorded which would
impact the independence of any of the directors.
The board does not specify the time commitment it requires from
its non-executive directors in taking on the role as they are expected
to fulfil it and manage their diaries accordingly. The board is content
that none of its directors are overcommitted and unable to fulfil their
responsibilities as a board director for United Utilities and are not
‘overboarded’. Each individual’s circumstances are different, as is their
ability to take on the responsibilities of a non-executive directorship
role. Should a director be unable to attend meetings on a regular
basis, not be preparing appropriately or not contributing to board
discussions the Chairman would be responsible for discussing the
matter with them and agreeing a course of action.
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 shall be
to maintain at least 25 per cent, and aspire to 33 per cent
female representation by 2020
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 and representatives of Ofwat.
Stock Code: UU.
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Nomination committee
Alison Goligher: summary of induction
— Met with members of the executive team discussing our
business and regulation
— Visited the integrated control centre based in Warrington,
meeting staff, and discussing the group’s monitoring and
control of its water and wastewater network and assets which
forms the ‘digital brain’ of our network
— Attended the AGM as a guest and met with board members
— Met with Sara Weller, chair of remuneration committee, the
head of reward and a representative from New Bridge Street as
part of her remuneration committee responsibilities
— Had a meeting with the business development director to
discuss new initiatives
— Met with the corporate affairs director and head of
sustainability in relation to her corporate responsibility
committee responsibilities
— Met with the head of customer services to discuss the actions
undertaken by the business and its employees to improve their
service to customers
— Discussed the wholesale operating model with the wastewater
services director and water services director and visited the
water and wastewater testing laboratories
— Visited Davyhulme wastewater treatment works and met with
the programme services director with a particular focus on the
extension of the sludge treatment plant and the offsite design
and build approach being used
— Visited Cumbria to view the progress with the extension of the
water supply network to ensure the security of water supplies
to customers in West Cumbria
What have we done in 2016/17?
Improving diversity across the talent pool
In our executive team of eight (including the CEO and CFO), three are
women, namely Louise Beardmore (customer services director), 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 and capabilities to take up a non-executive appointment.
Women hold 15 per cent (2016: 21 per cent) of senior leadership
positions. We actively support their individual personal development
plans, which includes encouraging them to broaden their external
network. The ‘Women in UU’ network is very popular and membership
has trebled during the year. This year we are focusing on extending
our network to include our partners and making better use of digital
media to promote 'Women in UU' externally, with a view to externally
enhancing our employer brand. Sally Cabrini, business services
director, has been included in the top 50 of the Northern Power
Women list, and this year Louise Beardmore has been nominated for
inclusion on to the list. We were nominated as a finalist in the large
company category of the 2017 Northern Power Women Awards in
recognition of the work we are doing to attract and develop female
talent.
Our graduate scheme continues to be successful in attracting female
applicants; the overall number of female graduates on the scheme is
40 per cent and 36 per cent of our engineering graduates are female.
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,
which now includes more granularity in terms of timescale. This plan
identifies an interim internal successor to fill a role in the short-term
should the need arise, and the longer term development needs of
potential successors to be able to fulfil a role on a more permanent
basis. As with all our board appointments, we would always aim to
appoint the best person to fulfil a 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, board directors have a number of opportunities
to meet with members of the executive team, both formally when
senior managers are required to present to the board on matters
related to their responsibilities at board meetings, and on more
informal occasions such as when they host site visits for board
members. Board members also have the opportunity to meet
members of the apprentice and graduate population and other
employees identified as potential talent within the business.
In 2016, 24 per cent of our intake of apprentices were female, (2015:
30 per cent). 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. At United Utilities, 15 per cent of applicants were female (2015:
11 per cent) and our total female apprentice population is 22 per cent.
During the year, we have rolled out unconscious bias training to our
senior leadership teams to encourage them to consider any bias they
may have, not only from a gender perspective, but more broadly. This
training will also be provided to high volume recruitment managers.
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 aim is to achieve a silver award in
2017.
Our employee-run lesbian, gay, bisexual and transgender network,
newly rebranded as ‘Identity’ has organised a number of employee
events and has participated in a number of Pride events during
the year in our region. The company has enabled employee
representatives of the network to attend the Stonewall conference.
Louise Beardmore is the executive sponsor for the network.
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Code principle – Relations with shareholders
Introduction by Dr John McAdam
“During the year, along with the company secretary, I met with
several investors and we discussed a number of topics, the details
of which I shared with my board colleagues. Such face-to-face
meetings are extremely useful in providing the board with a
balanced understanding of the views of major shareholders.”
The board as a whole accepts its responsibility for engaging with
shareholders and is kept fully informed about information in the
marketplace including:
› the investor relations adviser produces an annual survey of investors’
views and perceptions about United Utilities, the results of which are
presented to and discussed by the board;
› 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 – this is also one of
the specific roles of the senior independent director.
During the year, the role of adviser providing investment research to
the company was re-tendered due to the service being considered
in accordance with the EU Audit Directive and Audit Regulation (see
page 77) to be a prohibited non-audit service, with the incumbent,
Makinson Cowell, being part of the KPMG organisation. Rothschild
Investor Advisory were engaged to provide these services with effect
from 1 April 2017.
Institutional investors
We are always keen to engage with our shareholders, hear their views
and update them on developments in our business. As well as current
investors, we engage actively with institutional investors who do not
currently hold shares in United Utilities, as we are keen to ensure our
business is well understood across the investment community, and to
hear and discuss the views of all investors.
We have an active investor relations programme, which includes:
› a regular schedule of meetings between the CEO and CFO and
representatives from our major shareholders, supplemented with
meetings hosted by our investor relations team;
› presentations by the CEO and CFO to groups of institutional
investors, both on an ad hoc basis and linked to our half and full
year results announcements;
› the programme covers a range of major global financial centres,
typically including the UK, Europe, North America and the Asia
Pacific region;
› regular feedback is provided to the board on the views of our
institutional investors following these meeting; and
› close contact is also maintained between the investor relations
team and a range of City analysts that conduct research on United
Utilities.
In 2016/17, through our investor relations programme, we met or
offered to meet with 42 per cent, by value, of the overall shareholder
base, which represents 74 per cent of the targetable institutional
shareholder base (when adjusting for shareholders who do not
typically meet with companies, such as indexed funds).
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Frequent areas of common interest arising in meetings with
investors include operational and environmental performance,
customer service, capital investment, efficiency initiatives, regulatory
performance and regulatory changes. Investors are always keen to
observe financial stability and are interested in the level of gearing
versus regulatory assumptions; cost of finance; our debt portfolio
and debt maturity profile; future financing requirements; and
dividends. The outcome of the price review, covering the 2015-20
period, remains a key area of interest, and investors are keen to
understand how the company is performing relative to the price
review allowances and targets each year, 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 over 50 per cent of
registered shareholdings on the share register. 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.
Outcome of 2016 AGM
At the 2016 AGM votes were cast in relation to approximately 61
per cent of the share capital. All 17 resolutions were passed by the
required majority. Votes were cast in favour of the reappointment of
the board directors as follows:
Dr John McAdam
Stephen Carter
Mark Clare
Sara Weller
97.49%
99.62%
99.63%
99.62%
Brian May
Steve Mogford
Russ Houlden
99.55%
99.80%
99.46%
Alison Goligher and Paulette Rowe will stand for election by
shareholders for the first time at the 2017 AGM.
Stock Code: UU.
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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 the debt
capital markets to fund our capital investment programme and
refinance upcoming debt maturities.
This requires 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 and repayment of principal on
maturity of the loans or bonds. 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 (EU), is our single biggest lender, currently providing around
£2 billion of debt and undrawn facilities to support our capital
investment programmes (past and present). Following the 2016
referendum regarding the UK exiting the EU (Brexit), it is likely that
the EIB will significantly curtail new lending into the UK once Brexit
has been effected. We therefore expect that post-Brexit, further loans
from the EIB will not be available and our existing loan portfolio with
the EIB will enter into 'run-off' in line with the scheduled maturities
of each loan. The group is therefore likely to access the debt capital
markets on a more regular basis post-Brexit. The group currently has
gross borrowings of circa £7,384 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 and the credit rating agencies. More information can be found on
our website at: corporate.unitedutilities.com/93
Code principle – Accountability
Introduction by Dr John McAdam
“One of the actions that was highlighted by our internal
investigation into the Lancashire water quality incident in August
2015 was providing increased focus on reputational and operational
risks. Accordingly, the information received by the board on the risk
profile of the group has been broadened considerably.”
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 risks predominantly reflect those
of all regulated water and wastewater companies. These generally
relate to the failing of regulatory performance targets or failing to fulfil
our obligations in any five-year planning cycle, potentially leading to the
imposition of fines and penalties in addition to reputational damage.
During the year, the board reviewed the effectiveness of the
risk management systems, including financial, operational and
compliance controls and the progress made to address the key
recommendations of the investigation undertaken by Mark Clare,
senior independent director, relating to the Lancashire water
quality incident in 2015. This investigation identified that the risk
management framework was robust whilst identifying a number of
improvement opportunities, namely: better coordination of drinking
water safety plans within wholesale; improved application by
business units of the risk management process; further embedding
existing risk management processes within wholesale; and improving
system integration. All the actions have either been completed or
were on target to be completed by their forecast completion date.
The board, following the review by the audit committee, concluded
that it was appropriate to adopt the going concern basis of
accounting (see page 131). Similarly, in accordance with the principles
of the Code, the board concluded, following the recommendation
from the audit committee, that it was appropriate to provide the
long-term viability statement (see page 73). Assurance supporting
these statements was provided by the review of: the group’s key
financial measures and contingent liabilities; the key credit financial
ratios; the group’s liquidity and ongoing ability to meet its financial
covenants. 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 to 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. This
now provides the board with information in two categories – group-
wide business risks and wholesale operational risks. 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 59) 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 to 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 80 to 81), the board:
› 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
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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. 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 raising of new finance, capital
programme deferral, the close-out of derivative asset positions and
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 in the accounting policies section of
the accounts.
Read the Principal risks and uncertainties
on pages 48 to 49
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 86 to 109
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;
› the oversight of treasury matters;
› reviewing and assessing the activities and effectiveness of internal
audit;
› reviewing management’s internal control self-assessment;
› reviewing reports from the group audit and risk board;
› reviewing the outcome of the biannual business unit risk
assessment process; and
› reviewing the business risk management framework supported by
the work of the independent reviewer (see page 81).
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 company will be
able to continue in operation and meet its liabilities as they fall due
over the five-year period to March 2022.
The long-term planning detailed on pages 26 to 29 assesses the
group’s prospects and establishes its strategy over a long-term time
horizon, proving a framework for the group’s strategic planning
process. The viability statement has been based on the group’s
strategic planning process which is aligned to the price control
period, the group’s liquidity position providing headroom to cover
its projected financing needs through until mid-2018 and the group’s
robust capital solvency position with a debt to RCV ratio of around 60
per cent, providing considerable headroom within which to increase
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 exist 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 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.
Stock Code: UU.
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Audit committee
Much of the work of the committee is necessarily targeted
at the regulated activities of United Utilities Water Limited,
which represent over 98 per cent of group revenues.
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
— All members of the committee are independent non-
executive directors
— 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 are both afforded 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
Audit committee members
Brian May (chair)
Dr Catherine Bell (stepped down 22 July 2016)
Stephen Carter
Alison Goligher (appointed 1 August 2016, relinquished 1 July 2017)
Paulette Rowe (appointed with effect from 1 July 2017)
Read the biographies of the
Board of directors on pages 52 to 54
Dear Shareholder
This year we are again required to report against the 2014 version
of the Code. However, we are content that we comply with the new
2016 Code provision that the ‘committee as a whole should have
competence relevant to the sector in which the company operates’
(see page 56). As chairman of the committee, I fully endorse the
view of the board that all the members of the committee have
competencies relevant to the utilities sector and the business of
the United Utilities group. All members contribute to the work of
the committee and have the skills and necessary degree of financial
literacy. As non-executive directors, my colleagues and I are of an
independent mindset and would have no hesitation in seeking
clarification and a full explanation from management or the external
auditor on any matter we feel necessary.
Although the audit committee has 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. Last year, 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. The audit committee was asked to monitor the progress
of the implementation of the actions and I can report that all actions
have either been completed or were on target to be completed by
their forecast completion date (see page 72). Our 2017 long-term
viability statement can be found on page 73; we are content that
a medium-term period of five years is appropriate to assess the
group’s viability given the nature of the business and the underlying
protection afforded by Ofwat’s primary legal duty to ensure that
water and wastewater companies are able to finance their functions.
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.
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Pictured: Brian May, chair of the audit committee.
The FRC Corporate Reporting Review team reviewed our 2016 annual
report and accounts; further information can be found on page 79.
The following report was approved by the committee at its meeting
held on 15 May 2017.
We have again worked this year 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 details of the annual evaluation process
of the committee’s performance, which was conducted alongside the
board evaluation process, can be found on page 63.
Brian May
Chairman of the audit committee
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
› Review the half-year and annual financial statements and any
announcements relating to financial performance, including
reporting to the board on the significant issues considered by the
committee in relation to the financial statements and how these
were addressed
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
› 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 responsibilities
Stock Code: UU.
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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 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 and how
the statutory audit contributed to the integrity of the financial
reporting;
› reviewing the proposed audit strategy for the 2016/17 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;
› agreed the appointment of the new lead audit partner;
› monitoring the progress of the implementation of actions
identified by the externally facilitated review of the business
risk management framework which the board commissioned in
response to the 2015 Lancashire water quality incident;
› reviewed the statutory audit fee for the year 2016/17;
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, 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 120 to 123.
The committee concluded that the key performance indicators (KPIs)
included in the strategic report (see pages 32 to 33) 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.
› reviewed and approved the non-audit services and related fees
provided by the statutory auditor for the year 2016/17; approval of
a revised policy on non-audit services provided by the auditor for
2017/18 to reflect the European Union Audit Directive and Audit
Regulation which came into force in the UK from 17 June 2016 and
applies to audits for financial years beginning on or after that date;
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.
› 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;
› reviewing the quality and effectiveness of internal audit; and
› 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 63). 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 continued to be effective.
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 partner, the audit director and the company. The
feedback was collated and presented to the committee’s meeting
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in November 2016, at which the conclusions were discussed and
any opportunities for improvement brought to the attention of the
external auditor. During the year, the FRC also undertook a review of
certain aspects of KPMG’s audit of United Utilities Group PLC for the
year ended 31 March 2016. We have discussed the review findings
with the FRC, enabling the Committee to challenge KPMG robustly in
relation to the points raised, and satisfy itself that KPMG had taken
appropriate action to enhance the quality of the audit process for the
2017 financial year.
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.
Notwithstanding the points raised by the FRC in relation to KPMG's
audit of the 2016 annual report, 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's 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
have an impact 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 other partners and staff in senior positions involved in the
engagement.
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 could 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 could be approved by the committee chair. Any such
fees are reported to the committee for review. These arrangements
were in place until 31 March 2017.
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The EU Audit Directive (2014/56/EU) and Audit Regulation
(537/2014) (the Regulation) came into force in the UK on 17 June
2016 and applies to audits for financial years beginning on or after
that date. Guidance was issued under the FRC’s Revised Ethical
Standards 2016 (FRC’s Ethical Standards), which prohibit the statutory
auditor from providing certain non-audit services to public interest
entities (i.e. United Utilities Group PLC) as such services could impede
their independence. Historically, the group has engaged Makinson
Cowell (a subsidiary of KPMG) to provide it with investor relations
services. With effect from 1 April 2017 such services were regarded as
prohibited in accordance with the Regulation. As a result, with effect
from 1 April 2017, Makinson Cowell no longer provided investor
relations services to the group; a tender process was conducted
appointing an alternative supplier. In response to the EU Audit
Directive and Audit Regulation, the FRC’s Ethical Standards have
clarified that in the future non-audit services will be subject to a fee
cap of no more than 70 per cent of the average annual statutory audit
fee for the three consecutive financial periods preceding the financial
period in which the cap will apply. The cap will first apply for the
group in the year ending 31 March 2021 and, as such, the year ending
31 March 2018 will be the first year of the initial three-year rolling
period over which the annual statutory audit fee will be measured
for this purpose. The committee has therefore revised its non-audit
services policy incorporating the 70 per cent fee cap as described
above with effect from 1 April 2017. Furthermore, a limit of £10,000
will be applied for individual items that the CFO can approve, with
individual items in excess of £10,000 requiring the approval of
the committee.
As part of UUW’s licence conditions it is required to prepare audited
regulatory accounts, which are derived from its statutory financial
statements. The licence stipulates that these regulatory accounts
are required to be audited by the appointed statutory auditor and,
as such, regulatory audit services will not form part of the non-audit
services subject to the 70 per cent cap.
Fees paid to KPMG also include non-audit services in relation to UUW
regulatory assurance work that is separate to the regulatory audit.
Fees for non-audit services are shown in the bar chart on page 78.
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 2017. There are
no contractual obligations that restrict the committee’s choice of
external auditor and no auditor liability agreement has been
entered into.
Stock Code: UU.
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300
250
200
0
0
0
£
’
150
100
50
0
1
9
2
0
8
2
8
8
2
8
7
2
9
3
2
0
7
2
7
3
4
0
3
20151
5
4
20161
Statutory audit - group and company
Regulatory audit services provided by the statutory auditor
Statutory audit - subsidiaries
Other non-audit services
1
0
2
3
5
2017
(1)
Prior year comparatives in the above table have been re-presented to reflect the classification of services provided by the auditor that will be adopted prospectively
in accordance with the audit committee's policy.
Audit tender
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. The Order requires that FTSE 350 companies should
put the external audit contract out to competitive tender at least
every 10 years. The Order promotes audit tendering every five years
through a ‘comply or explain’ requirement with mandatory tendering
after 10 years. Further legislation has been enacted by The Statutory
Auditors and Third Country Auditors Regulations 2016, which
overlaps the Code and the Order and requires mandatory tendering
every 10 years and a 20-year maximum term of engagement.
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. KPMG commenced
their appointment as auditor and presented their first report to
shareholders for the year ended 31 March 2012, following a tender
process for statutory audit services in 2011. The audit committee
last undertook an audit tender review in September 2015. 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 in 2019.
The committee’s audit tender review concluded that the quality
of the audit received from KPMG was satisfactory and that KPMG
demonstrated an independent approach and operated in accordance
with the Ethical Standards of the Auditing Practices Board (‘APB
ethical standards’). In accordance with APB ethical standards, the lead
audit partner must change every five years; the lead audit partner
has indeed been replaced for these 2016/17 financial statements.
Bill Meredith, the new lead audit partner, has considerable audit
experience of other FTSE 100 utility companies. In September 2015,
the committee also 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 2017 year end audit has been KPMG’s sixth consecutive year in
office as statutory auditor. As determined by the September 2015
audit tender review, the committee next intends to undertake a
competitive tender, most probably during 2020, for statutory audit
services 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 2017.
*
The Statutory Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014.
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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.
› In considering the work performed by KPMG during the year in
this area, the committee assessed the reasonableness of the
group’s capitalisation policy and the basis on which expenditure
is determined to relate to the enhancement or maintenance of
assets. These were both determined to be appropriate
› The committee also reviewed the recovery of the capital overhead
rate which management has applied during the year and which the
committee had approved in the year ended 31 March 2015 for the
five-year regulatory period ending 31 March 2020. The committee
concluded 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 15 for more detail). The
committee challenged management over the adequacy of the
overall levels of provisioning following these reviews and were
satisfied that the resulting net debtor balance was appropriate
Retirement benefits
The group’s defined benefit retirement schemes are an area of
considerable judgement, the performance and position of which is
sensitive to the assumptions made.
› The committee sought from management an understanding as
to the factors which led to the significant decrease 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
160) 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 and
following a review of the explanatory note approved its inclusion in
the financial statements
› 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
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 their attention on the more significant items and discussed
the judgements made by management in arriving at appropriate
provisions in relation to these matters
› Based on 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
Derivative financial instruments
The group has a significant value of swap instruments, the valuation
of which is based on 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 check a sample against their 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 on 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 and satisfied itself that those items being reported as
adjustments met the requirements of the group’s policy.
Interactions with the Financial Reporting
Council (FRC)
During the year, the FRC undertook a review of the United Utilities
Group PLC annual report and accounts for the year ended 31 March
2016, which resulted principally in queries relating to disclosures.
These queries were all resolved to the FRC’s satisfaction. To
provide greater clarity the group has provided enhanced, voluntary
disclosures on these and other matters in this year’s financial
statements. The review has subsequently been closed. The FRC noted
that their review did not provide assurance that the 2016 annual
report and accounts is materially correct as their role is not to verify
the information included therein but rather to consider compliance
with reporting requirements and stimulate improvements in the
quality of corporate reporting.
During the year, the FRC also undertook a review of certain aspects
of KPMG’s audit of United Utilities Group PLC for the year ended 31
March 2016. We have discussed the review findings with the FRC,
enabling the Committee to challenge KPMG robustly in relation to
the points raised, and satisfy itself that KPMG had taken appropriate
action to enhance the quality of their audit process for the 2017
financial year.
Stock Code: UU.
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Audit committee
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.
c. 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.
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 is applied. This
facilitates an 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. 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 the 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.
b. Assessing the effectiveness of
the internal audit function
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.
Taking all these elements into account, 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
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d. 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 monitored 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.
Supplementing the more detailed ongoing risk management activities
within each business area, the biannual 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. The group
utilises risk management software to underpin the company’s risk
management process. A new risk management assurance model
was implemented during the year. This annual assurance process
allows the objective appraisal and degree of maturity in how the risk
management system is being applied and the quality of each risk in
terms of quantification and management. Resulting actions will be
monitored and the results reported to the GARB.
