United Utilities
Group PLC
Annual Report and Financial Statements
for the year ended 31 March 2019
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Cover photo:
The cycle of our water and wastewater
services, much of which are designed to
use gravity to move the water naturally
in the most efficient way
Cover photo:
The cycle of our water and wastewater
services, much of which are designed to
use gravity to move the water naturally
in the most efficient way
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Contents
Chairman and Chief Executive Officer’s review
2018/19 highlights
Strategic report
What we do
Our purpose and strategy
Our marketplace
Our competitive advantages
Our economic regulation
Our business plan submission for 2020–25
Our business model
How we create value for stakeholders
Our planning horizons
How we measure our performance
Our performance in 2018/19
Our risk management
Governance
Corporate governance report
Board of directors
Letter from the Chairman
Nomination committee report
Audit committee report
Corporate responsibility committee report
Remuneration committee report
Tax policies and objectives
Directors’ report
Non-financial information statement
s172(1) statement
Statement of directors’ responsibilities
Financial statements
Independent auditor’s report to the members
of United Utilities Group PLC only
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
Notes to the financial statements – appendices
Five-year summary – unaudited
Shareholder information
Look out for
Read more content within our Annual Report
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.
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Welcome to our Annual Report and Financial
Statements for the year ended 31 March 2019
United Utilities is the UK’s largest listed water and wastewater
company. Our purpose is to provide great service to customers
and communities in the North West, creating long-term value for
all of our stakeholders.
We provide essential services that are relied on by millions of people
every day, and our embedded innovation culture and pioneering
Systems Thinking approach help us create value for a range of stakeholders.
We continually strive to improve our services, delivering more for less,
helping vulnerable customers, and investing to build resilience for the
long-term benefit of future generations.
Materiality
Our Annual Report and Financial Statements aim 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. We have included information
that we believe is material to these decisions, which is presented in a
way that we believe is fair, balanced and understandable.
Integrated Report
This Annual Report is an Integrated Report and has been prepared
and presented in accordance with the International Framework
published by the International Integrated Reporting Council in
December 2013. The board, which is responsible for the integrity of
this report, has considered the preparation and presentation of this
report and concluded that it has been prepared and presented in
accordance with the Framework.
We engage with – and recognise that this report will be read by – a
wide variety of other stakeholders including customers, suppliers,
employees, analysts, regulators, community bodies, politicians,
non-governmental organisations, and devolved authorities. Where
we believe that a topic is material to a large number of them,
which is assessed in part through a matrix approach to stakeholder
materiality as set out on page 45, we either include it in this report
or refer the reader to other reports and information (such as
our regulatory reports, customer communications, or corporate
responsibility web pages).
We believe this approach meets the requirements of company law,
the UK Corporate Governance Code, IFRS and the International
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.
Dr John McAdam
Chairman
Steve Mogford
Chief Executive Officer
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We have submitted our business plan for
the 2020–25 regulatory period
We received the highest grades in the sector against the test
areas in Ofwat's initial assessment of plans, and were one of
only three companies to be awarded a fast-track rating.
We see this achievement as recognition of the quality of our plan and of the
transformation we have made as a business, which has been delivered through a
consistent customer-focused approach and a drive for continuous improvement.
We were the only company to retain self-assurance status in Ofwat’s
Company Monitoring Framework assessment. We have now held this top
rating for three years in a row, recognising the consistently high level of
trust and confidence that stakeholders can place in the quality and
transparency of our reporting.
What to look for in this Annual Report
Consistent approach
We maintain a consistent and sustainable approach that provides a
strong foundation stakeholders can rely on.
Continuous improvement
We strive for continuous improvement in our
performance and in our reporting.
Carlisle
Workington
Whitehaven
Kendal
Barrow-in Furness
Lancaster
Blackpool
Burnley
Preston
Blackburn
Bolton
Liverpool Manchester
Warrington
Stockport
Chester
Crewe
Page 15
Our purpose and strategy
Look out for our strategic themes
throughout this report:
The best service to customers
At the lowest sustainable cost
In a responsible manner
Our strategy is broken down into these three
themes, which form the framework through
which we create value for our stakeholders.
These strategic themes are embedded
throughout this report. Our performance
measurement, risk assessment and
remuneration policy are all aligned to them,
often to more than one of the three themes,
such is the interconnectivity of what we do.