An external assessment of the risk management process took place
in 2015/16; this was sought as part of the internal investigation of
the Lancashire water quality incident. This 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 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 that there was
active engagement with risk management by senior management,
the executive team and the board, but it could be strengthened.
Following this assessment, the board took responsibility for ensuring
that the recommendations were implemented including: the need for
better coordination of drinking water safety plans to aid consistency;
improved application by some business units 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. As reported on page
72, all actions have either been completed or were on target to be
completed by their forecast completion date.
Stock Code: UU.
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Corporate responsibility committee
With its footprint in North West England, the committee noted
how the emergence of regional devolution will be of growing
significance for United Utilities.
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
eight years
Quick links
Terms of reference –
corporate.unitedutilities.com/corporate-governance
Corporate responsibility members
Stephen Carter (chair)
Catherine Bell (stepped down as chair 22 July 2016)
Alison Goligher (appointed 1 August 2016)
Steve Mogford
Read the Board of directors
on pages 52 to 54
Dear Shareholder
In my first year as chair of the corporate responsibility committee
(CRC), I am pleased to report on our work in 2016/17.
Over the past 12 months, external scrutiny of corporate behaviour
has increased, particularly focused on governance, trust and
legitimacy. This has been evident across many fronts – politically, as
seen in the corporate governance green paper; socially where, in a
post-Brexit Britain, it is perceived that companies do not fairly share
rewards with society; and in the water industry itself, with Ofwat’s
focus on the trust and confidence that customers have in their local
company.
Given this external context, the committee examined United Utilities'
current corporate responsibility (CR) position. It agreed that the CR
agenda was intertwined with United Utilities' strategy, supported
by management's CR Panel, and that United Utilities should focus
on further building legitimacy amongst the opinions of customers,
regulators and government.
The committee noted the steps already taken by the company
to demonstrate the value it generates, whether that is help for
customers in need of extra support through its Priority Services
initiative, the sharing of outperformance and tax rebates, and local
projects in communities where large projects are being undertaken. It
agreed to return to this topic on a regular basis.
The CRC explored what further actions the company could consider
in this regard and focused in particular on customers in lower income
groups i.e. those who aren’t eligible for financial assistance but who
are vulnerable to a financial shock. The CRC welcomed the steps
being taken by the company to consider what support can be given to
these customers.
The impact of the winter floods of December 2015, which devastated
parts of Cumbria, Lancashire and Greater Manchester, can still be felt
in the North West. In this context, the committee considered broader
questions of the risks and opportunities associated with resilience
and climate change and, in addition, the national issue of the unequal
distribution of water. It noted the significance of these topics to PR19
planning and the importance of striking a balance between resilience
and associated costs.
With its footprint in North West England, the committee noted how
the emergence of regional devolution will be of growing significance
for United Utilities. With the devolution of powers in areas such as
strategic planning, the CRC agreed that it will be important for the
company to engage with the new devolved administrations, including
the Liverpool City Region and Greater Manchester Mayors, to ensure
that water management challenges are understood and taken into
account as regional plans are developed.
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Pictured: Stephen Carter, chair of the corporate responsibility committee
Main responsibilities of the committee
The board approved an unchanged set of terms of reference for the
CRC in April 2017. The main duties are to:
› consider and recommend to the board the broad corporate
responsibility 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;
In addition, the CRC considered a wide range of topics. These
included cross-cutting themes such as governance, reputational
risk, stakeholder engagement and performance reporting through
to specific topics such as energy, natural capital, sustainable supply
chain, waste targets, the living wage, gender pay reporting and the
company’s approach to early careers and developing young people.
More broadly, the committee reviewed the company’s responsible
business scorecard, used to track progress against company
objectives to provide the best service to customers, at the lowest
sustainable cost, in a responsible manner. We were delighted to
retain World Class status in the Dow Jones Sustainability Index for the
ninth consecutive year and over 67 per cent of the stretching targets
tracked by the committee to measure the company’s CR performance
were achieved.
› 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; and
› review the profile of the charitable donations directed by the
United Utilities Trust Fund.
Given the sustained level of external scrutiny of responsible business
behaviour, and the specific challenges within the water sector, the
CRC agreed it should increase the frequency of its meetings and
by 2018 the committee will meet four times each year. Our areas
of focus will remain largely unchanged so, as the development of
plans for AMP7 gathers pace, this extra time will allow committee
members more opportunity to examine the steps being taken by the
company to act responsibly and ensure long-term success for both
our customers and shareholders.
Stephen Carter
Chair of the corporate responsibility committee
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Corporate responsibility committee
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 the following:
Environmental
› energy – the committee discussed the company’s energy approach
given the UK’s energy 'trilemma' – balancing supply security, cost
and low carbon – and plans to ensure United Utilities has a secure
power supply to meet its needs, at the lowest cost, whilst reducing
its carbon impact. The CRC noted good progress by the company in
generating more energy from its own renewable sources, reducing
carbon emissions and recognised the challenges in reducing energy
consumption given stringent water quality and environmental
standards typically mean more energy intensive processes. It also
noted the role that organisational culture will play, especially in
striking a balance between compliance and efficiency;
› resilience and climate change – examining the company’s approach
to resilience and climate change following the 2015 winter floods,
the CRC noted the significance of this topic to PR19 planning
and work already underway to inform this, in the context of the
national water agenda, and the potential for a common view to
emerge across the sector, balancing resilience with the associated
costs;
› natural capital – growing external stakeholder interest in the
emerging concept of natural capital was noted by the committee,
who supported the company’s intention to pilot approaches to
understand its value and application;
› waste – the CRC approved United Utilities' waste strategy target to
divert 95 per cent of waste to beneficial use by 2020 and that this
should be reported externally. Based on an analysis of waste types
and volumes, the committee supported the company’s plan to
enhance its focus on construction waste;
› sustainable supply chain – the committee considered the
company’s updated approach to engaging with suppliers on
responsible business issues and reviewed its proposed Sustainable
Supply Chain Charter. It supported company objectives to 2020
and how suppliers would be monitored as part of United Utilities'
supplier relationship management processes;
Social
› reward – the CRC examined two reward topics: living wage and
gender pay reporting. It supported the approach taken by the
company to engage proactively with the Living Wage Foundation,
recognising that the main challenge is in the supply chain rather
than United Utilities' employees. Given the emphasis placed on
gender pay by the Prime Minister, the committee was updated
on the new regulations from Autumn 2016 requiring employers
to publish details of their gender pay gap with accompanying
contextual narrative;
› lower income groups – the committee explored the company’s
approach to those customers in lower income groups who manage
to pay their bills but are vulnerable to financial shocks. It noted
work underway to differentiate and segment our tariff base and
the potential to target support from insights gained from new data
analysis into the relationship between macroeconomic trends in
the North West and individual customers’ economic experience;
› early careers – the company’s approach to developing young
people was discussed including the apprentice and graduate
programmes, initiatives targeted at young people not in education,
employment and training, and partnerships with organisations
such as Teach First. The CRC noted future priorities for significant
progress for BAME employees to bring more diversity into the
company’s talent pipeline and, in addition, clear plans for older
workers;
Governance (including reputation)
› reputation – this broad topic has been subject to considerable
discussion by the CRC covering: an analysis of the current external
landscape and growing scrutiny by government and society of
responsible business behaviour; building trust and confidence as
a company in the water sector; a review of United Utilities' key
reputational risks; and exploring the opportunities created by
regional devolution ;
› committee meetings – the committee and the board agreed to
increase the frequency of CRC meetings, from two each year to
four by 2018, in recognition of the continued and growing external
interest and scrutiny of responsible business behaviour;
› ESG awareness – the CRC discussed board awareness of
environmental, social and governance (ESG) matters and the
emerging external interest in the level of board understanding of
the subject. It requested further work be undertaken to understand
how this particular area of governance would develop over the
coming years; and
› measuring and reporting CR performance – the committee
reviewed the company’s CR scorecard for 2015/16, noting that 67
per cent of the targets were achieved.
Looking to the next year, critically important for PR19, the CRC will:
› continue its focus on the interaction between CR, communications
and reputation, with particular emphasis on stakeholder
engagement linked to the price review process;
› return to specific topics such as the company’s approach to lower
income groups and payment assistance schemes and gender pay
reporting;
› consider issues such as: what Brexit means for environmental and
social legislation; the responsible business issues and opportunities
afforded by the price review process; and a look at the new
competitive water market for non-retail customers through a CR
lens;
› review CR strategies including natural environment and community
investment;
› consider other matters such as integrated reporting in the 2017/18
Annual Report; and
› review progress in delivering responsible business targets set out
to 2020.
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Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Annual statement from the remuneration committee chair
We are confident that the review we have undertaken will
continue to encourage a keen focus on the sustainable
delivery of superior financial and operational performance
which will, in turn, support the long-term success of the
company.
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 pensions
and the external advisor to the committee
Quick links
Terms of reference –
corporate.unitedutilities.com/corporate-governance
Index
Read more about At a glance summary: executive directors'
remuneration on pages 88 to 90
Read more about Directors' remuneration policy
on pages 91 to 97
Read more about Annual report on remuneration
on pages 98 to 109
Remuneration committee members
Sara Weller (chair)
Dr Catherine Bell (stepped down 22 July 2016)
Mark Clare
Alison Goligher (appointed 1 August 2016)
Brian May (appointed 16 May 2017)
Dear Shareholder
I am pleased to introduce the directors’ remuneration report for the year
ended 31 March 2017, which includes my statement, an 'at a glance'
summary, a revised directors’ remuneration policy which is intended
to take effect from the date of our 2017 AGM (subject to shareholder
approval) and the annual report on remuneration for the year ended 31
March 2017.
Remuneration review
During the year the committee undertook a review of executive pay
arrangements, in advance of seeking shareholder approval for a new
directors’ remuneration policy at the 2017 AGM. The purpose of
the review was to ensure that executive pay remains aligned with
business strategy, reflects best practice expectations of shareholders
and is appropriately positioned relative to the market. In developing
the policy, we consulted with major shareholders and investor groups
during November and December 2016. The consultation process was
constructive and there was, in general, support for our proposals. The
responses received were carefully considered, and played an important
role in informing the review process.
Following this review, no significant changes are proposed to the current
arrangements as feedback indicates these are working well. A few minor
revisions to the policy are proposed as follows:
›
›
to include the flexibility to adjust the balance of incentives in the
reward package towards the longer term;
to increase flexibility on how long-term performance metrics are
weighted to enable appropriate measurement of performance over the
life of the policy; and
›
to strengthen recovery/withholding provisions.
See pages 91 to 97 for further detail on these proposed amendments.
Implementation of directors’
remuneration policy
Salary increases
Executive directors received a base salary increase of 2 per cent with
effect from 1 September 2016, in line with the headline increase applied
across the wider workforce. Salaries will next be reviewed in September
2017 in line with our normal annual review process.
Annual bonus
The annual bonus measures incentivise and reward 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 throughout the company, to ensure alignment
to the business plan at all levels.
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Pictured: Sara Weller, chair of the remuneration committee
As set out in detail in the annual report on remuneration, we have seen
another strong year of performance in 2016/17 with progress made
in moving towards our vision of becoming the UK’s best water and
wastewater company, providing great service to customers. Underlying
operating profit was up by £19 million and customer service continues
to improve with the achievement of our best ever score under Ofwat’s
revised qualitative SIM score for this regulatory period. The efficient
and effective delivery of our capital programme is reflected in our Time,
Cost and Quality index (TCQi) score which remains high at 92.9 per
cent and our accelerated capital expenditure has helped us to optimise
performance against our outcome delivery incentives. Our strong
corporate responsibility and environmental credentials were recognised
again this year when we retained a World Class ranking in the Dow Jones
Sustainability Index for the ninth consecutive year.
During the year, the committee used our discretion to exclude any profit
or loss arising from non-household services in the underlying operating
profit figure used for setting the bonus targets and assessing the outcome.
This was to recognise changes in the scope of business operations from
the creation of a joint venture with Severn Trent in June 2016 to provide
non-household services (Water Plus).
Overall company results, together with strong personal performance
by the two executive directors, has resulted in annual bonus outturn of
around 84 per cent of maximum (up from the 2015/16 outcome of around
54 per cent of maximum) and a company-wide bonus pool totalling
£18 million (up from £13 million in the prior year). Half of the executive
directors’ annual bonuses will be deferred into shares for a period of
three years.
In 2017/18, the annual bonus will operate in a broadly similar way with
the exception that the Dow Jones measure (currently representing
a maximum of four per cent of executive directors’ bonuses) will be
removed from the bonus scorecard and the weighting redistributed to the
outcome delivery incentive (ODI) measure. The ODI targets, introduced
in 2015, cover a broad range of customer priorities which closely link to
the sustainable delivery of company performance, such as water quality,
reliability of supply and wastewater network performance. The ODI
targets also have a direct financial impact on shareholder value, and so
on a going forward basis will, in the committee's view, form a stronger
measure of performance for customers and shareholders than the Dow
Jones measure.
In addition, in line with the revised policy, recovery and withholding
provisions for the annual bonus scheme will be made more robust on an
ongoing basis.
Long-term incentives
The Long Term Plan awards which were granted in 2014, and whose
performance is measured over the three years to 31 March 2017, are
expected to vest at 59.1 per cent. This reflects strong total shareholder
return over the period of around 45 per cent and the achievement of
the threshold level of sustainable dividend performance. The customer
service excellence measure is expected to outturn between median
and upper quartile versus comparator water companies. The awards for
executive directors will vest following an additional two-year holding period.
Long Term Plan awards to be granted in 2017 will operate in a broadly
consistent way, with the exception that, in line with the revised policy,
recovery and withholding provisions will be made more robust on an
ongoing basis and some changes will be made to the customer service
measure to ensure we are measuring performance appropriately. For
further details see page 102.
Agenda for 2017/18
The main focus of the committee’s work over the past year has been
on a thorough review of the remuneration policy, taking account of
changes to best practice in the wider market and the related shareholder
consultation process. We are confident that the review we have
undertaken will continue to encourage a keen focus on the sustainable
delivery of superior financial and operational performance which will, in
turn, support the long-term success of the company. During 2017/18,
we will continue to keep the remuneration arrangements under review,
although no material changes in how our policy is implemented are
expected. We remain mindful of the developing remuneration landscape
and a key priority for 2017/18 will be to continue to monitor the executive
pay environment, governance developments and market practice.
I hope we will receive your support for the resolutions relating to
remuneration at the 2017 AGM.
Sara Weller
Chair of the remuneration committee
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
At a glance summary: executive directors' remuneration
Executive directors’ remuneration policy
Elements of executive directors' pay
A significant proportion of executive directors’ pay is performance-linked, long-term and remains 'at risk' (i.e. subject to withholding and
recovery provisions for a period over which the committee can withhold vesting or recover sums paid):
Fixed vs performance-linked (%)(1)
Short-term vs long-term (%)(1)
Fixed
Base salary
Pension and
other benefits
33%
26%
7%
Performance-linked
67%
Annual bonus - cash
Annual bonus - shares
Long Term Plan (LTP)
17%
17%
33%
Short-term
Base salary
Pension and
other benefits
Annual bonus - cash
Long-term
Annual bonus - shares
Long Term Plan (LTP)
50%
26%
7%
17%
50%
17%
33%
(1) Based on maximum payout scenario for executive directors assuming the normal maximum award level of 130 per cent of salary for the Long Term Plan (LTP).
Pay at risk
Annual bonus - cash
Annual bonus - shares
Performance
period
Performance
period
Period subject to recovery provisions
Period subject to withholding provisions
Long Term Plan (LTP)
Performance period
Period subject to withholding
and recovery provisions
Year -1
Award date
Year 1
Year 2
Year 3
Year 4
Year 5
Further details on what triggers withholding and recovery provisions can be found on pages 92 to 93.
Implementation of directors' remuneration policy in 2016/17
The table below summarises the implementation of the directors' remuneration policy for executive directors in 2016/17. For further details
see the annual report on remuneration on pages 98 to 109.
Key element
Base salary
Benefits and pension
Annual bonus
Implementation of policy in 2016/17
— Salary increase of 2.0 per cent from 1 September 2016 in line with the headline increase for the wider workforce
— Market competitive benefits package
— Cash pension allowance of 22 per cent of base salary
— Maximum opportunity of 130 per cent of base salary
— 2016/17 annual bonus outcome of around 84 per cent of maximum
— 50 per cent of 2016/17 annual bonus deferred in shares for three years
— Withholding and recovery provisions apply
Long Term Plan
— Award of 130 per cent of base salary
— Estimated long-term incentive vesting of 59.1 per cent for the performance period 1 April 2014 to 31 March 2017,
supported by a total shareholder return of around 45 per cent over the same period. These awards will vest after an
additional two-year holding period
— Withholding and recovery provisions apply
Shareholding guidelines
— Personal shareholdings remain significantly above the 200 per cent of salary minimum guideline
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Key:
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Best service to customers
Lowest sustainable cost
Responsible manner
Single total figure of remuneration for executive directors for 2016/17
Fixed pay comprises base salary, benefits and pension. Further information on the single total figure of remuneration can be seen on page 98.
Steve Mogford CEO
Total £’000
£2,310
Russ Houlden CFO
Total £’000
£1,463
Fixed pay
Annual bonus
£908
£785
£617
£581
£492
£390
Long-term incentives
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0
500
1,000
1,500
2,000
2,500
0
500
1,000
1,500
£’000
£’000
KPI performance
Annual bonus –
Year ended 31 March 2017
Long Term Plan –
Three years ended 31 March 2017
Underlying operating
profit1
SIM qualitative2 SIM quantitative2
Wholesale outcome
delivery incentive
(ODI) composite
Time, Cost and
Quality index (TCQi)
Dow Jones
sustainability index
Total shareholder
Underlying dividend
return (TSR)3
cover4
£622.9m
4.42
77
£6.7m
92.9%
100%
44%
1.27
Key:
Above stretch target
Between threshold and stretch targets
Below threshold target
(1) For the purpose of annual bonus underlying operating profit is subject to a number of adjustments, principally in regard to infrastructure renewals expenditure, giving an
underlying operating profit of £765.4 million. See page 99 for further details.
(2) The estimated ranking versus 17 other water companies using the SIM combined score is seventh.
(3) For the purpose of the Long Term Plan, the TSR index is averaged over the three months prior to the start and end of the performance period.
(4) Average underlying dividend cover over 2014/15, 2015/16 and 2016/17.
Annual bonus and Long Term Plan (LTP) outcomes
The charts below show the results of the performance against targets for the annual bonus and LTP schemes. Further information on annual
bonus can be seen on page 99 and on LTP on page 101.
2016/17 Annual bonus outcome
Estimated 2014 Long Term Plan (LTP) outcome
Estimated total:
59.1% of award vests
Relative total
shareholder return (TSR)
Sustainable dividends
Customer service excellence
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
30.0%
12.0%
4.0%
20.0%
20.0%
4.0%
10.0%
24.4%
12.0%
4.0%
16.7%
13.6%
4.0%
9.0%
30.0%
12.0%
4.0%
20.0%
20.0%
4.0%
10.0%
24.4%
12.0%
4.0%
16.7%
13.6%
4.0%
8.5%
Actual totals:
Steve Mogford
83.7% of maximum
Russ Houlden
83.2% of maximum
Underlying operating
profit
SIM - qualitative
SIM - quantitative
Wholesale outcome
delivery incentive (ODI)
composite
TCQi
Dow Jones Sustainability
Personal objective
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
33.3%
33.3%
33.3%
33.3%
8.3%
17.5%
Maximum Actual
Steve Mogford
Maximum Actual
Russ Houlden
Maximum
Estimated
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
At a glance summary: executive directors' remuneration
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 31 to 33).
Alignment to strategy
Annual bonus
Underlying operating profit
Key measure of shareholder value.
Customer service in year
› Service incentive 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
› Dow Jones Sustainability
Index1
Personal
Delivering the best service to customers is a strategic objective.
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.
Ensures that we manage our business in a responsible manner.
Focused on specific areas of individual contribution.
Compulsory deferral of bonus
Deferral of part of bonus into shares aligns the interests of executive
directors and shareholders.
Long Term Plan (LTP)
Relative total shareholder
return (TSR)
Direct measure of delivery of shareholder returns, rewarding management
for the outperformance of a comparator group of companies.
Sustainable dividends
Direct measure of return to shareholders through dividend payments, whilst
focusing on the creation of strong earnings that ensure the sustainability of
dividends.
Customer service excellence
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.
Additional two-year
holding period
Ensures continued alignment with shareholder interests and provides an
additional period over which withholding can be applied.
Shareholding guidelines
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.
A long-term
approach
to creating
sustainable
value
Link to
strategic
objectives
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Key:
The best service to customers At the lowest sustainable cost In a responsible manner
(1) The Dow Jones Sustainability Index is included as a measure for the 2016/17 annual bonus but will be removed for the 2017/18 annual bonus. See page 100 for
further details.
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Corporate governance report
Directors’ remuneration policy
This part of the directors’ remuneration report sets out the remuneration policy for the company and has been prepared in accordance with
the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The policy in this report will be
put to a binding shareholder vote at the 2017 AGM on 28 July 2017 and will take formal effect from that date, subject to shareholder approval.
It is intended that the policy will formally apply for the three years beginning on the date of approval.
Overview of remuneration policy
The company’s remuneration arrangements are designed to promote the long-term success of the company. 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.
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The committee monitors the remuneration arrangements to ensure that there is an appropriate balance between risk and reward and that the
long-term performance of the business is not compromised by the pursuit of short-term value. There is a strong direct link between incentives
and the company’s strategy and if the strategy is delivered within an acceptable level of risk, 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.