Page 19
Our business plan submission
for 2020–25
Page 39
How we create value for
stakeholders
Page 17
Our competitive advantages
Page 24
Our business model
Page 152
Our s172(1) statement
Stock Code: UU.
unitedutilities.com/corporate
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Add logos next to each
bullet, all Ofwat except
Environment Agency one
Proud to be leading the industry
across a host of measures
Most
embedded
innovation
culture
Sector-
leading
approach to
affordability and
vulnerability
Fast-
tracked
business plan
with highest
overall grades
…all while maintaining sector- lead i n g r e s i
r o u n d
y e a r
l
i e n c e a l
l
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Read more about
our business plan
on pages 19 to 23
Read more about
our operational performance
on pages 56 to 61
High
quality
approach to
customer
engagement
Sector-
leading
rating with the
Environment
Agency
Highest
levels
of trust and
confidence in our
reporting
…all while maintaining sector- lead i n g r e s i
r o u n d
y e a r
l
i e n c e a l
l
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Chairman and Chief Executive Officer’s review
Our consistent focus on customers and pioneering Systems Thinking
approach have helped us go from strength to strength.
Pictured: Dr John McAdam, Chairman and Steve Mogford, Chief Executive Officer
Overview
This has been a busy year. Extreme weather
caused operational challenges for the sector as
a whole, and we submitted our business plan
for the next regulatory period. Throughout
these competing priorities, we maintained
a resilient and high-quality service and grew
stronger as a company.
We made further improvements in
customer satisfaction and delivered our best
performance to date against our outcome
delivery incentives, despite our targets
being tougher this year. We met our leakage
target for the 13th consecutive year, and we
maintained high standards of environmental
performance and drinking water quality.
Our 2020–25 business plan submission
received the highest grades in the sector and
a fast-track rating in Ofwat’s initial assessment.
These achievements are a testament to the
transformation we have delivered over recent
years and the hard work of all our team.
Continuing to improve
service for customers
Our purpose and strategy are centred around
customers. This has been our focus for many
years and underpins customer satisfaction
improvements year after year.
We achieved our best ever Service Incentive
Mechanism (SIM) scores this year, and our
performance across the first four years of this
regulatory period means we expect to be eligible
for a financial reward of around £16 million.
Proving that good service costs less, we have
reduced the amount it costs to serve our
customers by 27 per cent since the start of this
regulatory period, as a result of our improved
operational performance, digital strategy, and
driving down bad debt.
Our household bad debt has reduced from
3.6 per cent of regulated revenue in 2014/15
to 2.1 per cent in 2018/19, and customer bills
have reduced in real terms since 2010.
We have taken the lead in transforming how
the sector supports customers, particularly
those in vulnerable circumstances. We have
the sector’s most innovative and ambitious
assistance schemes, supporting over 100,000
customers struggling to pay. We held the
second North West Affordability Summit this
year, launching the North West Hardship Hub,
the first of its kind in the country. This platform
helps the money advice community in our
region locate cross-sector assistance schemes
all in one place, making it easier for them to
find the best help for their clients.
Read more about how we are working together to
support those in need on page 57
Our efforts are being recognised externally.
We were awarded the Institute of Customer
Service ‘Service Mark with Distinction’. We
were the first water company accredited by
the Chartered Institute of Credit Management
for our work with customers struggling to
pay; and we achieved Shaw Trust Accessibility
status as a further recognition of our
work supporting customers in vulnerable
circumstances.
Rising to challenges and
improving our resilience
2018 was a year of unprecedented extremes
of weather, with a deep freeze and rapid thaw
in the early part of the calendar year swiftly
followed by an intense heatwave in the summer.
It was the driest summer for our region since
modern records began in 1961, meaning our
impounding reservoirs were at much lower
levels than usual. The soaring temperatures
contributed to a huge increase in demand for
water.
We undertook a series of actions to minimise
any impact on customers and protect water
resources. We increased communication to
encourage customers to use water wisely.
We significantly increased our leak detection
efforts to help manage leakage. We used our
fleet of Alternative Supply Vehicles (ASVs) to
help maintain pressure in the network at peak
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times. We brought back into service groundwater
supplies such as boreholes that had not been used
for many years, and we used our West East Link Main
to pump water around our region.
Read more about how we are responding to extreme
weather conditions on page 30
The tireless hard work of our employees, together
with the support of customers and regulators
over this period, meant we were able to maintain
an unrestricted service to customers. Our ability
to manage these extreme conditions further
demonstrates the benefits of our Systems Thinking
approach. Many of the actions we took to protect
service to customers would not have been possible
without it.
Our actions resulted in one-off additional costs of
around £80 million, which has further improved the
high level of resilience we have already embedded
into our service. For example, our investment in ASVs
has been critical to improving our water service, an
efficient way of helping to keep customers supplied
during planned and unplanned interruptions.
Delivering strong and sustainable
financial performance
Our financial performance from a statutory perspective
has been very good this year.
Underlying earnings per share is 55.5 pence, an
increase of 24 per cent and more than covering the
dividend for the year. The main drivers of this increase
are our allowed regulatory revenue profile and a
decrease in the underlying net finance expense
due to lower RPI inflation applied to our index-
linked debt, partly offset by increases in infrastructure
renewals expenditure and depreciation.
Reported earnings per share is 53.3 pence, which is
slightly lower than the underlying figure, mainly due
to exceptional costs associated with the dry weather
period and fair value movements. Adjusting items
are outlined in the reconciliation table on pages
66 and 67. The £80 million additional dry weather
costs include £25.6 million operating costs and £10.5
million infrastructure renewals expenditure, with the
remainder being capital expenditure.
Read more about our financial performance for
2018/19 on pages 62 to 67
The board has proposed a final dividend of 27.52
pence per ordinary share, taking the total dividend
for 2018/19 to 41.28 pence. This is an increase of 3.9
per cent, in line with our policy for this regulatory
period of targeting an annual growth rate of at least
RPI inflation through to 2020.
We have had a pension surplus on an IAS 19 basis for
many years and this is well controlled through our
asset-liability matching approach. The IAS 19 surplus
increased to £484 million at 31 March 2019.
The funding position is assessed using a different
basis to value liabilities. While maintaining a pension
surplus on an IAS 19 basis, we have had a deficit on a
funding basis, and have been making deficit recovery
contributions of around £40 million per year. It was
Stock Code: UU.
confirmed in the most recent triennial valuation, signed
off as at 31 March 2018, that these contributions
would address the funding deficit by December 2021.
However, in April 2019, we prepaid the remaining
agreed deficit recovery contributions at a discount,
meaning we are now in a pension surplus position on
an IAS 19 basis and have eliminated the deficit on a
funding basis, achieving self-sufficiency.
This is a responsible approach, mitigating risk for
all of our stakeholders at a time when regulators,
including Ofwat and The Pensions Regulator, are
highlighting the importance of this area and in
some cases, intervening to protect pension scheme
members and customers.
As part of our business plan submission for the
next regulatory period, we have set out a range of
considerations that will determine the future level of
dividends paid. One of these is the impact of pension
deficits. With our historic well managed approach
to pensions and strong level of funding, we do not
expect future funding of our pension scheme to act
as a constraint in the 2020–25 period.
We have a consistent policy of targeting gearing of
55–65 per cent, measured as net debt to regulatory
capital value. This has been supportive of United
Utilities Water Limited’s A3 credit rating with
Moody’s, which affirmed a stable outlook on our
credit rating following Ofwat’s initial assessment of
business plans, despite retaining a negative outlook
on the sector in general.
This, alongside our pension position, gives us an
extremely robust capital base and provides a high
degree of resilience and financial flexibility as we
look to the future.
Performing well against our
regulatory contract
From an economic perspective, there are four key
drivers of value – total expenditure (totex), SIM
performance, outcome delivery incentives (ODIs),
and financing. We are delivering good results against
all of these areas, demonstrating strong all-round
performance in the current regulatory period.
As previously mentioned, we anticipate being eligible
for a SIM reward of around £16 million thanks to our
improved performance for customers.
On financing, the low cost of debt we have locked-
in places us in a strong position to outperform
the industry allowed cost of debt in the current
regulatory period, and into the next period.
On totex, we remain confident in outperforming our
totex allowance by £100 million against the scope of
our 2015–20 final determination.
Sitting outside the scope of the final determination is
an additional £350 million we have committed to invest
from our total outperformance, including £250 million
in resilience that we had committed to previously
and £100 million to give us a flying start for the next
regulatory period, and the £80 million additional totex
related to the dry weather event.
KEY FACTS
£350
million
additional investment
of outperformance
£19
million
ODI reward for 2018/19
against tougher targets
£16
million
expected SIM reward
for the 2015–20 period
Fast-
track
business plan
for 2020–25
Top
rating
for the high quality
and transparency
of our reporting
unitedutilities.com/corporate
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Chairman and Chief Executive Officer’s review
Although our ODI reward-penalty range was
skewed to the downside, we expect to earn
a net reward of around £30 million for the
2015–20 period. This year’s performance
was our best so far, with a net reward of
£19.2 million bringing our cumulative position
for the first four years of the period to a net
reward of £21.4 million.