Considerations when determining remuneration policy
The committee understands that listening to the views of the company’s key stakeholders plays a vital role in formulating and implementing
a successful remuneration policy over the long term. The committee thus actively seeks the views of shareholders and other key stakeholders
to inform the development of the remuneration policy, particularly where any changes to policy are envisaged. Although employees are not
consulted directly on executive remuneration policy, employee engagement surveys are carried out annually and regular discussion takes place
with union representatives on matters of pay and remuneration for employees covered by collective bargaining or consultation arrangements.
The committee takes into account the general base salary increase and remuneration arrangements for the wider employee population when
determining remuneration policy for the executive directors.
Changes to the remuneration policy
As described in the annual statement from the remuneration committee chair, during the year the committee undertook a review of the
current executive directors’ remuneration policy to ensure that it remains aligned with business strategy, reflects best practice expectations of
investors and is appropriately positioned relative to the market. In doing so, the committee engaged with institutional shareholders as well as
the leading shareholder advisory organisations. The changes proposed are minor and relate principally to the introduction of further flexibility
in the policy and the strengthening of recovery/withholding provisions. In summary, the key proposed changes include:
› increasing the maximum award limit under the Long Term Plan to 200 per cent of salary. However, the normal maximum remains unchanged
at 130 per cent of salary for 2017 and any increase to this over the term of this policy for current executive directors will be subject to
consultation with major shareholders;
› additional flexibility in the weightings and measures for the Long Term Plan;
› strengthening of the withholding and recovery provisions in the annual bonus and Long Term Plan; and
› limiting the notice period the company must give to executive directors when terminating their employment to a maximum of 12 months in
any circumstances.
Future policy table for directors
Base salary
Purpose and link to strategy: To attract and retain executives of the experience and quality required to deliver the company’s strategy.
Operation
Maximum opportunity
Normally reviewed annually, typically effective 1 September.
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).
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.
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 incumbent.
Performance measures
None.
Stock Code: UU.
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Directors’ remuneration policy
Benefits
Purpose and link to strategy: To provide market competitive benefits to help recruit and retain high calibre executives.
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.
Operation
Provision of benefits such as:
— health benefits;
— car or car allowance;
— relocation assistance;
— life assurance;
— group income protection;
— all employee share schemes (e.g. opportunity to join the ShareBuy
scheme);
— travel; and
— communication costs.
Any reasonable business related expenses can be reimbursed (and any tax
theron met if determined to be a taxable benefit).
Executives will be eligible for any other benefits which are introduced for
the wider workforce on broadly similar terms and 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.
Pension
Purpose and link to strategy: To provide a broadly mid-market level of retirement benefits.
Operation
Maximum opportunity
Executive directors are offered the choice of:
— a company contribution into a defined contribution pension scheme;
— 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 an existing United
Utilities defined benefit scheme will be offered the choice of staying in
that scheme or of choosing one of the above options.
— up to 25 per cent of salary into a defined contribution scheme;
— cash allowance of broadly equivalent cost to the company (up to
25 per cent of salary less employer National Insurance Contributions at
the prevailing rate, i.e. up to 22 per cent of base salary for 017/18); or
— a combination of both, such that the cost to the company is 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.
Performance measures
None.
Annual bonus
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
Maximum opportunity
A maximum of 50 per cent of bonus awarded paid as cash.
A minimum of 50 per cent of bonus awarded deferred into company
shares under the Deferred Bonus Plan (DBP) for a period of at least
three years.
DBP shares accrue dividend equivalents.
Not pensionable.
Bonuses are subject to withholding and recovery provisions in certain
negative circumstances; for example, in the event of a material
misstatement of audited financial results, an error in the calculation or
gross misconduct.
Maximum award level of up to 130 per cent of salary, for the achievement
of stretching performance objectives.
Performance measures
Payments predominantly based on financial and operational performance,
with a minority based on achievement of personal objectives.
Targets and weightings set by reference to the company’s financial and
operating plans.
Target bonus of up to 50 per cent of maximum bonus potential and bonus
of up to 25 per cent of maximum for threshold performance.
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Long Term Plan (LTP)
Purpose and link to strategy: To incentivise long-term value creation and alignment with longer term returns to shareholders.
Operation
Maximum opportunity
Awards under the Long Term Plan are rights to receive company shares,
subject to certain performance conditions.
The normal maximum award level will be up to 130 per cent of salary per
annum.
Each award is measured over at least a three-year performance period.
An additional two-year holding period applies after the end of the three-
year performance period.
The overall policy limit will be 200 per cent of salary. It is not anticipated
that awards above the normal level will be made to current executive
directors and any such increase on an ongoing basis will be subject to prior
consultation with major shareholders.
Vested shares accrue dividend equivalents.
Performance measures
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Shares under the LTP are subject to recovery and withholding provisions
in certain negative circumstances; for example: material misstatement of
audited financial results, an error in the calculation or gross misconduct.
The current performance measures are relative total shareholder return
(TSR), sustainable dividends and customer service excellence. The weighting
of any one of these single measures will not exceed 40 per cent.
Any vesting is also subject to the committee being satisfied that the
company’s performance on these measures is consistent with underlying
business performance.
The committee retains discretion to set alternative performance measures
for future awards but will consult with major shareholders before making any
changes to the currently applied measures.
100 per cent of awards vest for stretch performance, up to 25 per cent of
an award vests for threshold performance and no awards vest for below
threshold performance.
Non-executive directors’ fees and benefits
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
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.
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).
Fees are reviewed annually, taking into account the salary increase for the
general workforce and the levels of fees paid by companies of a similar size
and complexity. Any changes are normally effective from 1 September.
Additional fees are paid to the chairs of certain board sub-committees and
to the senior independent non-executive director.
In exceptional circumstances, if there is a temporary yet material increase in
the time commitments for non-executive directors, the board may pay extra
fees on a pro rata basis to recognise the additional workload.
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, including travel,
hospitality-related and other modest benefits and any tax liabilities thereon,
if appropriate.
Stock Code: UU.
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Directors’ remuneration policy
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.
The current Long Term Plan (LTP) measures were selected by the committee following an extensive review and shareholder consultation
in 2012/13. These measures were reviewed again as part of the wider review of the remuneration policy in 2016/17 and are considered to
continue to align with the company’s key strategic goals and be closely linked to the creation of long-term shareholder value as follows:
Measure
Relative total shareholder return
Sustainable dividends
Customer service excellence
Why selected
Direct measure of delivery of shareholder returns, rewarding management for 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.
It is a key strategic objective to provide the best service to customers. This is fundamental to delivering
our vision of being the best UK water and wastewater company, providing great service to our
customers. This measure has a direct financial impact on the company as our regulator can apply
financial incentives or penalties depending on our customer service performance.
The policy provides for committee discretion to alter the LTP measures and weightings to ensure they continue to facilitate an appropriate
measurement of performance over the life of the policy (taking into account any evolution of the strategic goals of the company). 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. These include making awards and setting
performance criteria each year, dealing with leavers, and adjustments to awards and performance criteria following acquisitions, disposals,
changes in share capital and to take account of the impact of other merger and acquisition activity. The committee also retains discretion
within the policy to adjust the targets, set different measures and/or alter weightings for the annual bonus plan, pay dividend equivalents on
vested shares up to the date those shares can first reasonably be exercised and, in exceptional circumstances, under the rules of the long-term
incentive plans to adjust targets to ensure that the awards fulfil their original purposes (for example, if an external benchmark or measure is no
longer available). All assessments of performance are ultimately subject to the committee’s judgement.
Any discretion exercised (and the rationale) will be disclosed in the annual remuneration report.
Historic awards
All historic awards that were granted under any current or previous share schemes operated by the company and remain outstanding, remain
eligible to vest based on their original award terms.
Differences in policy for executive directors compared to other employees
The remuneration approach is consistently applied at levels below the executive directors. Key features include:
› market competitive levels of remuneration, incentives and benefits to attract and retain employees;
› employees at all levels participate in a bonus scheme with the same corporate performance measures as for executive directors; and
› all employees have the opportunity to participate in the HMRC approved share incentive plan, ShareBuy.
At senior levels, remuneration is increasingly long-term, and ‘at risk’ with an increased emphasis on performance related pay and share-based
remuneration.
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Scenarios for total remuneration
The charts below show the pay-out under the remuneration policy for each executive director under three different scenarios.
Steve Mogford CEO
£'000s
Russ Houlden CFO
£'000s
Fixed
100%
915
Fixed
100%
586
Target
49%
25.5%
25.5%
1,860
Target
50%
25%
25%
1,183
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Maximum
33%
33.5%
33.5%
2,805
Maximum
33%
33.5%
33.5%
1,779
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
Notes on the scenario methodology:
Fixed
Annual bonus
Long Term Plan
› fixed pay is base salary effective 1 September 2016 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 2016/17;
› 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 (i.e. 260 per cent of salary in total);
› 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; and
› amounts relating to all-employee share schemes have, for simplicity, been excluded from the charts.
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. Shareholding guidelines are therefore operated and the details of how these are currently
applied are provided in the annual report on remuneration.
External directorships
The company recognises that its executive directors may be invited to become non-executive directors of other 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). Directors will be allowed to retain
any fees received in respect of such appointments.
Stock Code: UU.
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Directors’ remuneration policy
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.
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.
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 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 per annum on an ongoing basis. Therefore, the maximum 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) per annum on an ongoing basis. 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
Base salary levels for new recruits will be set in accordance with the policy, taking into account the experience of the individual recruited. 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 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 and/or incidental expenses as
appropriate.
Annual bonus performance conditions
Where a new executive director is appointed part way through a financial year, the committee may set different annual bonus measures and
targets for the new executive director from those used for other executive directors (for the initial year only).
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.
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Payment for loss of office
The circumstances of the termination, including 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. Our policy is shown in the table below:
Provision
Summary terms
Compensation
for loss of office
— An executive director’s service contract may be terminated without notice and without any further payment or
compensation, except for sums earned up to the date of termination, on the occurrence of certain contractually
specified events such as gross misconduct.
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— No termination payment if full notice is worked.
— Otherwise, a payment in respect of the period of notice not worked of basic salary, plus pension and car allowance for
that period.
— Half of the termination payment will be paid within 14 days of date of termination.
— The other half will be paid in monthly instalments over what would have been the second half of the notice
period. This will be reduced by the value of any salary, pension contribution and car allowance earned in new paid
employment in that period.
Treatment of
annual bonus on
termination
— A time prorated bonus may be payable for the period of active service; however, there is no automatic entitlement to
payments under the bonus scheme. Any payment is at the discretion of the committee and is subject to recovery and
withholding provisions as detailed in the policy table.
— Performance targets would apply in all circumstances.
Treatment of
deferred bonus
on termination
— Determined on the basis of the relevant plan rules. Full details can be found on the company’s website.
— Deferred bonuses are subject to recovery and withholding provisions as detailed in the policy table.
— The default treatment is that any outstanding awards will vest in full on the normal vesting date with no time prorating
applying.
— On a change of control, awards will generally vest on the date of a change of control, unless the committee permits (or
requires) awards to roll over into equivalent shares in the acquirer.
— Determined on the basis of the relevant plan rules. Full details can be found on the company’s website.
— Normally, any outstanding awards will lapse on date of cessation of employment (if that occurs during the performance
period).
— However, under the rules of the plans, in certain prescribed circumstances, such as death, disability, mutually
agreed retirement or other circumstances at the discretion of the committee, ‘good leaver’ status can be applied.
In these circumstances, a participant’s awards vest on a time prorated basis subject to the satisfaction of relevant
performance criteria, with the balance of awards lapsing. The committee retains the discretion not to time prorate if it
is inappropriate to do so in particular circumstances. The committee will take into account the individual’s performance
and the reasons for their departure when determining whether ‘good leaver’ status can be applied.
— On a change of control, awards will generally vest on the date of a change of control taking in to account the extent
to which any performance condition has been satisfied at that point. Time prorating will normally apply unless the
committee determines otherwise.
— On redundancy, an augmentation may apply to active members of a United Utilities defined benefit pension scheme in
line with the trust deed and rules of the appropriate section.
Treatment of
unvested
long-term
incentives on
termination
Treatment of
pensions on
termination
Outplacement services, reimbursement of legal costs and any other incidental expenses may be provided where appropriate. Any statutory
entitlements or compromise claims in connection with a termination of employment would be paid as necessary. Outstanding savings/shares
under all-employee share plans would be transferred in accordance with the terms of the plans as approved by HMRC.
Stock Code: UU.
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Annual report on remuneration
Executive directors’ remuneration for the year ended 31 March 2017
Single total figure of remuneration for executive directors (audited information)
Fixed pay
Base salary
£’000
Pension
£’000
Benefits
£’000
Variable pay
Annual
bonus
£’000
Long-term
incentives
£’000
Year ended 31 March
2017
2016
2017
2016
2017
2016
2017
2016 2017(1) 2016(2)
Steve Mogford
Russ Houlden
721
455
707
446
159
100
156
98
28
26
26
23
785
492
501
313
617
390
1,468
705
Total
£’000
2017
2,310
1,463
2016
2,858
1,585
(1) The long-term incentive amount is in respect of the Long Term Plan award which was granted in July 2014 (and which will vest based on performance over the three-year
period 1 April 2014 to 31 March 2017). 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 2017, and the award will not vest until the end of an additional two-year holding period. See page 101 for further detail.
(2) The long-term incentive amount for the year ended 31 March 2016 is in respect of the Long Term Plan award which was granted in July 2013 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 incentive
amount has been restated in respect of the 2013 Long Term Plan whose performance period ended on 31 March 2016, but which will not vest until the end of an
additional two-year holding period. The final vesting outcome was confirmed by the committee in July 2016 as 33.6 per cent. The restated amount reflects the additional
dividend equivalents accruing on these awards and is based on the average share price over the three-month period 1 January 2017 to 31 March 2017 of 945.6 pence
per share.
Base salary
Executive director salaries were increased by 2.0 per cent with effect from 1 September 2016, in line with the headline increase applied across
the wider workforce. The committee judged that the increase was supported by very good individual and business performance.
Executive director
Steve Mogford
Russ Houlden
Pensions
Base salary
£’000
1 Sept 2016
727.0
459.0
1 Sept 2015
713.0
450.0
The executive directors receive a cash allowance of 22 per cent of base salary in lieu of pension. No changes are expected to the pensions cash
allowance percentage during the year commencing 1 April 2017.
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 2017 (see page 92 in the policy report).
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Annual bonus
Annual bonus in respect of financial year ended 31 March 2017 (audited information)
The performance measures, targets and outcomes in respect of the executive directors’ annual bonus for the year ended 31 March 2017 are
set out below. The table on page 90 summarises how these performance measures are linked to our business strategy.
Measure
Underlying operating profit(1)
Threshold
(25%
vesting)
Achieved
Target
Stretch
(100%
vesting)
Payout
as a
% of
maximum
Steve Mogford
weighting
(% of award)
Outcome
Russ Houlden
weighting
(% of award)
Outcome
£724.6m
£749.6m
£774.6m
82%
£765.4m
30.0%
24.4%
30.0%
24.4%
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Customer service in year
Service incentive mechanism –
qualitative
Service incentive mechanism –
quantitative
4.33
84
4.36
81
4.41
4.42
78
77
100%
100%
Maintaining and enhancing services for customers
Wholesale outcome delivery incentive
(ODI) composite
(£35.2m)
(£8.8m)
£14.0m
84%
£6.7m
Time, cost and quality of capital
programme (TCQi)(2)
82%
Corporate responsibility
Dow Jones Sustainability Index rating
Personal objectives (see page 100 for further detail)
Steve Mogford
Russ Houlden
90%
92.9%
98%
68%
World Class
100%
100%
90%
85%
90%
85%
12.0%
12.0%
4.0%
4.0%
20.0%
16.7%
20.0%
13.6%
4.0%
4.0%
10.0%
9.0%
12.0%
12.0%
4.0%
4.0%
20.0%
16.7%
20.0%
13.6%
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)
83.7%
130%
83.2%
130%
108.8% £785k 108.2% £492k
(1) The underlying operating profit figure for bonus purposes is based on the underlying operating profit on page 45 and is subject to further adjustments in respect of
infrastructure renewals expenditure and property trading. To take into account changes in the scope of business operations from the creation of a joint venture with
Severn Trent in June 2016 to provide non-household services (Water Plus), the committee used its discretion to exclude any profits or loss arising from non-household
services in the underlying operating profit figure used for assessing the bonus targets and outcome. An underpin applied to this measure based on the prior year figure
(adjusted for non-household services) and was aimed at ensuring year-on-year growth in profit.
(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 quality 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.
Stock Code: UU.
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Corporate governance report
Annual report on remuneration
Further detail of achievement against personal objectives
Personal objectives represent 10 per cent of the total bonus opportunity.
The committee’s view is that Steve has performed very strongly against his personal objectives, warranting an outcome of 90 per cent. Key
achievements in the year include a step change improvement in customer service, strengthening of relationships with key stakeholders,
successful preparation for the opening of the non-household market to competition (including the creation of a joint venture with Severn
Trent) and continued development of the talent management process for senior roles.
Russ Houlden has also performed very well against the majority of his personal objectives, warranting an outcome of 85 per cent. Key
achievements in the year include outperformance against financing targets, development of relationships with key shareholders and analysts,
good progress on emerging areas of regulatory focus and further enhancements to the company's risk management approach.
Deferred Bonus Plan awards made in year ended 31 March 2017 (audited information)
Bonuses are earned by reference to performance in the financial year and paid in June following the end of the financial year. Fifty per cent
of any bonus is deferred into shares under the Deferred Bonus Plan. These awards vest after three years and are subject to withholding
provisions. There are no service or additional performance conditions attached.
The table below provides details of share awards made during the year in respect of bonus payments made in 2016/17. The face value of each
award reflects half of the value shown for 2015/16 in the single figure table.
Executive Director
Steve Mogford
Russ Houlden
Type
of award
Conditional shares
Conditional shares
Basis
of award
50% of bonus
50% of bonus
Face value of awards (1)
(£'000)
£250
£157
End of
deferral period
16/06/2019
16/06/2019
(1) The face value has been calculated using the closing share price on 15 June 2016 (the dealing day prior to the date of grant) which was 924 pence per share.
Annual bonus in respect of financial year commencing 1 April 2017
The maximum bonus opportunity for the year commencing 1 April 2017 will remain unchanged at 130 per cent of base salary.
The annual bonus will operate in a broadly similar way as that for the year 2016/17, with the exception that the Dow Jones measure (currently
representing a maximum of four per cent of executive directors’ bonuses) will be removed from the bonus scorecard and the weighting
redistributed to the outcome delivery incentive (ODI) measure. The ODI targets, introduced in 2015, cover a broad range of customer priorities
which closely link to the sustainable delivery of company performance, such as water quality, reliability of supply and wastewater network
performance. The ODI targets also have a direct financial impact on shareholder value, and so on a going forward basis will, in the committee's
view, form a stronger measure of performance for customers and shareholders than the Dow Jones measure.
In addition, in line with the revised policy, recovery and withholding provisions for the annual bonus will be made more robust on an ongoing
basis.
The table below summarises the measures, weighting and targets for the 2017/18 bonus. Please note that the majority of targets are
considered commercially sensitive, and consequently these will be disclosed in the 2017/18 annual report on remuneration.
Measure
Underlying operating profit (1)
Customer service in year
Service incentive mechanism – qualitative
Service incentive mechanism – quantitative
Maintaining and enhancing services for customers
Wholesale outcome delivery incentive (ODI) composite
Time, cost and quality of capital programme (TCQi) (2)
Personal objectives
Total:
Targets
Threshold
(25% vesting)
Target
(50% vesting)
Commercially sensitive
Stretch
(100% vesting)
Weighting
(% of award)
30.0%
Commercially sensitive
Commercially sensitive
85%
Commercially sensitive
90%
Commercially sensitive
98%
12.0%
4.0%
24.0%
20.0%
10.0%
100%
(1) Underlying operating profit for bonus purposes is subject to a number of adjustments, principally in regard to infrastructure renewals expenditure and property trading.
(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 quality standard. It is expressed as
a percentage, with a higher percentage representing better performance. For 2017/18 there will be some changes to the way the cost element of TCQi is measured.
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Long-term incentives
Performance for Long Term Plan awards
2014 Long Term Plan (LTP) awards with a performance period ended 31 March 2017 (audited information)
The 2014 LTP awards were granted in July 2014 and performance was measured over the three-year period 1 April 2014 to 31 March 2017.
Executive directors’ awards will normally vest in April 2019, following an additional two-year holding period. The unvested shares will remain
subject to withholding provisions over this two-year holding period.
Note that the final outcome for the customer service excellence measure (which forms one-third 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 2017). The values of the 2014 LTP awards in the single total figure of remuneration table are 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 2014 LTP was calculated:
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Measure
Relative total shareholder return (TSR)
TSR versus median TSR of FTSE 100 companies
(excluding financial services, oil and gas, and mining
companies)(1)
Sustainable dividends
Dividend growth in years ended 31 March 2016
and 31 March 2017
Threshold
(25%
vesting)
Median
TSR
Achieved
Intermediate
(80%
vesting)
Stretch
(100%
vesting)
Payout
as a % of
maximum
–
Median
TSR × 1.15
100.0%
Greater than median TSR x1.15
Company TSR of 43.8% was above stretch TSR of
42.2%
Steve
Mogford
weighting
(% of
award)
Outcome
Russ
Houlden
weighting
(% of
award)
Outcome
33.3%
33.3%
33.3%
33.3%
RPI+0%
–
RPI+2%
25.0%
33.3%
33.3%
Underpin 1:
Underpin 2:
RPI +0% (2)
✓ Met At least RPI+2% growth in year ended
31 March 2015
✓ Met Average underlying dividend cover of at least
1.1 over the three-year performance period
8.3%
8.3%
Customer service excellence
Ranking for the year ended 31 March 2017 versus
17 other water companies using Ofwat’s service
incentive mechanism (SIM) combined score
Median
rank
Upper
quartile rank
Upper
decile rank
52.5%
Estimate: Rank 7th out of 18
Note that this is an estimate as the final outcome will not be
known until the combined scores are published later in 2017.