This performance, across the range of our
ODIs, demonstrates the benefit of the
accelerated investment we made early in
the period. It is particularly pleasing given
we were delivering against increasingly
challenging targets and dealing with extremes
of weather. Our expected out-turn position
equates to performance towards the top end
of our estimates, providing a solid foundation
for the next regulatory period.
Achieving a fast-track rating
for our business plan
Our business plan submission for the 2020–25
period received the highest grades for the
sector against the test areas set out in Ofwat’s
ini(cid:415)al assessment, and was commended as
industry leading in many areas.
This achievement demonstrates the
transforma(cid:415)on we have achieved in
recent years, both in terms of opera(cid:415)onal
performance and e(cid:312)ciency, as well as the high
quality of our plan and our ambi(cid:415)on for further
improvement in the next regulatory period.
Read more about our business plan submission
for 2020–25 on pages 19 to 23
As previously men(cid:415)oned, we have commi(cid:425)ed
an addi(cid:415)onal £100 million investment towards
a (cid:327)ying start to the 2020–25 period. The main
priori(cid:415)es for this investment include three of
our toughest performance targets: leakage,
supply interrup(cid:415)ons and sewer (cid:327)ooding.
Supporting employees’
health and wellbeing
We are committed to protecting the health
and wellbeing of our employees, and have
made significant efforts in this area over
recent years.
We engage with employees to help them with
lifestyle choices. For example, we help them
to quit smoking and offer incentives for those
who stay smoke-free for six months. We have
reduced employee inactivity rates through
initiatives such as standing desks and walking
meetings, as well as offering discounted gym
memberships and an onsite gym at our head
office. We offer nutritional programmes and
have health kiosks where employees can
measure their weight and blood pressure.
As well as physical health, we focus on
mental health. We offer free confidential
support services for employees, and have
trained mental health champions and first
aiders across the business. We joined other
businesses in the year in an initiative aimed
at ending the stigma of talking about mental
health in the workplace.
Our progress in this area has been recognised
externally. We were named one of Britain’s
Healthiest Workplaces 2018 and the third most
improved organisation; we were reaccredited
with the Workplace Wellbeing Charter in 2018;
and we received two employee wellbeing
accolades at the Reward and Employee
Benefits Association (REBA) awards for physical
wellbeing and mental wellbeing.
Read more about how we are creating a healthy
workplace on page 33
Maintaining high standards
of corporate governance
We consistently operate in a manner that
aims to deliver the highest levels of corporate
governance. Our board continues to provide
sound and prudent governance, consistent
with the principles of the UK Corporate
Governance Code.
We continued to demonstrate good drinking
water quality compliance, as assessed by
the Drinking Water Inspectorate. We have
delivered a range of improvements in our
water transformation programme, which has
driven a significant reduction in the risk of water
quality events. We once again retained Industry
Pictured: Manchester skyline
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We are proud of the transformation we have
delivered and the performance of our team
during the year. We are excited about the
opportunity the 2020–25 period represents
as we deliver our purpose to provide great
service to customers and communities in the
North West, creating long-term value for all of
our stakeholders.
We would like to express our gratitude to our
employees for their hard work and dedication,
and to customers and other stakeholders for
their continued support.
Dr John McAdam
Chairman
Steve Mogford
Chief Executive Officer
The strategic report on pages 10 to 77 was approved at a
meeting of the board on 22 May 2019 and signed off on
its behalf by Steve Mogford, Chief Executive Officer.
Leading Company status in the Environment
Agency’s annual assessment, and we achieved a
World Class rating in the Dow Jones Sustainability
Index for the eleventh consecutive year.
Ofwat’s Company Monitoring Framework
Assessment provides an assessment of the
trust and confidence stakeholders can have in
the accuracy, completeness and transparency
of company reporting. Integrity is one of our
core values and we were delighted to be
awarded the top self-assurance rating again
this year, the only company to have held this
for three consecutive years.
Outlook
The acceleration of investment we made in
the current regulatory period, along with
our additional investment, Systems Thinking
approach and financial risk management,
are delivering sustainable improvements in
performance and resilience. Our customer
satisfaction is among the top of the water and
wastewater companies in the sector.