33.3%
17.5%
33.3%
17.5%
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
✓ Assumed met.
Note that the committee will make a final assessment of the
company’s performance once the combined SIM score is
known.
Estimated vesting (% of award)
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)
59.1%
100,692
9,793
110,485
65,296
9.46
617
59.1%
63,560
6,181
69,741
41,216
9.46
390
(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 2017 AGM.
(3) Average share price over the three-month period 1 January 2017 to 31 March 2017.
Stock Code: UU.
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Corporate governance report
Annual report on remuneration
Long Term Plan awards granted in the year
2016 LTP awards with a performance period ending 31 March 2019 (audited information)
The table below provides details of share awards made during the year in respect of the 2016 LTP:
Executive Director
Steve Mogford
Russ Houlden
Type of award
Conditional shares
Conditional shares
Basis of award
130% of salary
130% of salary
Face value of
award (£'000)(1)
£927
£585
Number of
shares under
award
98,763
62,333
% vesting at
threshold
25%
25%
End of
performance
period(2)
31/03/2019
31/03/2019
(1) The face value has been calculated using the closing share price on 27 June 2016 (the dealing day prior to the date of grant) which was 938.5 pence per share.
(2) An additional two-year holding period applies after the end of the three-year performance period.
Details about the 2016 LTP performance measures and targets are shown in the following table. Performance is measured over the three-year
period 1 April 2016 to 31 March 2019. The table on page 90 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
Targets
Threshold
(25% vesting)
Intermediate
Stretch
(100% vesting)
Median TSR
Straight-line
between
threshold and
stretch
Median TSR
x1.15
Sustainable dividends
Average underlying dividend cover over the three-year
performance period
Underpin
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 pay-outs
Dividend growth of at least RPI in each of the years ending
31 March 2017, 31 March 2018 and 31 March 2019
Weighting
33.3%
33.3%
Customer service excellence
Ranking for the year ending 31 March 2019 versus 17 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
Upper
quartile rank
(80% vesting)
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.
Performance targets for future Long Term Plan awards
2017 LTP awards with a performance period ending 31 March 2020
There will be broad consistency in the approach to how the 2017 Long Term Plan (LTP) awards will operate.
The performance targets for the total shareholder return measure are expected to be as for the 2016 LTP awards; the targets for the
sustainable dividends measure will be reviewed to ensure that they are appropriate for the performance period 1 April 2017 to 31 March
2020; and the customer service excellence targets will change such that: (i) Ofwat’s SIM will be measured against a smaller group of the nine
other companies providing both water and sewerage services; and (ii) 25 per cent will vest at median and 100 per cent at upper quartile, with
straight-line vesting between these points. The change to the customer service excellence SIM targets, which was subject to consultation with
major shareholders during the year, is aimed at ensuring that performance is compared to companies whose service provision is most similar
to United Utilities and at setting an appropriate level of stretch (the committee considers upper quartile performance to be a sufficiently
challenging target to merit a full payout and, further, historically there has not been any additional economic reward for achieving above upper
quartile SIM performance). Back-testing since 2010/11, when SIM was first introduced as a measure, demonstrates that below threshold
performance (i.e. nil vesting) would have been achieved under both the current and new customer service excellence targets, except for in
2013/14 when the threshold level of vesting (25 per cent) would have been achieved under the new measure.
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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External appointments
Steve Mogford was appointed as a senior independent director of G4S PLC in May 2016 for which he received and retained a fee of £46,000
for 2016. 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 £77,000.
Executive directors’ interests in shares
Executive directors’ shareholdings (audited information)
Executive directors are normally expected to reach a shareholding guideline of 200 per cent of salary 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 2017 held by each of the executive directors and their connected
persons are set out in the charts below along with progress against the target shareholding guideline level. The charts below show that both
Steve Mogford and Russ Houlden have exceeded the target shareholding.
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369
411
154
Unvested shares not
subject to performance
conditions1
Shares owned outright
Number of shares
required to hold
at 31 March 2017
s
e
r
a
h
s
f
o
s
0
0
0
s
e
r
a
h
s
f
o
s
0
0
0
450
400
350
300
250
200
150
100
50
0
2016
2017
Year ended 31 March
Steve Mogford
(1) After tax and national insurance.
Unvested shares not
subject to performance
conditions1
Shares owned outright
Number of shares
required to hold
at 31 March 2017
140
120
100
80
60
40
20
0
119
126
97
2016
2017
Year ended 31 March
Russ Houlden
Further detail of the executive directors’ shareholdings is given in the table below and in the appendix on page 109.
Shareholding
guideline
(% of salary)
Number of shares
required to meet
shareholding
guideline(1)
Number of shares owned
outright (including
connected persons)
Unvested shares not
subject to performance
conditions(2)
Total shares counting
towards shareholding
guidelines(3)
2017
2016
2017
2016
2017
2016
200%
200%
153,759
327,287
297,164
157,289
135,813
410,668
369,163
97,077
73,500
73,196
99,127
85,726
126,056
118,649
Shareholding
as % of base
salary at 31
March 2017(1)
Shareholding
guideline met
at 31 March
2017
Unvested shares
subject to performance
conditions(4)
2017
534%
260%
2017
2017
2016
Yes
Yes
314,125
338,869
198,286
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 2017 to 31 March 2017 (945.6 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 withholding
(3)
(4)
(5)
provisions 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 2017 to 24 May 2017, additional shares were acquired by Steve Mogford (30 ordinary shares) and Russ Houlden (29 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.
Stock Code: UU.
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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 eight 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 shows the remuneration data for the CEO over the same eight-year period as the TSR chart.
350
300
250
200
150
100
)
£
(
e
u
a
V
l
150
123
100
2009
2010
162
138
2011
265
214
272
203
306
250
189
183
215
201
164
148
2012
2013
2014
2015
2016
2017
Year ended 31 March
United Utilities Group PLC
FTSE 100 Index
Year ended 31 March
CEO single figure of
remuneration (£000)
Annual bonus payment
(% of maximum)
LTP vesting
(% of maximum)(2)
Steve Mogford
Philip Green
Steve Mogford
Philip Green
Steve Mogford
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
2015
2,884
2016
2,858(1)
n/a
78.2
n/a
93.5
n/a
77.4
n/a
97.5
2017
2,310
n/a
83.7
n/a
59.1(6)
n/a
n/a
54.5
n/a
33.6(4)
100(5)
n/a
Philip Green
0(7)
100(8)
28.1(9)
12.5(10)
n/a
n/a
n/a
n/a
(1) This includes the estimated pay-out from the 2013 Long Term Plan (LTP) as well as £1.028 million in respect of Steve Mogford’s one-off Matched Share Investment
Scheme which ended on 5 January 2016. The estimated pay-out from the 2013 LTP has been restated to reflect the additional dividend equivalents accruing on these
awards and updated share price – see page 101 for further details.
(2) For performance periods ended 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) 2013 LTP.
(5) The retention period applicable to Steve Mogford’s Share Investment Scheme ended on 5 January 2016.
(6) The 2014 Long Term Plan amount vesting percentage is estimated (see page 101 for further details).
(7) 2007 Performance Share Plan (PSP).
(8) 2007 Matching Share Award Plan (MSAP).
(9) 2008 PSP and MSAP.
(10) The retention period applicable to Philip Green’s Matched Share Investment Scheme ended on 12 February 2011.
Date of service contracts
Executive directors
Steve Mogford
Russ Houlden
Date of service contract
5.1.11
1.10.10
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Percentage change in CEO’s remuneration versus the wider workforce
The figures below show how the percentage change in the CEO’s salary, benefits and bonus earned in 2015/16 and 2016/17 compares with the
percentage change in the average of each of those components for a group of employees.
Change in CEO remuneration(1)
Base salary(2)
+2.0%
Change in employee remuneration(4)
Bonus(3)
+56.8%
Taxable benefits
+6.5%
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Base salary(5)
+3.3%
Bonus
+35.0%
Taxable benefits
+8.1%
(1) See single total figure of remuneration table on page 98 for more information.
(2) On 1 September 2016, Steve Mogford received a base salary increase of 2.0 per cent.
(3) As disclosed in last year’s directors’ remuneration report the committee had used its discretion to reduce the 2015/16 bonus outcome for the executive directors in
relation to the water quality incident in Lancashire. This reduction was not applied to the wider workforce.
(4) To aid comparison, the group of employees selected by the committee are all those members of the workforce who were employed over the complete two-year period.
(5)
Includes promotional increases. Headline salary increase for employees was 2.0 per cent.
Relative importance of spend on pay
The chart below shows the relative importance of spend on pay compared to distributions to shareholder.
+3.9%
£278
£268
£268
£280
£275
£270
£265
£260
£255
£250
£245
£240
+1.7%
£259
£263
Employee costs £m (1)
Dividends paid to shareholders £m
2015/16
2016/17
(1) Employee costs include wages and salaries, social security costs, and post-employment benefits.
Stock Code: UU.
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Corporate governance report
Annual report on remuneration
Non-executive directors
Single total figure of remuneration for non-executive directors (audited information)
Salary/fees
£’000
Taxable benefits
£’000
2017
294
22
70
76
43
78
76
2016
287
71
62
75
n/a
77
75
2017
1
1
1
1
0
1
0
2016
1
1
0
0
n/a
0
0
Total
£’000
2017
295
23
71
77
43
79
76
2016
288
72
62
75
n/a
77
75
Dr John McAdam
Dr Catherine Bell(1)
Stephen Carter
Mark Clare
Alison Goligher(2)
Brian May
Sara Weller
(1) Catherine Bell retired from the board on 22 July 2016
(2) Alison Goligher joined the board on 1 August 2016
Fees
Non-executive director annual fee rates were reviewed and increased with effect from 1 September 2016 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 2016
296.0
64.0
12.5
15.0
12.5
10.0
1 Sept 2015
290.0
62.6
12.5
15.0
12.5
10.0
Non-executive directors’ shareholdings (audited information)
Details of beneficial interests in the company’s ordinary shares as at 31 March 2017 held by each of the non-executive directors and their
connected persons are set out in the table below:
Dr John McAdam
Stephen Carter
Mark Clare
Alison Goligher
Brian May
Sara Weller
(1) From 1 April 2017 to 24 May 2017 there have been no movements in the shareholdings of the non-executive directors.
Non-executive directors
Dr John McAdam
Stephen Carter
Mark Clare
Alison Goligher
Brian May
Sara Weller
Number of shares owned
outright (including connected
persons) at 31 March 2017(1)
1,837
3,075
7,628
3,000
3,000
11,000
Date first appointed
to the board
4.2.08
1.9.14
1.11.13
1.8.16
1.9.12
1.3.12
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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The remuneration committee
Summary terms of reference
The committee’s terms of reference were last reviewed in November 2016 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 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;
› approving the remuneration of the Chairman;
› proposing all new long-term incentive schemes for approval of the board, and for recommendation by the board to shareholders; and
› assisting the board in reporting to shareholders and undertaking appropriate discussions as necessary with institutional shareholders on
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aspects of executive remuneration.
Role
Sara Weller (chair since 27.7.12)
Dr Catherine Bell (1)
Mark Clare
Alison Goligher
Brian May
(1) Catherine Bell retired from the board on 22 July 2016.
Member since
1.3.12
1.3.11
1.9.14
1.8.16
16.5.17
Member to
To date
22.7.16
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 and pensions (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.
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
Services provided to the
committee in year ended
31 March 2017
General advice on
remuneration matters
Fees paid by company for these
services in respect of year and
basis of charge
£148,000 Time/cost basis
Other services provided to the company
— Benchmarking of roles not under the committee’s remit and advice on non-executive director remuneration
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 Sutherland and Slaughter and May provided advice on the company’s share schemes to
the company.
Stock Code: UU.
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Corporate governance report
Annual report on remuneration
Key activities of the remuneration committee over the past year
The committee met six times in the year ended 31 March 2017.
Regular activities
› Approved the 2015/16 directors’ remuneration report
› Reviewed the pay comparator group
› Reviewed the base salaries of executive directors and other members of the executive team
› Reviewed the base fee for the Chairman
› Assessed the achievement of targets for the 2015/16 annual bonus scheme, reviewed progress against the targets for the 2016/17 annual
bonus scheme, and set the targets for the 2017/18 annual bonus scheme
› Assessed the achievement of targets for the Long Term Plan (LTP) awards made in 2013 and set the targets for LTP awards made in 2016
› Reviewed and approved awards made under the annual bonus scheme, Deferred Bonus Plan (DBP) and LTP
› Monitored progress against shareholding guidelines for executive directors and other members of the executive team
› Reviewed the committee’s performance during the period
› Reviewed the committee’s terms of reference
› Considered governance developments and market trends in executive remuneration, including in the wider utilities sector.
Other activities
› Reviewed the executive pay arrangements and consulted with shareholders on the proposed remuneration policy
› Considered level playing field requirements for incentives following the opening of the non-household market to full competition from 1
April 2017
2016 AGM: Statement of voting
At the last Annual General Meeting on 22 July 2016, votes on the 2015/16 directors’ remuneration report (other than the part containing the
directors’ remuneration policy) were cast as follows:
Votes for 415,175,128
(99.47% of votes cast)
Votes against 2,194,497
(0.53% of votes cast)
417,369,625
Total votes cast
3,381,948
Votes withheld
(absten�ons)
The directors’ remuneration report was approved by the board of directors on 24 May 2017 and signed on its behalf by:
Sara Weller
Chair of the remuneration committee
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Appendix: Executive directors’ share plan interests 1 April 2016 to 31 March 2017
Award date
Awards held
at 1 April 2016
Granted
in year
Notional
dividends
accrued in
year(1) Vested in year
Lapsed/
forfeited
in year
Awards held
at 31 March
2017
Steve Mogford
Shares not subject to performance conditions at 31 March 2017
56,389
DBP
41,145
DBP
38,240
DBP
DBP(2)
–
133,148
LTP
ShareBuy matching shares(3)
39
17.6.13
30.6.14
16.6.15
16.6.16
29.7.13
1.4.16
to 31.3.17
268,961
30.6.14
30.6.15
28.6.16
106,237
99,484
–
205,721
474,682
Subtotal
Shares subject to performance conditions at 31 March 2017
LTP
LTP
LTP(4)
Subtotal
TOTAL
Russ Houlden
Shares not subject to performance conditions at 31 March 2017
35,578
DBP
25,969
DBP
24,140
DBP
DBP(2)
–
84,029
LTP
ShareBuy matching shares(3)
39
17.6.13
30.6.14
16.6.15
16.6.16
29.7.13
1.4.16
to 31.3.17
–
–
–
27,087
–
38
27,125
–
–
98,763
98,763
125,888
–
–
–
16,940
–
39
Subtotal
Shares subject to performance conditions
LTP
LTP
LTP (4)
Subtotal
TOTAL
30.6.14
30.6.15
28.6.16
169,755
16,979
67,060
62,808
–
129,868
299,623
–
–
62,333
62,333
79,312
–
1,644
1,528
1,082
1,788
–
6,042
4,248
3,977
1,416
9,641
15,683
–
1,037
964
677
1,128
–
3,806
2,681
2,511
893
6,085
9,891
56,389
–
–
–
–
39
–
–
–
–
88,411
–
–
42,789
39,768
28,169
46,525
38
56,428
88,411
157,289
–
–
–
0
56,428
35,578
–
–
–
–
39
–
–
–
0
88,411
–
–
–
–
55,796
–
110,485
103,461
100,179
314,125
471,414
–
27,006
25,104
17,617
29,361
39
35,617
55,796
99,127
–
–
–
0
35,617
–
–
–
0
55,796
69,741
65,319
63,226
198,286
297,413
Note that these are also subject to performance conditions where applicable.
(1)
(2) See page 100 for further information.
(3)
Under ShareBuy, matching shares vest provided the employee remains employed by the company one year after grant. During the year Steve Mogford purchased 191
partnership shares and was awarded 38 matching shares (at an average share price of 944 pence per share). Russ Houlden purchased 191 partnership shares and was
awarded 39 matching shares (at an average share price of 943 pence per share).
(4) See page 102 for further information.
Dilution limits
Awards granted under the Company’s share plans are satisfied by market purchased shares bought on behalf of the company by United Utilities
Employee Share Trust immediately prior to the vesting of a share plan. The company does not make regular purchases of shares into the Trust nor
employ a share purchase hedging strategy and shares are bought to satisfy the vesting of share plans. The rules of the Deferred Bonus Plan do not
permit awards to be satisfied by newly issued issues and must be satisfied by market purchased shares. The rules of the Long Term Plan permit the
awards to be satisfied by newly issued shares but the company has decided to satisfy awards by market purchased shares.
Should the company’s method of satisfying share plan vestings change (i.e. issuing new shares) then the company would monitor the number of
shares issued and their impact on dilution limits set by The Investment Association in respect of all share plans (10 per cent in any rolling 10-year
period) and executive share plans (5 per cent in any rolling 10-year period).
No treasury shares were held or utilised in the year ended 31 March 2017.
Stock Code: UU.
unitedutilities.com/corporate
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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
manage any such risk.
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 profits
relating to the group’s 35 per cent holding in Tallinn Water which are
fully taxable in Estonia).
In addition to corporation tax, the group pays and bears significant
further annual economic contributions, in the form of business rates,
employer’s national insurance contributions, environmental taxes and
other regulatory service fees, such as water abstraction charges. The
annual amount payable is disclosed within the 'our performance' tax
section of the report.
We expect the above details, which apply for both financial years
ended 31 March 2017 and 31 March 2018, to comply fully with the
new legislative requirements for 'Publication of Group Tax Strategies'
for UK groups.
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Directors’ report
Statutory and other information
Gross carbon emissions for 2016/17
452,301
tonnes CO2 equivalent (tCO2e)
22.8 per cent below our 2005/06 baseline
149GWh
generated from renewables in 2016/17
equivalent to 18 per cent of our electricity consumption
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Our directors present their management report including the
strategic report on pages 10 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 2017.
Business model
A description of the company's business model can be found within
the strategic report on pages 14 to 30.
Greenhouse gas emissions
We measure our emissions over the financial reporting year against
a footprint covering all our operational activities 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 emissions account for all six Kyoto Protocol gases – converted to
carbon dioxide equivalents. There are no material omissions.
Carbon
The boundary of our carbon footprint includes both direct and
indirect emissions resulting from our operations.
Direct emissions are those from activities we own or control including
those from our treatment processes, company vehicles and burning
of fossil fuels for heating or incineration of sewage sludge.
Indirect emissions result from operational activities we do not own
or control. These include indirect energy emissions produced as a
consequence of electricity we purchase to power our treatment
plants and other indirect emissions as a consequence of our activities,
e.g. from travel on company business and sludge and process waste
disposal emissions.
CH4
Methane
CO2
Carbon dioxide
SF6
Sulphur
hexafluoride
HFC
Hydrofluorocarbons
PFC
Perfluorocarbons
N2O
Nitrous
oxide
Scope 2
Energy indirect emissions
Purchased electricity (generation)
Scope 1
Direct emissions
Process emissions
Fossil fuel use
Company vehicles
Scope 3
Other indirect emissions
Purchased electricity
(transmission and distribution)
Sludge and process waste disposal
Public transport and mileage
Stock Code: UU.
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Directors’ report
Statutory and other information
We monitor our operational carbon emissions against a target, which
is aligned to our investment cycle. In 2020 (end of AMP6) we will aim
to reduce our emissions by 50 per cent on the 2005/06 baseline and
continue to reduce emissions to achieve 60 per cent by 2035 (end of
AMP9).
Our performance in 2016/17 was 452,301 tCO2e which is 22.8 per
cent below the 2005/06 baseline. The trend in our overall emissions
continues to be downwards although both the level and proportion
of each component fluctuates year by year as they are affected by
weather, operational conditions and the carbon content of the UK’s
electricity supply.
1%
5%
4%
5%
Direct emissions from burning
of fossil fuels
Process emissions from our treatment plants –
including refrigerants
21%
Transport: company owned
or leased vehicles
3%
Total grid electricity purchased
by company: generation
61%
Total grid electricity purchased
by company: transmission and distribution
Business travel on public transport and private
vehicles used for company business
Emissions from sludge and process
waste disposal
We expect the overall trend in our emissions to remain downwards
reflecting our continued efforts to use less energy and increase
renewable energy generation, alongside projected decreases in the
carbon content of the UK’s energy supply.
The majority of our emissions are as a result of our use of grid
electricity. In 2016/17 we purchased more grid electricity than the
previous year but emissions reduced due to a 10.8 per cent reduction
in the carbon intensity of the UK grid emissions factor.
The company generated the equivalent of 149GWh of electricity from
renewable sources. This is an increase of 8GWh compared to last year
and is a result of our investment in energy recovery and generation
from wind and solar photovoltaics.
Our carbon footprint since 2005/06 – our baseline year
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
Gross carbon footprint total (tCO2e)
Historical trend
Greenhouse
gas emissions
Scope
Source
Scope 1
Direct
emissions
Scope 2
Energy indirect
emissions
Scope 3
Other indirect
emissions
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
Emission reductions from exported
renewable electricity
Emission reductions from exported
biomethane
Net carbon footprint total
Emissions per £million turnover
2014/15
(tCO2e)
9,575
2015/16
(tCO2e)
12,283
2016/17
(tCO2e)
20,848
83,762
104,041
87,004
110,533
96,019
128,649
10,704
11,246
11,783
321,185
321,185
302,791
302,791
277,727
277,727
28,086
25,006
25,120
2,971
484,82
2,783
41,533
2,889
45,924
17,425
13,744
17,915
473,708
(6,155)
–
467,553
275.44
454,857
(4,209)
–
450,648
262.92
452,301
(4,417)
(3,240)
444,644
265.43
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Dividends
Directors
Reappointment
Interests
Corporate governance
statement
Share capital
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Our directors are recommending a final dividend of 25.92 pence per ordinary share for the year ended
31 March 2017, which, together with the interim dividend of 12.95 pence, gives a total dividend for the
year of 38.87 pence per ordinary share (the interim and final dividends we paid in respect of the 2015/16
financial year were 12.81 pence and 25.64 pence per ordinary share respectively). Subject to approval by our
shareholders at our AGM, our final dividend will be paid on 4 August 2017 to shareholders on the register at
the close of business on 23 June 2017.
The names of our directors who served during the financial year ended 31 March 2017 can be found on pages
52 and 54.
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 66 to 70.
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 86 to 109 which is hereby incorporated by reference into
this directors’ report.
The corporate governance report on pages 52 to 110 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 2014 Code, as applicable to the company for the year ended
31 March 2017, 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.
At 31 March 2017, 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
147. 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 2017.
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 2017 AGM. Our directors’ powers are conferred on them
by UK legislation and by the company’s articles. At the AGM of the company on 22 July 2016, 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.
Voting
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.
Stock Code: UU.
unitedutilities.com/corporate
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Directors’ report
Statutory and other information
Transfers
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 24 May 2017, 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:
Purchase of own shares
Change of control
BlackRock Inc
Per cent of issued share capital
5.13
Direct or indirect nature of holding
Indirect
At our last AGM held on 22 July 2016, 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 2017 AGM, we will
again 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 2018.
As at 31 March 2017, 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 137. In line with current UK tax legislation, the amount is fully deductible
against the group’s corporation tax liability, resulting in tax relief of £5.8 million.
Directors' indemnities and
insurance
Political donations
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.
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 £11,298 (2016: £5,360) as part of this process. At the 2016 AGM, an
authority was taken to cover such expenditure. A similar resolution will be put to our shareholders at the 2017
AGM to authorise the company and its subsidiaries to make such expenditure.
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Trade associations
Employees
Environmental, social
and community matters
Essential contractual
relationships
Approach to technology
development
Financial instruments
Events occurring after the
reporting period
Slavery and Human
Trafficking Statement
We are members of a small number of trade associations. Some of these have a national focus, such as
Water UK, the representative body of the UK water industry, which considers industry-wide priorities such
as development of markets, customer trust, resilience, and legislation and regulation, and the Confederation
of British Industry, which provides a policy making voice for firms at a regional, national and international
level. Others, such as the North West Business Leadership Team and Atlantic Gateway, focus solely on North
West England and encourage engagement across the public and private sectors to promote the sustainable
economic development and long-term well-being of the region. Our contribution to these associations in
2016/17 was £393,000.
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Our policies on employee consultation and on equal opportunities for our disabled employees can be found in
the ‘People’ section on page 16. The company’s business principles make clear how the company 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 135.
Details of our approach to corporate responsibility, relating to the environment and social and community
issues, can be found on pages 82 to 84.
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.
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.
Our risk management objectives and policies in relation to the use of financial instruments can be found in
note A4 to the financial statements.
Details of events after the reporting period are included in note 25 to the consolidated financial statements on
page 148.
Our statement can be found on our website at: corporate.unitedutilities.com/slavery-human-trafficking
Stock Code: UU.
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Directors’ report
Statutory and other information
Total dividend per share
38.87p
for 2016/17
(2015/16: 38.45p per share)
Annual general meeting
Our 2017 annual general meeting (AGM) will be held on 28 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-2017
At our 2017 AGM, resolutions will be proposed, amongst other
matters:
› to receive the annual report and financial statements; to approve
the directors’ remuneration report; to approve the directors'
remuneration policy; 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; and
› to adopt new articles of association and to extend the life of the
share incentive plan.
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 24 May 2017 and signed on its behalf by:
Simon Gardiner
Company Secretary
116
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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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.
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
Responsibility statement of the directors in
respect of the annual financial report
We confirm that to the best of our knowledge:
› 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 10 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 24 May 2017 and signed on its behalf by:
› 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.
Dr John McAdam
Chairman
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Chief Financial Officer
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.
Stock Code: UU.
unitedutilities.com/corporate
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25344.04 – 1 June 2017 3:57 PM – Proof 3Our financial statementsUnited Utilities AR2017 - Financials - NEW.indd 11801/06/2017 17:37:48 Financial
Statements
In this section you will find our full
audited financial results
for the year ended 31 March 2017.
Independent auditor’s report
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated and company statements of
financial position
Consolidated statement of changes in equity
Company statement of changes in equity
Consolidated and company statements of cash flows
Guide to detailed financial statements disclosures
Accounting policies
Notes to the financial statements
Five-year summary – unaudited
120
124
125
126
127
128
129
130
131
134
172
Pictured: Thirlmere reservoir, Cumbria.
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25344.04 – 1 June 2017 5:59 PM – Proof 3Opinions and conclusions arising from our audit1. Our opinion on the financial statements is unmodified2. Our assessment of risks of material misstatementIn 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 set out below. We no longer consider derivative financial instrument valuations to be a significant risk of material misstatement on the basis that the valuations performed are mechanistic in nature and, although they are cumulatively a large balance, the risk of an error within the balance is relatively low.The riskOur responseRevenue recognition and provision for customer debtsRevenue: £1,704.0 million (2016: £1,730.0 million)Provision for customer debts: £85.4 million (2016: £94.4 million)Refer to page 79 (Audit Committee report), pages 131 and 165 (accounting policy), and pages 134 and 143 (financial disclosures).Subjective estimation:A proportion of the group's customers do not, or cannot, pay their bills, which results in the need for provisions to be made for non-payment of the customer balance. Due to the level of judgement and complexity of the calculation, which could lead to revenue and provision for customer debt being misstated, this is considered a key audit risk. Significant judgement is required when recognising revenue for services that are billed that relate to properties where either the occupier cannot be identified or where a past history of non-payment of bills exists and therefore there is uncertainty over the probability of these bills being settled.Further, an estimate is required of revenue for the value of water supplied to metered customers between the last meter reading and the period end.Our procedures included:Accounting analysis – comparison of policy with relevant accounting standards and industry practice, including the policy of not recognising revenue where it is not probable that cash will be received. Then through observation of processes assessing whether the revenue recognition policies have been applied in practice;Control observation – 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;Methodology choice – assessing the appropriateness of the customer debt provisioning based on historical cash collections, credits, re-bills and write-off information; Tests of details – assessing the assumptions used to calculate the metered accrued income by considering whether inputs to the calculation have been derived appropriately and recalculating the accrued income with the support of our own modelling speciaists; andAssessing transparency – 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.Independent auditor’s report to the members of United Utilities Group PLC onlyWe have audited the financial statements of United Utilities Group PLC for the year ended 31 March 2017 set out on pages 124 to 171. 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 2017 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.OverviewMaterialitygroup financial statements as a whole£19.5m (2016: £20.0m), 4.7% (2016: 4.9%) of normalised group profit before taxCoverage100% (2016: 100%) of normalised group profit before taxRisks of material misstatement vs 2016Recurring risksRevenue recognition and provision for customer debts Capital expenditure Retirement benefit surplus 120UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017United Utilities AR2017 - Financials - NEW.indd 12001/06/2017 18:05:02 25344.04 – 1 June 2017 5:59 PM – Proof 3The riskOur responseCapital expenditure£717.9 million (2016: £665.8 million)Refer to page 79 (Audit Committee report), pages 131 to 132 and 166 (accounting policy), and page 140 (financial disclosures).Accounting treatment: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. The determination of project costs as capital or operating expenditure is inherently judgemental as there is a need to distinguish between enhancement and maintenance works. Costs capitalised include an allocation of overhead costs, relating to the proportion of time spent by support function staff, which is also inherently judgemental.Our procedures included:Accounting analysis – assessing the group’s capitalisation policy for compliance with relevant accounting standards;Control observation – testing controls over the application of the policy in the period including assessment of project business case submissions and attending capital approval meetings to observe the judgements made and evaluating the documented conclusions;Tests of details – critically assessing the costs capitalised for a sample of projects against the capitalisation policy;Tests of details – identify and assess the impact of in-year changes to capitalisation rates and for all existing projects, as once set they are typically unchanged period to period;Historical comparisons – critically assess the proportion of overhead costs by business area which are capitalised using historical comparisons and expected changes based on corroborated enquiry and our sector knowledge; andAssessing transparency – assessing the adequacy of the group’s disclosures of its capitalisation policy and other related disclosures.Retirement benefit surplus£247.5 million (2016: £275.2 million)Refer to page 79 (Audit Committee report), pages 132 and 168 (accounting policy), and pages 145 and 159 to 163 (financial disclosures).Subjective estimation:Significant estimates are made in valuing the group’s retirement benefit obligation. Small changes in assumptions and estimates used to value the group’s pension obligation would have a significant effect on the group’s financial position.Our procedures included:Benchmarking assumptions – 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; andAssessing transparency – assessing the group’s disclosure in respect of the sensitivity of the surplus to changes in the key assumptions.Materiality for the group financial statements as a whole was set at £19.5 million (2016: £20.0 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). Materiality represents 4.7 per cent (2016: 4.9 per cent) of normalised group profit before tax. 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 (2016: £0.5 million), in addition to other identified misstatements that warrant reporting on qualitative grounds.Normalised group profit before tax£418.1m (2016: £404.6m)Normalised group profit before taxGroup materialityMateriality£19.5m (2016: £20.0m)£19.5mWhole financial statements materiality (2016: £20.0m)£18.5mRange of materiality at six components (£1.7m to £18.5m) (2016: £1.2m to £19.0m)£0.5mMisstatements reported to the audit committee (2016: £0.5m)3. Our application of materiality and an overview of the scope of our audit121unitedutilities.com/corporate Stock Code: UU.Financial StatementsUnited Utilities AR2017 - Financials - NEW.indd 12101/06/2017 18:05:02 25344.04 – 1 June 2017 5:59 PM – Proof 3Of the group’s six (2016: six) reporting components, we subjected six (2016: five) 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 (2016: 99 per cent), 100 per cent of group profit before tax (2016: 100 per cent), 100 per cent of group normalised profit before tax (2016: 100 per cent), and 97 per cent of group total assets (2016: 100 per cent).The group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The group team approved the component materialities, which ranged from £1.7 million to £18.5 million (2016: £1.2 million to £19.0 million), having regard to the mix of size and risk profile of the group across the components. The work on one of the six components (2016: none of the six components) was performed by component auditors and the rest by the group team. The group team performed procedures on the items excluded from normalised group profit before tax.The group team visited the component location in Stoke. Telephone conference meetings were also held with these component auditors. At these meetings the findings reported to the group team were discussed in more details and any further work required by the group team was then performed by the component auditor.99119999%(2016: 99%)Full scope for group audit purposes 2017Full scope for group audit purposes 2016Residual components 2016Residual components 2017Group revenue100100100%(2016: 100%)Group normalised profit before tax39710097%(2016: 100%)Group total assetsIndependent auditor’s report to the members of United Utilities Group PLC only4. Our opinion on other matters prescribed by the Companies Act 2006 is unmodifiedIn 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 is consistent with the financial statements.Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic report and the Directors' report: ›we have not identified material misstatements in these reports; and ›in our opinion those reports have been prepared in accordance with the Companies Act 2006.5. We have nothing to report on the disclosures of principal risksBased on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to: ›the directors’ statement of long-term viability on page 73, concerning the principal risks, their management, and, based on that, the directors’ assessment and expectations of the group’s continuing in operation over the five years to March 2022; or ›the disclosures in the accounting policies section concerning the use of the going concern basis of accounting.122UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017United Utilities AR2017 - Financials - NEW.indd 12201/06/2017 18:05:03 25344.04 – 1 June 2017 5:59 PM – Proof 36. We have nothing to report in respect of the matters on which we are required to report by exceptionUnder ISAs (UK and Ireland) 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 position and 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.Under the Listing Rules we are required to review: ›the directors’ statements, set out on page 73 and 131, in relation to going concern and longer-term viability; and ›the part of the Corporate Governance Statement on page 57 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 and responsibilitiesAs explained more fully in the Statement of directors' responsibilities set out on page 117, 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.William Meredith (Senior Statutory Auditor)for and on behalf of KPMG LLP, Statutory AuditorChartered AccountantsSt Peter’s Square, Manchester, M2 3AE 24 May 2017123unitedutilities.com/corporate Stock Code: UU.Financial StatementsUnited Utilities AR2017 - Financials - NEW.indd 12301/06/2017 18:05:03 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
Profit on disposal of business
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
2017
£m
2016
£m
1
2
3
3
3
4
5
9
6
6
6
6
7
7
8
1,704.0
(151.9)
(435.1)
4.2
(364.9)
(150.8)
(1,098.5)
605.5
13.7
(202.7)
(189.0)
22.1
3.8
442.4
(31.5)
(35.2)
58.2
(8.5)
433.9
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
63.6p
63.5p
58.3p
58.2p
38.87p
38.45p
124
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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Consolidated statement of comprehensive income
for the year ended 31 March
Profit after tax
Other comprehensive income
Remeasurement (losses)/gains on defined benefit pension schemes
Tax on items taken directly to equity
Foreign exchange adjustments
Total comprehensive income
Note
18
6
2017
£m
433.9
(76.7)
17.3
3.7
378.2
2016
£m
397.5
160.1
(26.5)
3.0
534.1
With the exception of foreign exchange adjustments, none of the items in the table above will be prospectively reclassified to profit or
loss.
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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
Current tax asset
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
2017
£m
Group
2016
£m
2017
£m
Company
2016
£m
10
11
12
13
15
18
A4
14
15
16
A4
9
21
17
19
A4
21
17
20
A4
22
10,405.5
187.7
75.2
9.0
112.3
247.5
731.0
11,768.2
22.4
303.9
7.1
247.8
76.7
–
657.9
12,426.1
(589.3)
(7,058.4)
(1,031.5)
(235.5)
(8,914.7)
(323.0)
(326.1)
–
(26.5)
(14.2)
(689.8)
(9,604.5)
2,821.6
499.8
2.9
(2.0)
–
329.7
1,991.2
2,821.6
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
–
–
–
6,326.8
–
–
–
6,326.8
–
69.0
–
–
–
–
69.0
6,395.8
–
(1,665.4)
–
–
(1,665.4)
(10.3)
(0.6)
–
–
–
(10.9)
(1,676.3)
4,719.5
499.8
2.9
–
1,033.3
–
3,183.5
4,719.5
–
–
–
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
These financial statements for the group and United Utilities Group PLC (company number: 6559020) were approved by the board of
directors on 24 May 2017 and signed on its behalf by:
Steve Mogford
Chief Executive Officer
Russ Houlden
Chief Financial Officer
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Consolidated statement of changes in equity
for the year ended 31 March
At 1 April 2016
Profit after tax
Other comprehensive (expense)/income
Remeasurement losses 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)
Equity-settled share-based payments (see note 2)
Exercise of share options – purchase of shares
At 31 March 2017
At 1 April 2015
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 income
Dividends (see note 8)
Equity-settled share-based payments (see note 2)
Exercise of share options – purchase of shares
At 31 March 2016
Share
capital
£m
499.8
–
Share
premium
account
£m
2.9
–
Cumulative
exchange
reserve
£m
(5.7)
–
Merger
reserve
£m
329.7
–
Retained
earnings
£m
1,878.8
433.9
–
–
–
–
–
–
–
499.8
–
–
–
–
–
–
–
2.9
–
–
3.7
3.7
–
–
–
(2.0)
–
–
–
–
–
–
–
329.7
(76.7)
17.3
–
374.5
(263.1)
3.4
(2.4)
1,991.2
Share
capital
£m
499.8
–
Share
premium
account
£m
2.9
–
Cumulative
exchange
reserve
£m
(8.7)
–
Merger
reserve
£m
329.7
–
Retained
earnings
£m
1,610.7
397.5
–
–
–
–
–
–
–
499.8
–
–
–
–
–
–
–
2.9
–
–
3.0
3.0
–
–
–
(5.7)
–
–
–
–
–
–
–
329.7
160.1
(26.5)
–
531.1
(258.7)
2.3
(6.6)
1,878.8
Total
£m
2,705.5
433.9
(76.7)
17.3
3.7
378.2
(263.1)
3.4
(2.4)
2,821.6
Total
£m
2,434.4
397.5
160.1
(26.5)
3.0
534.1
(258.7)
2.3
(6.6)
2,705.5
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.
Stock Code: UU.
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Company statement of changes in equity
for the year ended 31 March
At 1 April 2016
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 2017
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
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
3,204.8
240.8
240.8
(263.1)
3.4
(2.4)
3,183.5
Retained
earnings
£m
3,231.4
236.4
236.4
(258.7)
2.3
(6.6)
3,204.8
Total
£m
4,740.8
240.8
240.8
(263.1)
3.4
(2.4)
4,719.5
Total
£m
4,767.4
236.4
236.4
(258.7)
2.3
(6.6)
4,740.8
The capital redemption reserve arose as a result of a return of capital to shareholders following the reverse acquisition of United
Utilities PLC by United Utilities Group PLC in the year ended 31 March 2009.
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 £240.8 million (2016: £236.4 million).
128
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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
Loans to joint ventures
Investment in joint ventures
Proceeds from disposal of business
Dividends received from joint ventures
Proceeds from investments
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 generated from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Note
A1
21
A6
12
9
13
8
16
2017
£m
1,018.1
(161.0)
4.9
(42.4)
1.2
820.8
(672.4)
(52.4)
4.1
29.0
(109.0)
(13.5)
3.3
5.4
0.9
(804.6)
736.2
(448.7)
(263.1)
(2.4)
22.0
38.2
182.1
220.3
Group
2016
£m
905.5
(168.7)
1.9
(53.1)
–
685.6
(634.2)
(66.1)
1.4
17.3
–
–
–
4.6
0.2
(676.8)
693.0
(474.1)
(258.7)
(6.6)
(46.4)
(37.6)
219.7
182.1
2017
£m
265.4
(28.5)
–
–
5.5
242.4
Company
2016
£m
261.3
(27.5)
–
–
5.5
239.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23.0
–
(263.1)
(2.4)
(242.5)
(0.1)
(0.5)
(0.6)
25.9
–
(258.7)
(6.6)
(239.4)
(0.1)
(0.4)
(0.5)
Stock Code: UU.
unitedutilities.com/corporate
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Guide to detailed financial statements disclosures
In the interest of providing clear and relevant information to the users of our financial statements we have included summary
information within notes to the financial statements, with additional detailed information included in appendices where required.
These notes and appendices can be grouped as follows:
Notes and appendices
Page
Notes and appendices
Operations – information relating to our operating results
1
2
3
Revenue and segment reporting
Directors and employees
Operating profit
134
134
135
23
A1
Operating lease commitments
Cash generated from operations
Financing – information relating to how we finance our business
4
5
7
8
16
Investment income
Finance expense
Earnings per share
Dividends
Cash and cash equivalents
136
137
139
139
144
17
22
A2
A3
A4
Borrowings
Share capital
Net debt
Borrowings
Financial risk management
Working capital – information relating to the day-to-day working capital of our business
14
15
16
Inventories
Trade and other receivables
Cash and cash equivalents
142
143
144
21
A6
Trade and other payables
Related party transactions
Tax – information relating to our current and deferred taxation
6
Tax
138
19 Deferred tax liabilities
Employees – information relating to the costs associated with employing our people
2
18
Directors and employees
Retirement benefits
134
145
A5 Retirement benefits
Long-term assets – information relating to our long-term operational and investment assets
10
11
12
Property, plant and equipment
Intangible assets
Joint ventures
140
141
141
13
18
A5
Investments
Retirement benefits
Retirement benefits
Page
148
149
144
147
149
150
152
147
163
146
159
142
145
159
Other – other useful information
9
20
24
Disposal of non-household retail business
Provisions
Contingent liabilities
139
146
148
25
A7
A8
Events after the reporting period
Accounting policies
Subsidiaries and other group undertakings
148
165
170
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Accounting policies
The principal accounting policies adopted in the preparation of
these financial statements are set out below. Further detail can
be found in note A7.
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 United Utilities Water
Limited's (UUW) 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 2017, have had no material
impact on the group’s financial statements:
› Amendments to IAS 1 ‘Disclosure initiative’, in respect of
improved financial statement disclosures;
› Amendments to IFRS 11 'Accounting for Acquisitions of
Interests in Joint Operations', requiring business combination
accounting to be applied; and
› Improvements to IFRS (2014), 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.
Changes to these estimates, judgements and assumptions could
have a material effect on the financial statements.
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.
Revenue recognition and allowance for doubtful receivables
Accounting judgement – 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.
Accounting estimate – at each reporting date, the company and
each of its subsidiaries evaluate the estimated recoverability of
trade receivables and record allowances for doubtful receivables
based on experience. Judgements associated with 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.
Accounting estimate – UUW 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 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.
Property, plant and equipment
Accounting judgement – 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 requires an
accounting judgement, particularly when projects have both
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Accounting policies
elements within them. In addition, management capitalises
time and resources incurred by the group’s support functions on
capital programmes, which requires accounting judgements to be
made in relation to the appropriate capitalisation rates.
Accounting estimate – the estimated useful economic lives of
PPE is based on management’s 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 and, as such, this is a key source of estimation
uncertainty, although historically few changes to estimated useful
economic lives have been required.