The benefit of accelerated investment to
deliver earlier improvements to service is
clear to see. Given our total an(cid:415)cipated
outperformance for the 2015–20 regulatory
period, we are reinves(cid:415)ng £350 million of our
outperformance to deliver enhanced resilience
and improved performance earlier in the next
regulatory period.
Stock Code: UU.
unitedutilities.com/corporate
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2018/19 highlights
Operational highlights
We have delivered
another strong
performance
against a more
challenging
backdrop
The best service
to customers
Read more about our performance
in 2018/19 against this strategic theme
on page 56
At the lowest
sustainable cost
Read more about our performance
in 2018/19 against this strategic theme
on page 58
In a responsible
manner
Read more about our performance
in 2018/19 against this strategic theme
on page 60
Year-on-year improvements in customer
satisfaction and lower bills
›
Our pioneering Systems Thinking approach has delivered
sustained year-on-year improvements in service for customers
› We achieved our best ever Service Incentive Mechanism (SIM)
scores, ranking us among the best water and wastewater
companies, and we anticipate being eligible for a SIM reward
of around £16 million for the 2015–20 regulatory period
› We have delivered these improvements at lower cost, with a
27 per cent reduction in cost to serve, and customer bills have
reduced in real terms since 2010
Transforming how the sector supports
vulnerable customers
› We have the sector’s most innovative and ambitious assistance
schemes supporting over 100,000 customers struggling to pay
› We launched the North West Hardship Hub, a one-stop-shop
platform to help the money advice community easily locate
the best cross-sector assistance schemes for vulnerable people
Best performance on outcome delivery
incentives against a tougher backdrop
› We have achieved our best performance yet on our outcome
delivery incentives (ODIs) against a backdrop of increasingly
challenging targets and periods of extreme weather
› We earned a net ODI reward of £19.2 million for the year,
and we now expect a cumulative ODI reward for the 2015–20
period of around £30 million, at the top end of our previously
indicated range
Made strides in operational efficiency
›
Our business plan for 2020–25 was assessed as among the
most efficient in Ofwat’s Initial Assessment of Plans versus its
own view of efficient costs, helping us attain a fast-track rating
› We are on track to deliver £100 million in total expenditure
(totex) outperformance against the scope of our 2015–20
final determination, and secure a run rate that supports our
business plan submission for base totex as we transition into
the next regulatory period
Sector-leading approach delivers all-
round resilience
› We have met our leakage target for 13 consecutive years
› We are investing £250 million of our outperformance in the
current regulatory period to improve resilience further, and
have committed to invest an additional £100 million to get a
fast start for the next regulatory period
› We have a stable pension surplus on an IAS 19 basis, and in
April 2019 we eliminated our funding deficit and achieved self-
sufficiency by prepaying the remaining agreed contributions
›
Our robust capital structure and relatively low gearing provide
long-term financial resilience and future financial flexibility
Consistently trusted reporting
› We have been awarded the top self-assurance status for three
years in a row in Ofwat’s Company Monitoring Framework
assessment, demonstrating that stakeholders can place the
highest levels of trust and confidence in the accuracy and
completeness of our reporting
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2018/19 highlights
Financial highlights
Tight cost control
helped us deliver
a strong result and
we maintain sector-
leading financial
resilience
Revenue
Underlying operating profit*
2018/19
2017/18
2017/18
2016/17
2015/16
2014/15
£1,819m
2018/19
£1,736m
£1,704m
£1,730m
£1,720m
2017/18
2017/18
2016/17
2015/16
2014/15
£684.8m
£645.1m
£622.9m
£604.1m
£664.3m
Revenue of £1,819 million increased by
£83 million, largely reflecting the allowed
regulatory revenue profile in our final
determination for this financial year
Underlying operating profit of £685 million
increased by £40 million, mainly due to the
revenue increase partly offset by increases
in infrastructure renewals expenditure and
depreciation for the year
Reported operating profit*
Total dividend per share
2018/19
2017/18
2017/18
2016/17
2015/16
2014/15
£634.9m
2018/19
£636.4m
2017/18
2017/18
£605.5m
£567.9m
2016/17
2015/16
£653.3m
2014/15
41.28p
39.73p
38.87p
38.45p
37.70p
Read more about our financial
performance on pages 62 to 65
* A guide to alternative performance
measures and a reconciliation
between underlying operating profit
and reported operating profit is
shown on pages 66 and 67.