Accounting estimate – the group is required to evaluate the
carrying values of PPE for impairment whenever circumstances
indicate, in management’s view, that the carrying value of such
assets may not be recoverable. An impairment review requires
management to make uncertain estimates concerning the cash
flows, growth rates and discount rates of the cash generating
units under review.
Retirement benefits
Accounting estimate – 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, which are
used to estimate the present value of defined benefit obligations.
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.
Accounting estimate – profit before tax and net assets are
affected by the actuarial assumptions used. The key assumptions
include: discount rates, pay growth, mortality and increases to
pensions in payment and deferred pensions. It should be noted
that actual rates may differ from the assumptions used due to
changing market and economic conditions and longer or shorter
lives of participants and, as such, this represents a key source of
estimation uncertainty.
Tax
Accounting judgement – 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.
Derivative financial instruments
Accounting estimate – 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.
Provisions and contingencies
Accounting judgement – the group is subject to a number of
claims incidental to the normal conduct of its business, relating
to and including commercial, contractual, employment and
environmental 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.
Accounting estimates – reasonable estimates are 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.
New and revised standards not yet effective
At the date of authorisation of these financial statements, the
following relevant major standards were in issue but not yet
effective. The directors anticipate 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. 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, an £11.9 million
loss 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, £0.8 million of fair value losses would have been
recognised in other comprehensive income rather than within the
income statement.
In addition, the standard requires entities to use an expected
credit loss model for impairment of financial assets instead of an
incurred credit loss model. This is expected to impact the way
in which the group provides for bad and doubtful receivables.
Work in this area is ongoing and it is not currently possible to
quantify the expected impact as this will be dependent on the
design of the model and the economic circumstances at the
point of implementation; however, the current expectation is
that it is unlikely to have a material impact on the overall level of
provisions.
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IFRS 15 ‘Revenue from Contracts with Customers’
The standard is effective for periods commencing on or after
1 January 2018. This standard introduces a new revenue
recognition model and replaces IAS 18 ‘Revenue’, IAS 11
‘Construction Contracts’, IFRIC 13 ‘Customer Loyalty Programmes’,
IFRIC 15 ‘Agreements for the Construction of Real Estate’, IFRIC
18 ‘Transfer of Assets from Customers’ and SIC-31 ‘Revenue –
Barter Transactions Involving Advertising Services’. While the
introduction of IFRS 15 is expected to have a significant impact
for many companies, the directors have carefully considered the
potential effects in the context of the group’s revenues and have
concluded that on adoption there will be no significant changes
to the way in which the group’s performance obligations to
customers are identified or deemed to be satisfied and, therefore,
no material impact on the revenues recognised in the financial
statements.
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.
If the standard had been adopted in the current year a
depreciation charge of around £4 million in relation to the
right-of-use asset and a finance expense charge of around £1
million would have been recognised in the income statement in
place of the operating lease charge of £4.4 million. In addition, a
right-of-use asset and largely offsetting lease liability of around
£105 million would be recognised in the statement of financial
position, assuming application of the modified retrospective
transitional approach as permitted by the standard and current
incremental costs of borrowing. The actual impact on adoption
will be sensitive to the incremental costs of borrowing at the
1 April 2019 application date.
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.
Stock Code: UU.
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Notes to the financial statements
1 Revenue and segment reporting
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 domestic retail customer base with no significant reliance on any single customer in this area.
Following the sale of the group's non-household business on 1 June 2016 (see note 9), £402.7 million (2016: £nil) of the group's
revenue from wholesale water and wastewater services during the year was derived from sales to Water Plus Group Limited (Water
Plus), a joint venture formed during the year between United Utilities PLC and Severn Trent PLC, and its subsidiaries. Please see notes
A4 and A6 for further details.
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 45), 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
2017
£m
0.7
1.2
0.3
0.6
1.5
4.3
2016
£m
0.6
1.2
0.3
0.4
1.0
3.5
Further information about the remuneration of individual directors and details of their pension arrangements are provided in the
directors’ remuneration report on pages 86 to 109.
Remuneration of key management personnel
Salaries and short-term employee benefits
Post-employment benefits
Share-based payment charge
2017
£m
5.5
0.1
2.6
8.2
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 expense (see note 18)
Charged to regulatory capital schemes
Amounts recharged to related parties at nil margin under transitional service agreements (see note A5)
Employee benefits expense
Within employee benefits expense were £10.1 million (2016: £0.9 million) of restructuring costs.
2017
£m
219.9
21.7
7.0
25.5
11.2
36.7
(129.4)
(4.0)
151.9
2016
£m
4.9
0.1
1.8
6.8
2016
£m
212.7
19.1
(0.2)
26.1
9.9
36.0
(120.7)
–
146.9
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2 Directors and employees continued
The total expense included within employee benefits expense in respect of equity-settled share-based payments was £3.4 million
(2016: £2.3 million). The company operates several share option schemes, details of which are given on pages 101 to 103 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.
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Average number of employees during the year
Company
The company has no employees.
2017
number
5,310
2016
number
5,265
3 Operating profit
The following items have been charged/(credited) to the income statement in arriving at the group’s operating profit:
Other operating costs
Hired and contracted services
Property rates
Power
Materials
Charge for bad and doubtful receivables (see note 15)
Regulatory fees
Cost of properties disposed
Legal and professional expenses
Operating leases payable:
Property
Plant and equipment
Loss on disposal of property, plant and equipment
Third party wholesale charges
Impairment of property, plant and equipment (see note 10)
Impairment of assets classified as held for sale
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 10)
Amortisation of intangible assets (see note 11)
2017
£m
101.5
91.6
68.7
67.7
29.9
28.6
8.6
6.5
3.8
0.6
3.3
3.0
0.2
–
(6.7)
(12.3)
40.1
435.1
(4.2)
(4.2)
336.2
28.7
364.9
2016
£m
107.5
86.3
65.3
67.2
39.2
27.9
10.5
5.8
4.2
0.8
5.4
15.1
11.4
2.7
(6.9)
(20.1)
63.5
485.8
(3.6)
(3.6)
332.5
31.2
363.7
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Notes to the financial statements
3 Operating profit continued
As a result of two significant flooding incidents caused by storms Desmond and Eva in December 2015, there were £13.8 million (2016:
£19.5 million) of expenses incurred, comprising £11.1 million (2016: £7.0 million) of operating costs, £2.5 million (2016: £1.1 million) of
infrastructure renewals expenditure, and a £0.2 million (2016: £11.4 million) impairment of property, plant and equipment. Insurance
compensation of £12.3 million (2016: £20.1 million) relating to the flooding incidents has been recognised and the group expects there
to be further recovery of flooding incident costs under its insurance cover in the year ending 31 March 2018, as further remedial work
is undertaken.
In addition, there were £5.8 million (2016: £11.1 million) of market reform restructuring costs incurred in preparing the business for
competition in the non-household retail market and £nil (2016: £24.8 million) of costs relating to a large water quality incident in the
prior year, largely comprising customer compensation payments included within other expenses.
Total other operating costs are stated net of £14.5 million (2016: £nil) of costs recharged to Water Plus at nil margin under transitional
service agreements.
Research and development expenditure for the year ended 31 March 2017 was £2.3 million (2016: £2.3 million).
During the year, the group obtained the following services from its auditor:
Audit services
Statutory audit – group and company
Statutory audit – subsidiaries
Non-audit-services
Regulatory audit services provided by the statutory auditor
Other non-audit services
Re-presented*
2016
£’000
2017
£’000
72
278
350
53
201
604
70
239
309
45
288
642
* Prior year comparatives in the above table have been re-presented to reflect the classification of services provided by the auditor that will be adopted prospectively in
accordance with the group audit committee's policy in relation to this area, further details of which can be found within the corporate governance report on page 77.
4
Investment income
Interest receivable on short-term bank deposits held at amortised cost
Interest receivable on loans to joint ventures held at amortised cost (see note A6)
Net pension interest income (see note 18)
2017
£m
0.9
2.6
10.2
13.7
2016
£m
1.9
–
3.1
5.0
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5 Finance expense
Interest payable
Interest payable on borrowings held at amortised cost(1)
Fair value (gains)/losses 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 (gains)/losses on debt and derivative instruments(6)
Notes:
2017
£m
227.0
227.0
70.4
(81.4)
(11.0)
37.5
(30.1)
7.4
0.8
(9.6)
(14.4)
(5.0)
7.5
(20.7)
(24.3)
202.7
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
(1)
(2)
(3)
(4)
(5)
(6)
Includes an £80.7 million (2016: £37.9 million) non-cash inflation uplift expense in relation to the group’s index-linked debt.
Includes foreign exchange losses of £119.7 million (2016: £62.1 million), excluding those on instruments measured at fair value through profit or loss. These losses are
largely offset by fair value gains on derivatives.
Includes an £11.9 million loss (2016: £15.1 million gain) on the valuation of debt reported at fair value through profit or loss due to changes in credit spread assumptions.
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 intends 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 £15.4 million income (2016: £16.5 million) due to net interest on swaps and debt under fair value option.
Interest payable is stated net of £29.2 million (2016: £21.3 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
3.0 per cent (2016: 2.7 per cent) to expenditure on such assets as prescribed by IAS 23 ‘Borrowing Costs’.
Stock Code: UU.
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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 for the year
Total tax charge/(credit) for the year
2017
£m
54.0
(22.5)
31.5
28.2
7.0
35.2
(58.2)
(23.0)
8.5
2016
£m
53.3
(9.0)
44.3
18.6
5.6
24.2
(112.5)
(88.3)
(44.0)
The deferred tax credit of £58.2 million (2016: £112.5 million) reflects the enacted reduction in the headline rate of corporation tax to
17 per cent from 1 April 2020 (2016: 20 per cent to 18 per cent from 1 April 2020). The adjustments in respect of prior years relates
to agreement with the tax authorities of prior years' UK tax matters; the current year figure also includes the release of a current tax
provision in relation to agreed historic overseas tax matters.
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)/expense not taxable/other
Total tax charge/(credit) and effective tax rate for the year
Tax on items taken directly to equity
Current tax
Relating to other pension movements
Deferred tax (see note 19)
On remeasurement (losses)/gains on defined benefit pension schemes
Relating to other pension movements
Change in tax rate
Total tax (credit)/charge on items taken directly to equity
2017
£m
442.4
88.5
(15.5)
(58.2)
(6.3)
8.5
2017
%
20.0
(3.5)
(13.2)
(1.4)
1.9
2016
£m
353.5
70.7
(3.4)
(112.5)
1.2
(44.0)
2017
£m
(9.8)
(9.8)
(13.8)
8.8
(2.5)
(7.5)
(17.3)
2016
%
20.0
(1.0)
(31.8)
0.3
(12.5)
2016
£m
–
–
32.0
–
(5.5)
26.5
26.5
The deferred tax credit of £2.5 million (2016: £5.5 million) reflects the enacted reduction in the headline rate of corporation tax to
17 per cent from 1 April 2020 (2016: 20 per cent to 18 per cent from 1 April 2020).
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7 Earnings per share
Profit after tax attributable to equity holders of the company
Earnings per share
Basic
Diluted
2017
£m
433.9
2017
pence
63.6
63.5
2016
£m
397.5
2016
pence
58.3
58.2
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 (2016: 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 (2016: 683.0 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 2016 at 25.64 pence per share (2015: 25.14 pence)
Interim dividend for the year ended 31 March 2017 at 12.95 pence per share (2016: 12.81 pence)
Proposed final dividend for the year ended 31 March 2017 at 25.92 pence per share
(2016: 25.64 pence)
2017
million
681.9
1.1
683.0
2017
£m
174.8
88.3
263.1
176.8
2016
million
681.9
1.1
683.0
2016
£m
171.4
87.3
258.7
174.8
The proposed final dividends for the years ended 31 March 2017 and 31 March 2016 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 2017 and 31 March 2016 respectively.
9 Disposal of non-household retail business
On 3 May 2016, the Competition and Markets Authority approved the formation of a joint venture, Water Plus Group Limited (Water
Plus), between United Utilities PLC and Severn Trent PLC. On 1 June 2016, the group completed the disposal of its non-household
water and wastewater retail business, principally comprising billing and customer service activities, to Water Plus. This resulted in a
£22.1 million profit and £3.3 million of cash proceeds on disposal of the business, together with a £15.6 million disposal of assets that
had been classified as held for sale. The formation of the joint venture resulted in an increase in interests in joint ventures of £39.1
million (see note 12), comprising £25.6 million of shares in the joint venture received on disposal of the non-household retail business,
and £13.5 million of equity contributed during the year. The group's £2.0 million share of the joint venture's losses for the period was
subsequently recognised, which included £5.2 million of initial set-up costs not expected to be incurred in future years.
Stock Code: UU.
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Notes to the financial statements
10 Property, plant and equipment
Group
Cost
At 1 April 2015
Additions
Transfers
Disposals
At 31 March 2016
Additions
Transfers
Disposals
At 31 March 2017
Accumulated depreciation
At 1 April 2015
Charge for the year
Impairment
Disposals
At 31 March 2016
Charge for the year
Impairment
Transfers
Disposals
At 31 March 2017
Net book value at 31 March 2016
Net book value at 31 March 2017
Land and
buildings
£m
Infra-
structure
assets
£m
Operational
assets
£m
Fixtures,
fittings, tools
and
equipment
£m
Assets in
course of
construction
£m
303.6
4.5
19.1
(0.3)
326.9
6.7
24.3
(3.7)
354.2
95.5
9.0
–
(0.3)
104.2
10.1
–
–
(2.7)
111.6
222.7
242.6
4,888.0
98.0
134.8
(0.1)
5,120.7
80.1
42.3
–
5,243.1
275.2
34.6
–
(0.1)
309.7
36.0
–
0.2
–
345.9
4,811.0
4,897.2
6,264.0
106.3
156.5
(47.2)
6,479.6
107.0
494.6
(48.0)
7,033.2
2,441.4
249.6
11.4
(42.2)
2,660.2
253.1
0.2
–
(42.8)
2,870.7
3,819.4
4,162.5
487.2
7.4
11.1
(7.6)
498.1
10.5
22.6
(34.4)
496.8
298.8
39.3
–
(5.8)
332.3
37.0
–
(0.2)
(33.2)
335.9
165.8
160.9
Total
£m
12,827.2
665.8
–
(55.2)
13,437.8
717.9
–
(86.1)
14,069.6
3,110.9
332.5
11.4
(48.4)
3,406.4
336.2
0.2
–
(78.7)
3,664.1
884.4
449.6
(321.5)
–
1,012.5
513.6
(583.8)
–
942.3
–
–
–
–
–
–
–
–
–
–
1,012.5
942.3
10,031.4
10,405.5
At 31 March 2017, the group had entered into contractual commitments for the acquisition of property, plant and equipment
amounting to £335.2 million (2016: £439.0 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 2017 or 31 March 2016.
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11 Intangible assets
Group
Cost
At 1 April 2015
Additions
Transfer to assets classified as held for sale
At 31 March 2016
Additions
Disposals
At 31 March 2017
Accumulated amortisation
At 1 April 2015
Charge for the year
Transfer to assets classified as held for sale
At 31 March 2016
Charge for the year
Disposals
At 31 March 2017
Net book value at 31 March 2016
Net book value at 31 March 2017
The group’s intangible assets relate mainly to computer software.
At 31 March 2017, the group had entered into contractual commitments for the acquisition of intangible assets amounting to
£1.7 million (2016: £8.3 million).
Company
The company had no intangible assets or contractual commitments for the acquisition of intangible assets at 31 March 2017 or
31 March 2016.
12 Joint ventures
Group
At 1 April 2015
Share of profits of joint ventures
Dividends received from joint ventures
Currency translation differences
At 31 March 2016
Additions
Share of profits of joint ventures
Dividends received from joint ventures
Currency translation differences
At 31 March 2017
Total
£m
264.5
67.0
(20.6)
310.9
54.5
(8.2)
357.2
119.6
31.2
(2.3)
148.5
28.7
(7.7)
169.5
162.4
187.7
£m
31.7
5.0
(4.6)
3.0
35.1
39.1
3.8
(5.4)
2.6
75.2
During the year ended 31 March 2017, the group recognised a £39.1 million investment in Water Plus, a joint venture formed during
the year between the group and Severn Trent PLC that is jointly owned and controlled by both parties under a joint venture agreement.
Further details of the formation of Water Plus are disclosed in note 9.
Stock Code: UU.
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Notes to the financial statements
12 Joint ventures continued
The group’s other interests in joint ventures mainly comprise its interest in AS Tallinna Vesi (Tallinn Water). Joint management of Tallinn
Water is based on a shareholders’ agreement.
There are no restrictions on the ability of the group's joint ventures to transfer funds to the group in the form of cash dividends, or to
repay loans or advances made by the group.
Details of transactions between the group and its joint ventures are disclosed in note A6.
Company
The company had no investments in joint ventures at either 31 March 2017 or 31 March 2016.
13 Investments
Group
At 1 April 2015
Disposals
Currency translation differences
At 31 March 2016
Disposals
Currency translation differences
At 31 March 2017
£m
8.6
(0.2)
0.3
8.7
(0.9)
1.2
9.0
During the year, the group reduced its investment in Muharraq Holding Company 1 Limited through a £0.9 million (2016: £0.2 million)
repayment of a shareholder loan.
At 31 March 2017, the group's investments mainly comprised its investment in Muharraq Holding Company 1 Limited. These
investments are held at fair value.
Company
At 31 March 2017, the company's investments related solely to its investments in United Utilities PLC, which was recorded at cost of
£6,326.8 million (2016: £6,326.8 million).
14 Inventories
Group
Properties held for resale
Other inventories
Company
The company had no inventories at 31 March 2017 or 31 March 2016.
2017
£m
13.5
8.9
22.4
2016
£m
19.7
9.6
29.3
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15 Trade and other receivables
Trade receivables
Amounts owed by subsidiary undertakings
Amounts owed by related parties (see note A6)
Other debtors and prepayments
Accrued income
2017
£m
124.7
–
163.5
62.0
66.0
416.2
Group
2016
£m
175.1
–
2.9
71.8
120.1
369.9
2017
£m
–
69.0
–
–
–
69.0
Company
2016
£m
–
62.5
–
–
–
62.5
At 31 March 2017, the group had £112.3 million (2016: £2.5 million) of trade and other receivables classified as non-current. In both
years, all of the amount was owed by related parties.
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 bad and 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
2017
£m
94.4
29.9
(38.9)
85.4
2016
£m
100.5
39.2
(45.3)
94.4
At each reporting date, the group evaluates the recoverability of trade receivables and records allowances for doubtful receivables
based on experience.
At 31 March 2017 and 31 March 2016, 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 2017
At 31 March 2016
Aged
less than
one year
£m
79.9
127.0
Aged
between
one year and
two years
£m
32.0
37.5
Aged
greater than
two years
£m
5.0
5.1
Carrying
value
£m
116.9
169.6
At 31 March 2017, the group had £7.8 million (2016: £5.5 million) of trade receivables that were not past due.
Company
At 31 March 2017 and 31 March 2016, the company had no trade receivables that were past due.
The carrying amount of trade and other receivables approximates to their fair value at 31 March 2017 and 31 March 2016.
Stock Code: UU.
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Notes to the financial statements
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
2017
£m
1.5
246.3
247.8
(27.5)
220.3
Group
2016
£m
4.8
208.8
213.6
(31.5)
182.1
2017
£m
–
–
–
(0.6)
(0.6)
Company
2016
£m
–
–
–
(0.5)
(0.5)
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 and payments initiated that had
not cleared as at the reporting 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)
For further details of the principal economic terms and conditions of outstanding borrowings see note A3.
Company
Non-current liabilities
Amounts owed to subsidiary undertakings
Current liabilities
Book overdrafts (see note 16)
2017
£m
4,851.0
2,207.4
7,058.4
37.3
261.3
27.5
326.1
7,384.5
2017
£m
1,665.4
1,665.4
0.6
0.6
1,666.0
2016
£m
4,439.2
2,069.6
6,508.8
–
437.7
31.5
469.2
6,978.0
2016
£m
1,636.9
1,636.9
0.5
0.5
1,637.4
Borrowings are unsecured and are measured at amortised cost. The carrying amounts of borrowings approximate their fair value.
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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:
Group
Current service cost
Curtailments/settlements
Administrative expenses
Pension expense charged to operating profit
Net pension interest income credited to investment income
(see note 4)
Net pension expense charged before tax
2017
£m
19.7
3.1
2.7
25.5
(10.2)
15.3
2016
£m
22.3
1.1
2.7
26.1
(3.1)
23.0
Defined benefit pension costs excluding curtailments/settlements included within employee benefit expense were £22.4 million
(2016: £25.0 million) comprising current service costs and administrative expenses. Total post-employment benefits expense excluding
curtailments/settlements charged to operating profit of £33.6 million (2016: £34.9 million) comprise the defined benefit costs
described above of £22.4 million (2016: £25.0 million) and defined contribution pension costs of £11.2 million (2016: £9.9 million) (see
note 2).
The reconciliation of the opening and closing net pension surplus 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 (losses)/gains gross of tax
At the end of the year
2017
£m
275.2
(15.3)
64.3
(76.7)
247.5
2016
£m
79.2
(23.0)
58.9
160.1
275.2
Included in the contributions paid of £64.3 million (2016: £58.9 million) were deficit repair contributions of £43.0 million (2016: £33.3
million). No inflation funding mechanism payments were made during the year (2016: £nil).
Remeasurement gains and losses are recognised directly in the statement of comprehensive income.
Group
The return on plan assets, excluding amounts included in interest
Actuarial (losses)/gains arising from changes in financial assumptions
Actuarial gains/(losses) arising from changes in demographic assumptions
Actuarial gains arising from experience
Remeasurement (losses)/gains on defined benefit pension schemes
2017
£m
555.5
(721.4)
52.7
36.5
(76.7)
2016
£m
56.0
98.1
(46.6)
52.6
160.1
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 £11.2 million (2016: £9.9 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 2017 and 31 March 2016.
Stock Code: UU.
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Notes to the financial statements
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 2015
(Credited)/charged to the income statement (see note 6)
Charged to equity (see note 6)
At 31 March 2016
(Credited)/charged to the income statement (see note 6)
Credited to equity (see note 6)
At 31 March 2017
Accelerated
tax
depreciation
£m
1,125.0
(88.2)
–
1,036.8
(25.4)
–
1,011.4
Retirement
benefit
obligations
£m
16.6
6.5
26.5
49.6
–
(7.5)
42.1
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 2017 or 31 March 2016.
20 Provisions
Group
At 1 April 2015
(Credited)/charged to the income statement
Utilised in the year
At 31 March 2016
Charged to the income statement
Utilised in the year
At 31 March 2017
Severance
£m
4.8
(0.2)
(3.7)
0.9
7.0
(4.2)
3.7
Other
£m
(17.8)
(6.6)
–
(24.4)
2.4
–
(22.0)
Other
£m
7.7
11.5
(5.0)
14.2
11.0
(2.4)
22.8
Total
£m
1,123.8
(88.3)
26.5
1,062.0
(23.0)
(7.5)
1,031.5
Total
£m
12.5
11.3
(8.7)
15.1
18.0
(6.6)
26.5
The group had no provisions classed as non-current at 31 March 2017 or 31 March 2016.
The severance provision as at 31 March 2017 and 31 March 2016 relates to severance costs as a result of group reorganisation.
Other provisions principally relate to contractual, legal and environmental 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 2017 or 31 March 2016.
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21 Trade and other payables
Non-current
Deferred grants and contributions
Other creditors
Current
Trade payables
Amounts owed to subsidiary undertakings
Amounts owed to related parties
Other tax and social security
Deferred grants and contributions
Accruals and other creditors
Deferred income
The average credit period taken for trade purchases is 23 days (2016: 26 days).
The carrying amounts of trade and other payables approximate their fair value.
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 costs (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
2017
£m
570.7
18.6
589.3
2017
£m
35.2
–
12.1
5.1
8.5
222.6
39.5
323.0
Group
2016
£m
517.4
13.1
530.5
Group
2016
£m
44.1
–
–
4.9
9.0
241.1
42.6
341.7
2017
million
681.9
274.0
955.9
2017
£m
34.1
465.7
499.8
2017
£m
–
–
–
2017
£m
–
8.7
–
–
–
1.6
–
10.3
2017
£m
526.4
29.0
33.5
(3.0)
(6.7)
579.2
2016
million
681.9
274.0
955.9
Company
2016
£m
–
–
–
Company
2016
£m
–
9.5
–
–
–
1.6
–
11.1
2016
£m
485.8
17.3
32.8
(2.6)
(6.9)
526.4
2016
£m
34.1
465.7
499.8
Details of the voting rights of each category of shares can be found within the directors’ report on page 113.
Stock Code: UU.
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Notes to the financial statements
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
2017
£m
Plant and
equipment
2017
£m
Property
2016
£m
Plant and
equipment
2016
£m
2.8
10.2
277.9
290.9
0.6
0.4
–
1.0
3.0
10.4
278.6
292.0
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 2017 or 31 March 2016.
24 Contingent liabilities
A contingent liability exists in relation to the equalisation of Guaranteed Minimum Pension (GMP), though at this stage it is not possible
to quantify the impact of legislative changes proposed by the UK Government in this area. See note A5 for further details.
Following a review undertaken during the year, the group has determined that the possibility of any outflow in respect of performance
guarantees issued is remote and, as such, there are no contingent liabilities to be disclosed in respect of these (2016: £9.8 million).
The company has not entered into performance guarantees as at 31 March 2017 or 31 March 2016.
25 Events after the reporting period
There were no events arising after the reporting date that require recognition or disclosure in the financial statements for the year
ended 31 March 2017.
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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 profit on disposal of business (see note 9)
Adjustment for share of profits of joint ventures (see note 12)
Operating profit
Adjustments for:
Depreciation of property, plant and equipment (see note 10)
Amortisation of intangible assets (see note 11)
Impairment of property, plant and equipment (see note 10)
Impairment of assets classified as available for sale
Loss on disposal of property, plant and equipment (see note 3)
Loss on disposal of intangible assets
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 in inventories (see note 14)
Decrease/(increase) in trade and other receivables
Decrease in trade and other payables
Increase in provisions (see note 20)
Pension contributions paid less pension expense charged to
operating profit
Cash generated from operations
2017
£m
442.4
189.0
(22.1)
(3.8)
605.5
336.2
28.7
0.2
–
3.3
0.5
(6.7)
3.4
(3.0)
6.9
71.1
(0.6)
11.4
(38.8)
1,018.1
Group
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
2017
£m
235.4
27.7
–
–
263.1
–
–
–
–
–
–
–
–
–
–
2.3
–
–
–
265.4
Company
2016
£m
230.8
27.9
–
–
258.7
–
–
–
–
–
–
–
–
–
–
2.6
–
–
–
261.3
The group has received property, plant and equipment of £33.5 million (2016: £32.8 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)
Loans to joint ventures
Interest
Inflation uplift on index-linked debt (see note 5)
Tax
Other
Fair value movements*
Cash generated from operations (see note A1)
At the end of the year
2017
£m
6,260.5
691.7
263.1
109.0
156.1
80.7
41.2
4.4
(9.9)
(1,018.1)
6,578.7
2016
£m
5,924.0
681.6
258.7
–
166.8
37.9
53.1
1.5
42.4
(905.5)
6,260.5
* Fair value movements includes net fair value gains on debt and derivative instruments of £24.3 million (2016: £26.3 million losses), less £14.4 million (2016: £16.1 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.
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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:
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
5.625% 300m bond
1.129% 52m bond
5.02% JPY 10bn dual currency loan
2.058% 30m bond
1.641% 30m bond
2.9% 600m bond
5.0% 200m bond
Borrowings designated at fair value through
profit or loss
6.875% 400m bond
Borrowings measured at amortised cost
1.97%+RPI 200m EIB IL loan
Short-term bank borrowings – fixed
1.30%+LIBOR 5bn bond
2.46%+RPI 50m EIB IL loan
2.10%+RPI 50m EIB IL loan
1.93%+RPI 50m EIB IL loan
1.90%+RPI 50m EIB IL loan
1.88%+RPI 50m EIB IL loan
1.84%+RPI 50m EIB IL loan
1.73%+RPI 50m EIB IL loan
1.61%+RPI 50m EIB 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
0.01%+RPI 20m IL bond
1.29%+RPI 50m EIB (amortising) IL loan
1.23%+RPI 50m EIB (amortising) IL loan
1.12%+RPI 50m EIB (amortising) IL loan
1.10%+RPI 50m EIB (amortising) IL loan
0.75%+RPI 50m EIB (amortising) IL loan
1.15%+RPI 50m EIB (amortising) IL loan
1.11%+RPI 50m EIB (amortising) IL loan
0.76%+RPI 50m EIB (amortising) IL loan
0.178%+RPI 35m IL bond
0.245%+CPI 20m IL bond
Currency
Year of final
repayment
GBP
USD
USD
EUR
GBP
GBP
EUR
JPY/USD
EUR
EUR
HKD
GBP
USD
GBP
GBP
JPY
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
2018
2018
2019
2020
2022
2027
2027
2029
2030
2031
2031
2035
2028
2016
2017
2017
2020
2020
2020
2020
2020
2020
2020
2020
2022
2023
2025
2025
2026
2028
2029
2029
2029
2029
2029
2030
2030
2030
2030
2031
Fair value
2017
£m
2,544.6
164.3
208.1
295.3
478.9
455.4
408.7
43.5
97.7
27.0
25.7
61.1
278.9
375.5
375.5
5,682.8
–
202.0
36.3
69.3
68.5
68.2
68.2
68.1
68.2
68.0
67.8
102.6
116.5
115.6
28.1
112.3
22.0
57.4
55.1
56.5
56.3
56.5
57.5
57.6
56.4
40.2
20.2
Carrying
value
2017
£m
2,522.4
156.8
204.7
294.8
469.7
429.3
412.1
43.6
105.8
26.3
24.6
56.4
298.3
375.5
375.5
4,486.6
–
202.0
37.3
60.8
60.8
60.9
61.0
60.9
61.1
61.2
61.2
100.0
107.9
103.8
25.9
102.4
22.3
51.5
49.7
51.0
51.0
51.9
51.5
51.7
51.7
36.2
20.0
Fair value
2016
£m
2,293.0
169.6
183.9
263.2
455.9
449.5
382.7
38.4
81.4
23.7
–
–
244.7
338.0
338.0
4,830.1
269.9
127.5
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
56.2
56.2
55.0
33.6
–
Carrying
value
2016
£m
2,373.0
162.5
185.6
269.3
455.1
434.5
411.1
41.0
96.1
25.1
–
–
292.7
338.0
338.0
4,267.0
267.4
127.5
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
54.1
54.2
54.3
35.3
–
150
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A3 Borrowings continued
Borrowings measured at amortised cost (continued)
0.01%+RPI 38m IL bond
3.375%+RPI 50m IL bond
0.709%+LIBOR 100m EIB (amortising) loan
0.691%+LIBOR 150m EIB (amortising) loan
0.573%+LIBOR 100m EIB (amortising) loan
0.511%+LIBOR 150m EIB (amortising) loan
0.01%+RPI 100m EIB (amortising) IL loan
0.01%+RPI 75m EIB (amortising) IL loan
0.01%+RPI 75m EIB (amortising) IL loan
0.01%+RPI 75m EIB (amortising) IL loan
1.9799%+RPI 100m IL bond
0.379%+CPI 20m IL bond
0.01%+RPI 26.5m IL bond
0.01%+RPI 29m IL bond
1.66%+RPI 35m IL bond
0.093%+CPI 60m 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
2017
£m
Carrying
value
2017
£m
Fair value
2016
£m
Carrying
value
2016
£m
s
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a
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F
i
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
GBP
GBP
GBP
GBP
GBP
2031
2032
2032
2032
2033
2033
2033
2034
2034
2034
2035
2036
2036
2036
2037
2037
2039
2040
2041
2042
2043
2046
2049
2053
2056
2056
2056
2056
2056
2056
2056
2056
2057
2057
2017
42.2
124.1
94.9
146.4
100.2
149.6
107.9
80.9
80.7
80.7
212.4
20.9
30.3
32.2
62.7
59.0
132.2
207.5
95.7
202.6
102.4
102.9
118.0
56.1
224.1
221.5
218.2
52.5
105.8
105.3
102.5
71.0
107.9
208.6
27.5
8,602.9
41.3
74.2
93.8
145.3
100.0
150.0
102.3
76.7
76.2
76.2
138.9
20.0
31.0
31.5
44.7
59.6
87.2
137.5
68.6
137.0
68.4
68.5
68.2
28.4
135.0
134.4
134.2
33.4
67.0
66.7
66.5
46.5
65.1
129.1
27.5
7,384.5
–
107.6
95.6
142.9
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
–
72.8
100.0
150.0
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
IL
CPI
RPI
EIB
Index-linked debt – this debt is adjusted for movements in the Consumer or Retail Prices Indices with reference to a base CPI
or RPI established at trade date
The UK general index of consumer prices (for all items) as published by the Office for National Statistics (May 2015 = 100)
The UK general index of retail prices (for all items) as published by the Office for National Statistics (Jan 1987 = 100)
Borrowings that are held with the European Investment Bank
Borrowings in the above table are unsecured. Funding raised in foreign currencies is swapped to sterling to match funding costs to
income and assets.
Stock Code: UU.
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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 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 2017, the group had £1,147.8 million (2016: £888.6 million) of available liquidity, which comprised £247.8 million (2016:
£213.6 million) of cash and short-term deposits, £725.0 million (2016: £600.0 million) of undrawn committed borrowing facilities, and
£175.0 million (2016: £75.0 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
Total borrowing facilities
Facilities drawn(1)
Undrawn borrowing facilities
Note:
(1) Facilities expiring after more than two years.
2017
£m
150.0
100.0
500.0
750.0
(25.0)
725.0
2016
£m
150.0
150.0
300.0
600.0
–
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 2017 or 31 March 2016.
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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
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 2017
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 2016
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
9,926.5
3,061.4
(5,603.4)
7,384.5
1,292.1
(1,855.3)
5.2
(558.0)
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)
Adjust-
ment(2)
£m
1 year or
less
£m
191.9
318.5
1–2 years
£m
771.4
110.9
2–3 years
£m
563.2
117.8
3–4 years
£m
107.2
663.4
4–5 years
£m
482.9
111.6
More than
5 years
£m
7,809.9
1,739.2
(5,603.4)
(5,603.4)
5.2
5.2
510.4
882.3
681.0
770.6
594.5
9,549.1
143.3
(245.5)
397.8
(807.9)
491.2
(518.7)
33.3
(10.7)
25.0
(10.6)
201.5
(261.9)
(102.2)
(410.1)
(27.5)
22.6
14.4
(60.4)
Adjust-
ment(2)
£m
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
(5,791.7)
(5,791.7)
12.8
12.8
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)
(2)
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 and CPI will be two per cent over the life of each instrument.
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 £0.6 million (2016: £0.5 million), which are payable within one year, and £1,665.4 million (2016:
£1,636.9 million), which are payable within one to two years.
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). While the opening of the non-household retail market to competition from
1 April 2017 has impacted on the profile of the group's concentration of credit risk, as discussed further overleaf, the group does not
believe it is exposed to any material concentrations that could have an impact on its ability to continue as a going concern or its longer-
term viability.
Stock Code: UU.
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Notes to the financial statements – appendices
A4 Financial risk management continued
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 majority of the group’s customer base consisting of a large number of
unrelated households. 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.
Following the sale of the group’s non-household business on 1 June 2016 and the non-household retail market opening to competition,
credit risk in this area is now concentrated to a small number of retailers to whom the group provides wholesale water and wastewater
services. Retailers are licensed and monitored by Ofwat and as part of the regulations they must demonstrate that they have adequate
resources available to supply services. The group’s retail customers are on 30 day credit terms in respect of trading transactions. As at
31 March 2017, Water Plus was the group's single largest debtor, with amounts outstanding in relation to wholesale services of £40.8
million (2016: £nil). During the year, sales to Water Plus in relation to wholesale services were £402.7 million (2016: £nil). Details of
transactions with Water Plus can be found in note A6.
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 15). An allowance is made by the water regulator in the price limits at each price review for a proportion
of debt deemed to be irrecoverable.
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 2017 and 31 March 2016, 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 15)*
Investments (see note 13)
Derivative financial instruments
2017
£m
247.8
416.2
9.0
807.7
1,480.7
Group
2016
£m
213.6
369.9
8.7
765.6
1,357.8
2017
£m
–
69.0
–
–
69.0
Company
2016
£m
–
62.5
–
–
62.5
* Included within trade and other receivables is £122.0 million of amounts owed by joint ventures in respect of borrowings, further details of which are disclosed in note A6.
The credit exposure on derivatives is disclosed gross of any collateral held. At 31 March 2017, the group held £176.9 million (2016:
£127.5 million) as collateral in relation to derivative financial instruments (included within borrowings in note A3).
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 that 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 unexpected RCV movements caused by inflation.
154
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A4 Financial risk management continued
Ofwat has indicated that from April 2020 the inflation return as an uplift to RCV will still comprise an element that will be linked to RPI;
however, this will commence transition towards CPI. As a result, the group will identify opportunities to amend the economic hedge
currently in place which can be evidenced by the issuing of £100.0 million of CPI indexed-linked debt during the year. Inflation risk is
reported monthly to the treasury committee in the operational compliance report.
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The carrying value of index-linked debt held by the group was £3,602.3 million at 31 March 2017 (2016: £3,447.3 million).
Sensitivity analysis
The following table details the sensitivity of profit before tax to changes in the RPI and CPI 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/CPI
1 per cent decrease in RPI/CPI
2017
£m
(36.4)
36.4
2016
£m
(35.0)
35.0
The sensitivity analysis assumes a one per cent change in RPI and CPI 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 and CPI 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 or CPI change either three or eight months earlier.
Company
The company had no material exposure to inflation risk at 31 March 2017 or 31 March 2016.
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 10 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
2017
£m
155.7
(153.6)
Group
2016
£m
175.6
(183.0)
2017
£m
(16.7)
16.7
Company
2016
£m
(16.4)
16.4
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.
Stock Code: UU.
unitedutilities.com/corporate
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Notes to the financial statements – appendices
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.
Our largest concentration of floating interest rate risk is with index-linked instruments. This has been classified as repricing in one year
or less due to the refixing of the interest charge with changes in RPI and CPI.
Group
At 31 March 2017
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 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
Total
£m
1 year or
less
£m
1–2 years
£m
2–3 years
£m
3–4 years
£m
4–5 years
£m
More than
5 years
£m
2,522.4
–
2,522.4
–
2,522.4
2,522.4
656.3
(656.3)
–
469.7
(469.7)
–
429.3
(429.3)
–
967.1
(967.1)
–
–
–
–
–
–
–
0.6
–
–
0.6
325.0
325.6
–
325.6
–
–
–
0.5
–
–
0.5
(50.0)
(49.5)
–
(49.5)
–
–
–
0.6
–
–
0.6
1,127.1
1,127.7
–
1,127.7
1–2 years
£m
2–3 years
£m
3–4 years
£m
4–5 years
£m
–
–
–
–
–
–
0.5
–
–
0.5
(125.0)
(124.5)
–
(124.5)
617.4
(617.4)
–
455.1
(455.1)
–
–
–
–
0.5
–
–
0.5
(50.0)
(49.5)
–
(49.5)
–
–
–
0.6
–
–
0.6
1,127.1
1,127.7
–
1,127.7
–
–
–
–
–
–
0.6
–
–
0.6
325.0
325.6
–
325.6
–
–
–
0.7
–
–
0.7
–
0.7
–
0.7
375.5
(375.5)
–
25.5
–
–
25.5
1,729.2
1,754.7
–
1,754.7
More than
5 years
£m
1,300.5
(1,300.5)
–
338.0
(338.0)
–
26.3
–
–
26.3
1,729.2
1,755.5
–
1,755.5
375.5
–
375.5
230.4
653.9
3,602.3
4,486.6
–
7,384.5
(247.8)
7,136.7
–
375.5
375.5
202.5
653.9
3,602.3
4,458.7
(3,131.3)
4,225.3
(247.8)
3,977.5
Total
£m
1 year or
less
£m
2,373.0
–
2,373.0
–
2,373.0
2,373.0
338.0
–
338.0
156.2
663.5
3,447.3
4,267.0
–
6,978.0
(213.6)
6,764.4
–
338.0
338.0
127.7
663.5
3,447.3
4,238.5
(3,006.3)
3,943.2
(213.6)
3,729.6
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A4 Financial risk management continued
Company
Borrowings measured at amortised cost
Floating rate instruments
Total borrowings
2017
1 year or less
£m
Total
£m
2016
1 year or less
£m
Total
£m
1,666.0
1,666.0
1,666.0
1,666.0
1,637.4
1,637.4
1,637.4
1,637.4
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.
Currency risk
Currency exposure principally arises in respect of funding raised in foreign currencies.
2017
£m
9.8
(9.8)
2016
£m
7.7
(7.7)
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 2017, group consolidated gearing was 61 per cent (2016: 61 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.
Stock Code: UU.
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Notes to the financial statements – appendices
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
2017
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
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
Note:
Level 1
£m
Level 2
£m
Level 3
£m
–
–
–
–
–
(1,766.1)
(937.9)
(2,704.0)
9.0
591.1
216.6
(249.7)
(375.5)
(778.5)
(4,744.9)
(5,331.9)
–
–
–
–
–
–
–
–
Level 1
£m
Level 2
£m
Level 3
£m
–
–
–
–
–
8.7
583.8
181.8
(261.7)
(338.0)
(2,149.5)
(1,309.9)
(3,459.4)
(143.5)
(3,520.2)
(3,489.1)
–
–
–
–
–
–
–
–
Total
£m
9.0
591.1
216.6
(249.7)
(375.5)
(2,544.6)
(5,682.8)
(8,035.9)
Total
£m
8.7
583.8
181.8
(261.7)
(338.0)
(2,293.0)
(4,830.1)
(6,948.5)
(1)
These derivatives form economic hedges and, as such, management intends to hold these through to maturity. Derivatives forming an economic hedge of the currency
exposure on borrowings included in these balances were £215.7 million (2016: £177.2 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 £2,704.0 million (2016:
£3,459.4 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 £755.4 million reduction (2016: £1,213.5 million
increase) in ‘level 1’ fair value measurements is largely due to a decrease in the number of observable quoted bond prices in active
markets at 31 March 2017.
During the year, changes in the fair value of financial liabilities designated at fair value through profit or loss resulted in a £37.5 million
loss (2016: £4.3 million). Included within this was an £11.9 million loss (2016: £15.1 million gain) attributable to changes in own credit
risk. The cumulative amount recognised in the income statement due to changes in credit spread was £62.2 million profit (2016: £74.1
million). The carrying amount is £173.4 million (2016: £135.9 million) higher than the amount contracted to settle on maturity.