Reported operating profit of £635 million
decreased by £1 million, mainly as a result of the
increase in underlying operating profit offset by
exceptional one-off costs associated with the
extreme dry weather in the summer of 2018
Total dividend per ordinary share of 41.28 pence
increased by 3.9 per cent in line with our policy
of targeting an annual growth rate of at least RPI
inflation through to 2020
Stock Code: UU.
unitedutilities.com/corporate
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Strategic
report
The 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 do
Our purpose and strategy
Our marketplace
Our competitive advantages
Our economic regulation
Our business plan submission for 2020–25
Our business model
How we create value for stakeholders
Our planning horizons
How we measure our performance
Our performance in 2018/19
Our risk management
12
15
16
17
18
19
24
39
48
51
56
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Our reservoir at Ennerdale Water -
photograph taken by our water services
network colleague Ian Greenwood
United Utilities Strategic.indd 11
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What we do
Our wholesale water team maintains reservoirs and water
treatment works across the region and thousands of kilometres of
water pipes in order to collect, treat, store and deliver billions of
litres of reliable, clean drinking water to millions of customers 24
hours a day.
Our wholesale wastewater team maintains hundreds of
treatment works and thousands of kilometres of wastewater pipes
in order to collect wastewater from homes, businesses and surface
water run-off, transport and treat it, and return treated water to
protect our natural environment.
Our household retail team deals with new connections, metering and billing for millions of customers as well as helping
vulnerable customers with our Priority Services and other assistance schemes.
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CLEANING AND RETURNING
WASTEWATER
569
wastewater
treatment works
7,000
kilometres
of rivers
1,300
kilometres
of coastline
REMOVING WASTEWATER
AND GENERATING ENERGY
77,000
kilometres of
wastewater pipes
190,000
tonnes of sewage
sludge every year
37
renewable energy
facilities
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12
United Utilities Group PLC Annual Report and Financial Statements for the year ended 31 March 2019
United Utilities Strategic.indd 12
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Did you know?
We are investing £3.9 billion over 2015–20,
including £350 million additional investment
of outperformance earned over the period.
r n
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m ers across our region to use.
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COLLECTING AND
TREATING WATER
56,000
hectares
of land
reservoirs
165
88
water treatment
works
DELIVERING WATER
TO CUSTOMERS
42,000
kilometres of
water pipes
1.7 billion
litres of clean
water every day
7.2 million
customers served
24 hours a day
Stock Code: UU.
unitedutilities.com/corporate
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What we do
We work in the North West, for the North West. This means understanding the
key factors that make our region unique
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Carlisle
Workington
Whitehaven
Kendal
Barrow-in Furness
Lancaster
Blackpool
Burnley
Preston
Blackburn
Bolton
Liverpool Manchester
Warrington
Stockport
Chester
Crewe
Economic factors
We are building resilience to continue serving
our growing population and support jobs and the
tourism industry
7.2 million population expected to
grow significantly in the next 25 years
17,500 jobs actively
supported by our work, with over
5,000 direct employees
Tourism relied on by Lake District,
Liverpool and coastal areas
Social factors
We are leading the sector on affordability and
vulnerability
41% of the most deprived areas
in the country
47% of households have less
than £100 savings to cope with
unexpected bills
18% of households are affected
by water poverty, 20% higher then
the national average
Environmental factors
We have a large coastline, protected rural areas
and dense urban areas, all of which create
different demands
30% of land is National Park or
Area of Outstanding Natural Beauty
or Sites of Special Scientific Interest
31 designated bathing waters
with 25 ‘good’ or ‘excellent’
and 6 ‘sufficient’
830mm higher than
average UK rainfall each year
14
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Our purpose and strategy
Our core values and strategic themes demonstrate the way we operate in order
to work towards our vision and deliver our purpose
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We are a purpose-driven organisation.
This is the reason we exist, and is what
drives us to continually improve our
performance and the creation of value.
Read more about
how we create value
for stakeholders
on pages 39 to 46
Our
purpose
To provide great
service to
customers and
communities in the
North West, creating
long-term value for all
of our stakeholders.
Our
vision
To be the best UK
water and wastewater
company.
Our strategy is broken down
into three themes which form
the framework for how we work
towards our vision. Our operational
performance measurement, risk
assessment and remuneration
policy are all aligned to these
strategic themes.
Read more about our
operational performance
on pages 56 to 61
Read more about
how we manage risk
on pages 68 to 76
Read more in our
remuneration report
on pages 116 to 143
Our
strategic themes
The best
service to
customers
At the lowest
sustainable
cost
In a
responsible
manner
Customer focus
Innovation
Integrity
Our
core values
Customers are at the heart of
everything we do, and we aim
to provide a great and resilient
service at the most efficient cost.
We continually look for
new ways to make our
services better, safer,
faster and cheaper.
We make promises
knowingly and keep them,
behaving responsibly towards
all of our stakeholders.
Our core values provide the cultural
framework we operate in and we encourage
our employees to live these values in
everything they do in their daily work.
Read more about our values and culture
on pages 92 and 93
Stock Code: UU.
unitedutilities.com/corporate
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Our marketplace
We are the water and wastewater provider in the North West of England and are
subject to economic, quality and environmental regulation
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KEY FACTS
50
million
household and non-
household customers
in England and Wales
10
licensed water and
wastewater companies
>£130
billion
invested in maintaining
and improving assets
and services since
privatisation
Our industry and market
Customers in England and Wales are served by
ten licensed water and wastewater companies,
making up around 95 per cent of the industry, with
the remainder being smaller licensed companies
providing water-only services.
Our competitive environment
Our main competitors are the other water and
wastewater companies in England and Wales. Our
vision is to be the best UK water and wastewater
company, and so we regularly benchmark our
performance against these peers.
Since privatisation in 1989, the water industry has
invested over £130 billion and delivered a significant
contribution to improvements in public health. This
investment has led to improvements in the quality
of services, significantly higher environmental
standards, and superior quality drinking water.
The advancement of technology and innovation
makes way for more improvements as we continue
to invest to improve services for the long term.
Customer bills have declined in real terms in the
current and last regulatory periods.
The water and wastewater companies are split
regionally based on river catchment areas. United
Utilities Water Limited (UUW) operates in the North
West of England, and is the second largest of these
companies based on the size of our asset base,
measured by Regulatory Capital Value (RCV).
We provide water and wastewater services to
a population of over seven million people, with
over three million household customers making
up around two-thirds of our total revenue, and
over 200,000 businesses, ranging in size from large
manufacturing companies to small shops.
Our regulators assess our comparative operational
performance against the other water and
wastewater companies in England and Wales:
›
›
›
The Drinking Water Inspectorate (DWI) assesses
our performance in the water business;
The Environment Agency (EA) assesses our
performance in the wastewater business; and
Ofwat assesses our customer service
performance through its qualitative and
quantitative Service Incentive Mechanism (SIM)
scores.
The EA performance assessment and qualitative
and quantitative SIM scores are included in our
operational key performance indicators (KPIs).
Read more about our operational KPIs on pages 52 and 53
As well as assessment against our water peers,
we benchmark our customer service performance
against other leading service providers in our region.
As a FTSE 100 public listed company, the other UK
and worldwide utilities are competitors from an
investment perspective.
E c o n omic regulation
Our political and
regulatory environment
We are subject to regulation of price
and performance by economic,
quality and environmental regulators,
as set out in the diagram. These
bodies exist to help protect the
interests of customers and the
environment.
The political and regulatory
framework can change significantly
in the long term and we have seen
substantial tightening of laws and
regulations since privatisation of
the water industry. To some extent
these changes are outside our
direct control. Maintaining good
relationships with these bodies
enables us to engage positively in
order to influence future policy
with the aim of achieving the best
outcome for all of our stakeholders.
Read more about how we create value
for stakeholders on pages 39 to 46.
n
o
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t
io
n
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United Utilities Group PLC Annual Report and Financial Statements for the year ended 31 March 2019
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Our competitive advantages
Our pioneering Systems Thinking approach and prudent financial risk
management give us a clear competitive advantage
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Systems Thinking improves efficiency and operational resilience. Prudent financial risk
management delivers long-term predictability and resilience to financial shocks. These
competitive advantages help us to deliver sustainable long-term value for stakeholders.
Systems Thinking
What do we do?
Systems Thinking looks at how each individual element interacts with
the other constituents of the system in which it operates. Instead of
isolating smaller and smaller elements of the system, Systems Thinking
expands its view to consider larger and larger numbers of interactions
over time as a particular issue is being studied.
We use this pioneering approach to operate our business. For a water
and wastewater company this means, rather than assessing and
operating each asset or individual treatment works in isolation, we use
all the data from the telemetry backbone we have installed across our
network to analyse the entire system and all its linkages, enabling us
to find the best overall long-term solutions.