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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
2017
£m
917.5
798.9
1,899.1
3,615.5
2016
£m
831.6
624.1
1,514.7
2,970.4
The duration of the combined schemes is around 21 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 finalised funding valuations of the schemes were carried out by independent qualified actuaries as at 31 March 2013
(UUPS) and 31 March 2016 (ESPS) and determined that the schemes were both in a deficit position on a funding basis. The basis on
which scheme liabilities are valued for funding purposes differs from the basis required under IAS 19, with liabilities on a funding
basis being subject to assumptions at the valuation date that are not updated between revaluations. Funding deficits vary significantly
from company to company, but neither the deficits, the assumptions on which they are based, the associated sensitivities, nor the
risk exposures are disclosed by many companies and therefore meaningful cross-company comparisons are not possible. Conversely,
scheme liabilities are valued on a consistent basis between companies under IAS 19 and are subject to assumptions and sensitivities
that are required to be disclosed. Consequently, the relative economic positions of companies are comparable only on an IAS 19 basis,
subject to normalisation of assumptions used between companies.
A retirement benefit surplus was recognised as an asset at both 31 March 2017 and 31 March 2016 as, under both the UUPS and ESPS
scheme rules, the group has an unconditional right to a refund of the surplus assuming the full settlement of the plans' liabilities in a
single event, such as a scheme wind-up.
Under UK legislation there is a requirement that pension schemes are funded prudently, and that funding plans are agreed by pension
scheme trustees. The group has plans in place with the schemes’ trustees to address the funding deficits by 31 December 2020 for
the UUPS and 30 September 2024 for the ESPS, through a series of 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. Further details of the derivatives
used in reducing investment risk are disclosed in the 'Further reporting analysis' section of this appendix.
Stock Code: UU.
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Notes to the financial statements – appendices
A5 Retirement benefits continued
In addition, the group has had an Inflation Funding Mechanism (IFM) in place since 2010 for the UUPS, which was extended to the ESPS
in 2013. Under the IFM, additional contributions may be payable annually, calculated with reference to a notional amount of liabilities
and the difference between outturn inflation and a fixed inflation assumption, currently set at 3.0 per cent per annum. To the extent
that outturn inflation exceeds the fixed inflation assumption, additional contributions are payable in the following year and the base on
which future payments are calculated increases, resulting in the smoothing of inflation effects over future years. If outturn inflation is
less than the fixed inflation assumption, no additional contributions are payable. The IFM does not have an accounting impact except
to the extent that resulting cash contributions increase the level of scheme assets.
The group expects to make contributions of £62.5 million in the year ending 31 March 2018, comprising £38.9 million to the UUPS and
£4.1 million to the ESPS in respect of deficit repair contributions, £18.2 million and £0.7 million in respect of regular contributions to
UUPS and ESPS respectively, and £0.6 million in respect of expenses to the ESPS; no additional contributions are expected to be made
under the IFM.
The schemes’ funding plans are reviewed every three years. The UUPS funding valuation at 31 March 2016 is currently ongoing and the
next funding valuation for the ESPS is due no later than 31 March 2019.
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
a high quality 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 contributions, and through external market hedges.
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, at the current time, 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 2017, the discount rate has fallen by 0.85 per cent, which includes a 0.6 per cent decrease in credit spreads
and a 0.25 per cent decrease in swap yields over the year. The IAS 19 remeasurement loss of £76.7 million reported in note 18 has
largely resulted from the impact of the decrease in credit spreads during the year, partially offset by growth asset gains, the reduction
in swap yields and the favourable impact of changes in mortality during the year.
Reporting and assumptions
The results of the latest funding valuations at 31 March 2016 for ESPS, and 31 March 2013 for UUPS, have been adjusted for IAS 19
in order to assess the position at 31 March 2017, 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.
Member data used in arriving at the liability figure included within the overall IAS 19 surplus has been based on the finalised actuarial
valuation as at 31 March 2016 for ESPS and the preliminary results of the actuarial valuation as at 31 March 2016 for UUPS.
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
2017
% p.a.
2.55
3.40
3.40
2016
% p.a.
3.40
3.20
3.20
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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) S2PA (2016: S1NA) year of birth
tables, with scaling factor of 108 per cent for males and 102 per cent for females (2016: one-year age rating for males in the UUPS
only), reflecting actual mortality experience; and CMI 2015 (2016: CMI 2014) long-term improvement factors, with a long-term annual
rate of improvement of 1.75 per cent (2016: 1.75 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
2017
years
27.0
29.0
29.8
31.9
2016
years
27.1
29.2
30.7
32.9
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 £74.8 million (2016: £58.4 million)
decrease/increase in the schemes’ liabilities at 31 March 2017, 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 high quality 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 £70.0 million (2016:
£55.3 million) increase/decrease in the schemes’ liabilities at 31 March 2017, as a significant proportion of the schemes’ benefit
obligations are linked to inflation. However, around half of the schemes' liabilities were hedged for RPI in the external market at
31 March 2017, meaning that this sensitivity is likely to be halved as a result. In addition, around half of the schemes' liabilities
were hedged through the IFM, with any change in inflation outturn resulting in a change to cash contributions provided under this
mechanism. Any change in inflation outturn results in a change to the cash contributions provided under the IFM. As assumptions
for pensionable salary growth and pension increases are in line with those for price inflation, sensitivities are also in line.
› Life expectancy – an increase/decrease in life expectancy of one year would have resulted in a £135.3 million (2016: £92.5 million)
increase/decrease in the schemes’ liabilities at 31 March 2017. 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.
Further reporting analysis
At 31 March, the fair values 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
%
9.1
4.8
44.8
39.8
1.5
100.0
Schemes’
assets
%
9.8
9.4
36.9
41.0
2.9
100.0
2017
£m
350.4
185.6
1,729.3
1,537.3
60.4
3,863.0
(3,615.5)
247.5
2016
£m
318.3
304.3
1,196.2
1,332.7
94.1
3,245.6
(2,970.4)
275.2
The fair values in the table above are all based on quoted prices in an active market, where applicable.
Stock Code: UU.
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A5 Retirement benefits continued
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.
The fair value derivatives included within pension scheme asset classification are analysed as follows:
Group
At 31 March 2017
Equities
Other non-equity growth assets
Gilts
Bonds
Other
Total fair value of schemes' assets
At 31 March 2016
Equities
Other non-equity growth assets
Gilts
Bonds
Other
Total fair value of schemes' assets
Underlying
assets
£m
Fair value of
derivatives
£m
Combined
£m
320.6
185.6
1,729.3
1,547.6
250.5
4,033.6
317.1
304.3
1,196.2
1,347.2
53.5
3,218.3
29.8
–
–
(10.3)
(190.1)
(170.6)
1.2
–
–
(14.5)
40.6
27.3
350.4
185.6
1,729.3
1,537.3
60.4
3,863.0
318.3
304.3
1,196.2
1,332.7
94.1
3,245.6
The derivative values in the table above represent the net market value of derivatives held within each of these asset categories as
follows:
› derivatives are held within the UUPS equity portfolio to gain economic exposure equivalent to around 4.0 per cent of that scheme’s
assets, and comprise total return swaps on equity indices with a value of £18.2 million (2016: £1.0 million) and currency forwards
with a value of £11.6 million (2016: £0.2 million);
› derivatives are used within the UUPS bond portfolio to hedge non-sterling exposure back to sterling, and comprise credit default
swaps with a value of £(10.3) million (2016: £0.4 million), interest rate swaps with a value of £nil (2016: £(15.4) million) and currency
forwards with a value of £nil (2016: £0.5 million);
› derivatives are used within both the UUPS and ESPS 'other' portfolios to manage liability risks, and comprise £(227.8) million (2016:
£(9.0) million) in the UUPS and £37.7 million (2016: £49.6 million) in the ESPS. These are further broken down as follows:
› the UUPS has a liability hedging strategy in place, which uses a wide range of derivatives to target a high level of interest rate and
inflation hedging. The net value of £(227.8) million (2016: £(9.0) million) comprises asset swaps with a value of £(132.9) million
(2016: £(250.7) million), interest rate swaps with a value of £522.0 million (2016: £631.7 million), gilt repurchase agreements with a
value of £(655.8) million (2016: £(377.6) million) and RPI inflation swaps with a value of £38.9 million (2016: £(12.4) million); and
› the ESPS has a liability hedging strategy in place, implemented using pooled funds which make use of derivatives. The value of
£37.7 million (2016: £49.6 million) represents the total value of these pooled funds, i.e. underlying assets plus the value of the
derivatives within these funds.
The derivatives shown in the tables only cover those expressly held for the purpose of reducing certain undesirable asset and liability
risks. The schemes also invest in a number of other pooled funds that make use of derivatives. No allowance is made in the figures
above for any derivatives held within these, as these are not held expressly for the purpose of managing risk. The total fair value of
pooled funds held within the schemes' assets was £1,179.5 million (2016: £1,521.8 million).
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A5 Retirement benefits continued
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
2017
£m
3,245.6
109.4
555.5
5.2
(114.3)
(2.7)
64.3
3,863.0
2016
£m
3,133.7
96.3
56.0
5.8
(102.4)
(2.7)
58.9
3,245.6
The group’s actual return on the schemes’ assets was a gain of £664.9 million (2016: £152.3 million), principally due to gains on
derivatives hedging the schemes’ liabilities.
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 (losses)/gains arising from changes in financial assumptions
Actuarial gains/(losses) 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
2017
£m
(2,970.4)
(99.2)
(721.4)
52.7
36.5
(3.1)
(5.2)
114.3
(19.7)
(3,615.5)
2016
£m
(3,054.5)
(93.2)
98.1
(46.6)
52.6
(1.1)
(5.8)
102.4
(22.3)
(2,970.4)
A contingent liability exists in relation to the equalisation of Guaranteed Minimum Pension (GMP), which is expected to have a
widespread impact for defined benefit schemes operating in the UK. 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 has further developed its proposals, 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.
The related party trading transactions with the group's joint ventures during the period and amounts outstanding at the period end
date were as follows:
Sales of services
Purchases of goods and services
Costs recharged at nil margin under transitional service agreements
Interest income and fees recognised on loans to related parties
Amounts owed by related parties
Amounts owed to related parties
2017
£m
404.3
0.7
18.5
2.6
163.5
12.1
2016
£m
1.2
0.7
–
–
2.9
–
Sales of services to related parties during the year mainly represent non-household wholesale charges and were on the group's normal
trading terms.
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A6 Related party transactions continued
At 31 March 2017, amounts owed by joint ventures, as recorded within trade and other receivables in the statement of financial
position, were £163.5 million (2016: £2.9 million), comprising £41.5 million of trade balances, which are unsecured and will be settled
in accordance with normal credit terms, and £122.0 million relating to loans. Included within these loans receivable were the following
amounts owed by Water Plus:
› £100.0 million outstanding on a £100.0 million revolving credit facility provided by United Utilities Water Limited, which is
guaranteed by United Utilities PLC, with a maturity date of 30 September 2019, bearing a floating interest rate of LIBOR plus a credit
margin;
› £9.0 million receivable being the fair value of amounts owed in relation to a £12.5 million unsecured loan note held by United
Utilities PLC, with a maturity date of 28 March 2027. This is an interest-free shareholder loan with a total amount outstanding at
31 March 2017 of £12.5 million, comprising the £9.0 million receivable held at fair value, and £3.5 million recorded as an equity
contribution to Water Plus recognised within interests in joint ventures; and
› £9.7 million outstanding on a £19.6 million unsecured amortising loan note held by United Utilities PLC, with a final maturity date of
30 November 2017, bearing a floating interest rate of LIBOR plus a credit margin. Repayments received on this loan note represent
part of the proceeds received on disposal of the group's non-household retail business (see note 9).
A further £3.3 million of non-current receivables was owed by other related parties at 31 March 2017 (2016: £2.5 million).
No expense or allowance has been recognised for bad and doubtful receivables in respect of amounts owed by related parties (2016:
£nil).
During the year, United Utilities PLC provided guarantees in support of Water Plus in respect of certain amounts owed to wholesalers.
The aggregate limit of these guarantees was £42.5 million, of which £24.0 million related to guarantees to United Utilities Water
Limited.
At 31 March 2017, amounts owed to joint ventures were £12.1 million (2016: £nil). The amounts outstanding are unsecured and will be
settled in accordance with normal credit terms (2016: £nil).
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 £263.1 million (2016: £258.7 million) and total net interest
payable during the year was £27.7 million (2016: £27.9 million). Amounts outstanding at 31 March 2017 and 31 March 2016 between
the parent company and subsidiary undertakings are provided in notes 15, 17 and 21.
At 31 March 2017 and 31 March 2016, 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 2017 and 31 March 2016.
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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 131 to 132.
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.
On losing control of a subsidiary disposed of to a joint venture,
the group recognises the gain or loss attributable to measuring
the investment retained in the former subsidiary at its fair value
at the date when control is lost.
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.
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A7 Accounting policies continued
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.
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
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cash flows that are independent from other assets, the group
estimates the recoverable amount of the cash generating unit to
which the asset belongs.
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.
Stock Code: UU.
unitedutilities.com/corporate
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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 to determine the funding of the schemes,
along with future contribution rates, are carried out by the
pension scheme actuary as directed by the trustees at intervals of
not more than three years. In any intervening years, the trustees
review the continuing appropriateness of the funding and
contribution rates.
From a financial reporting perspective and in accordance with
IAS 19, defined benefit assets are measured at fair value while
liabilities are measured at present value, using the projected
unit credit method. The difference between the two amounts is
recognised as a surplus or obligation in the statement of financial
position. Where this difference results in a defined benefit surplus
this is recognised in accordance with IFRIC 14 ‘IAS 19 – The limit
on a defined benefit asset, minimum funding requirements and
their interaction’ on the basis that the group has an unconditional
right to a refund of any surplus that may exist following the full
settlement of plan liabilities in a single event.
The cost of providing pension benefits to employees relating
to the current year’s service (including curtailment gains and
losses) is included within employee benefits expense, while
the interest on the schemes’ assets and liabilities is included
within investment income and finance expense respectively.
Remeasurement gains/losses on scheme assets and liabilities are
presented in other 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
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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.
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.
Stock Code: UU.
unitedutilities.com/corporate
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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 12 and 13.
Class of share
capital held
Proportion of
share capital
owned/voting
rights %* Nature of business
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 Solutions (Industrial) Limited
United Utilities Utility Solutions Holdings Limited
United Utilities Water Finance PLC
United Utilities Water Limited
United Utilities Water Operations Holdings Limited
UU (ESPS) Pension Trustee Limited
UU Group Limited
UU Secretariat Limited
YCL Transport Limited
United Utilities Bioresources Limited
The Netherlands
United Utilities (Tallinn) 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
Water Plus Group Limited(2)
Estonia
AS Tallinna Vesi(3)
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
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Dormant
Holding company for international business
Dormant
Holding company
Energy generation
Corporate trustee
Consulting services and project management
Holding company
Operations and maintenance contract holder
Corporate trustee
Holding and management company
Property management
Renewable energy generation
Water and wastewater services
Holding company
Holding company
Financing company
Water and wastewater services
Holding company
Corporate trustee
Dormant
Dormant
Non-trading
Wastewater services
Ordinary
100.0
Holding company
Ordinary
Ordinary
49.0
100.0
Management company
Non-trading
Ordinary
Ordinary
Ordinary
Ordinary
50.0
50.0
16.7
50.0
Development company
Property management
Procurement portal
Holding company
Ordinary
35.3
Water and wastewater services
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A8 Subsidiaries and other group undertakings continued
Associated undertakings
Bahrain
Muharraq STP Company BSC(c)(4)
Muharraq Wastewater Services Company WLL(4)
Jebel Ali Free Zone, Dubai, UAE
Muharraq Holding Company 1 Limited(5)
Class of share
capital held
Proportion of
share capital
owned/voting
rights %* Nature of business
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Ordinary
20.0
35.0
Project company
Operations and maintenance company
Ordinary
20.0
Holding company
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* 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: Two Smithfield, Leonard Coates Way, Stoke-on-Trent, United Kingdom, ST1 4FD.
(3) Registered address: Adala 10, Tallinn 10614, Estonia.
(4) Registered address: Building 200, Road 13, Block 115, Hidd, Kingdom of Bahrain.
(5) Registered address: Al Tamimi & Company, 9th Floor, Dubai World Trade Centre, Sheikh Zayed Road, Dubai, United Arab Emirates.
Stock Code: UU.
unitedutilities.com/corporate
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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 2017. 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 reported results
Underlying operating profit
Profit before tax per reported results
Underlying profit before tax
Profit after taxation per reported results
Underlying profit after tax
Earnings per share (basic) per reported results (pence)
Underlying earnings per share (pence)
2017
£m
1,704.0
2016
£m
1,730.0
2015
£m
1,720.2
2014
£m
1,688.8
2013
£m
1,636.0
605.5
622.9
442.4
389.4
433.9
313.4
63.6p
46.0p
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
Dividend per ordinary share (pence)
38.87p
38.45p
37.70p
36.04p
34.32p
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
11,768.2
657.9
12,426.1
(8,914.7)
(689.8)
(9,604.5)
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)
Total net assets and shareholders’ equity
2,821.6
2,705.5
2,434.4
2,215.9
1,871.9
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
820.8
(804.6)
22.0
38.2
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:
6,578.7
61%
6,260.5
61%
5,924.0
59%
5,519.9
58%
5,450.6
60%
(1) Regulatory capital value (RCV) gearing is calculated as group net debt (see note A2), divided by the RCV expressed in outturn prices, of United Utilities Water Limited.
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Stock Code: UU.
unitedutilities.com/corporate
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Shareholder information
Key dates
͵ 22 June 2017
Ex-dividend date for 2016/17 final dividend
͵ 23 June 2017
Record date for 2016/17 final dividend
͵ 28 July 2017
Annual general meeting
͵ 4 August 2017
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.
Payment of 2016/17 final dividend to shareholders
͵ 22 November 2017
Announcement of half-year results for the six months ending
30 September 2017
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.
Online annual report
Our annual report is available online. View or download the full
annual report and financial statements from:
unitedutilities.com/corporate
͵ 21 December 2017
Ex-dividend date for 2017/18 interim dividend
͵ 22 December 2017
Record date for 2017/18 interim dividend
͵ 1 February 2018
Payment of 2017/18 interim dividend to shareholders
͵ May 2018
Announce the final results for the 2017/18 financial year
͵ June 2018
Publish the annual report and financial statements for the
2017/18 financial year
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
› 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
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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017
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25192.04 – 1 June 2017 4:17 PM – Proof 325192.04 – 1 June 2017 4:17 PM – Proof 3Important informationCautionary statement: The annual report and financial statements (the annual report) contains certain forward-looking statements with respect to the operations,performanceandfinancialconditionofthegroup.Bytheirnature,thesestatementsinvolveuncertaintysincefutureevents 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: Unlessexpresslystatedotherwise,the‘group’,‘UnitedUtilities’,‘UU’or‘thecompany’meansUnitedUtilitiesGroupPLCandits subsidiary undertakings; the ‘regulated business’, ‘regulated activities’ or ‘UUW’ means the licensed water and wastewater activitiesundertakenbyUnitedUtilitiesWaterLimited(formerlyUnitedUtilitiesWaterPLC)intheNorthWestofEngland.Key shareholder factsBalanceanalysisasat31March201720132014201520162017Interim11.4412.0112.5612.8112.95Final22.8824.0325.1425.6425.92Total ordinary34.3236.04 37.7038.4538.87Dividend history – pence per shareLooking after your investmentOur approach to responsible business has again helped us retain world class status in the Dow Jones Sustainability Index for the ninthconsecutiveyearandmembershipofFTSE4GoodIndexforthefifteenth.WealsoreceivedaBratingintheCarbonDisclosureProjectandsecured90percentinBitC’sCRIndex.2.925.422.5466,91416,10666314.1728746.2310128.7291-1,0001,001 -10,00010,001 -100,000100,001 -1,000,0001,000,001 -10,000,00010,000,001 to highestShareholders by location59.6%13.2%20%7.2%This document is printed on Cocoon Silk 100 which is made from 100% FSC® Recycled pulp and post-consumer waste paper. This reduces waste sent to landfill, greenhouse gas emissions, as well as the amount of water and energy consumed.% of sharesNumber of holdingsUnited KingdomNorth AmericaEuropeRest of the WorldYou can find information about United Utilities quickly and easily on our website: corporate.unitedutilities.comHeretheannual report and financial statements, responsible business performance, company announcements, the half-year and final results and presentations are published.RegistrarThegroup’sregistrar,Equiniti,canbecontactedon: 0371 384 2041 or textphone for those with hearing difficulties: 0371 384 2255.Linesareopen8.30amto5.30pm,MondaytoFriday excluding public holidays.The address is: Equiniti,AspectHouse,SpencerRoad, Lancing,WestSussex,BN996DA.Overseas shareholders may contact them on: +44 (0)121 415 7048 Equinitioffersasharedealingservicebytelephone: 0345 603 7037 and online: shareview.co.uk/dealing EquinitialsooffersastocksandsharesISAforUnitedUtilities shares, call 0345 300 0430 or go to: shareview.co.uk/dealingKeeping you in the picturePleasebeverywaryofanyunsolicitedcontactaboutyourinvestmentsor 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-firmsWarning to shareholdersunitedutilities.com/corporate Stock Code: UU.Shareholder InformationUnited Utilities AR2017 - Strategic.indd 601/06/2017 17:36:49 25192.04 – 1 June 2017 4:17 PM – Proof 325192.04 – 1 June 2017 4:17 PM – Proof 3United Utilities Group PLC Haweswater HouseLingley Mere Business ParkLingley Green AvenueGreat SankeyWarringtonWA5 3LPTelephone +44 (0)1925 237000Stock Code: UU.Registered in England and WalesRegistered number 6559020UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017United Utilities AR2017 - Strategic.indd 101/06/2017 17:36:50
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