Our field engineers across the region are linked by an Integrated
Control Centre (ICC) at head office, from which we plan, monitor and
control our operations. We process enormous amounts of real-time
data in the ICC from right across our network, as well as factoring
in other source data such as weather forecasts, and we have begun
using artificial intelligence and machine-learning to process this data
and spot issues so that we can work to resolve them before they
impact customers. We allocate resources to production teams with full
accountability for asset and system performance, helping to embed
this way of thinking within our operational teams.
Read more about the rollout of artificial intelligence across our water
network on page 35 — just one example of Systems Thinking in action.
Why is this a differentiator?
The water industry was consolidated into its current regions in 1973
and a lot of our assets were originally built a long time ago when
water and wastewater services were managed by local authorities
with little coordination at a regional or national level.
It takes considerable time and investment to install the telemetry and
interconnections across a water and wastewater network to enable a
Systems Thinking approach to be used. No other UK water company
does this at the holistic level we do, and we are continuing to extend
our lead, with new developments and further rollouts in the pipeline.
What value does it create?
Using network-wide real-time data and operating our network in this
way enables us to optimise cost and service performance.
Systems Thinking is improving the reliability and resilience of our
assets, reducing unplanned service interruptions, and helping us move
away from the traditional reactive approach to address problems
proactively before they affect customers.
This approach is helping us deliver operational improvements and
£100 million cost savings versus our original business plan for the
current regulatory period. Further development of Systems Thinking is
embedded into our business plan submission for the 2020–25 period.
It is part of our long-term strategy to continue delivering benefits for
customers and other stakeholders well into the future.
Prudent financial risk management
What do we do?
Inflation — we maintain around half our debt in index-linked form,
offering good relative value and hedging the impact of inflation on
a portion of our regulatory capital value (RCV) and revenue. Most of
this is RPI-linked, reflecting the current regulatory model. From 2020
Ofwat will transition towards consumer price inflation including owner
occupiers' housing costs (CPIH), so we will gradually increase our CPI
exposure, subject to cost and availability, as CPI is the best available
proxy for CPIH in the absence of a CPIH debt capital market.
Interest rates — we fix the underlying interest cost on our remaining
nominal debt out to ten years, on a reducing balance basis. We have
previously supplemented this by substantively fixing interest rates for
each forthcoming regulatory period when Ofwat publishes the final
determination, including the cost of debt allowance. From 2020 Ofwat
will apply debt indexation to the portion of debt assumed to be new
debt, so this supplement will not be necessary for the 2020–25 period.
Pensions — we adopt an asset-liability matching approach for our
defined benefit pension schemes by investing in assets, such as
corporate bonds and gilts and the use of interest rate swaps, that
perform in line with the liabilities, providing a hedge against changes in
swap and gilt yields and therefore stability in our pensions position. The
schemes have hedged inflation exposure through RPI gilts and swaps,
and in April 2019 we prepaid all remaining deficit repair contributions
meaning the schemes are now self-sufficient.
Why is this a differentiator?
Different companies have different levels of risk exposure as a result
of preference and/or analysis of the costs and benefits of moving away
from a historically different approach. Our prudent approach offers a
lower risk exposure than many other companies.
What value does it create?
Effective financial risk management delivers long-term resilience and
our clearly articulated policies, covering a variety of market risks, help
us reduce our exposure to the economic and regulatory environment,
providing more predictable returns to investors.
Our approach to debt financing and interest rate risk management
enables us to consistently lock in long-term debt at good relative
value, manage uncertainty in Ofwat’s approach to setting the cost of
debt at each price review, and maintain resilience to financial shocks.
Our asset-liability matching approach reduces the volatility of the
required funding level of our defined benefit pension schemes, and
self-sufficiency means our employees and pensioners are in a very
secure position and shareholders are well protected.
All of this underpins our target to maintain gearing (measured as net
debt to RCV) within a range of 55 to 65 per cent, which supports a
solid A3 credit rating with Moody’s for United Utilities Water Limited,
and enables us to maintain efficient access to the debt capital markets
across the economic cycle.
Stock Code: UU.
unitedutilities.com/corporate
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Our economic regulation
Ofwat sets the regulatory contract that we will deliver in each five-year period
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KEY FACTS
5-year
regulatory contracts
set by Ofwat for Asset
Management Plan
(AMP) periods
AMP6
covers 1 April 2015 to
31 March 2020, with
four of these five years
now delivered
AMP7
covers 1 April 2020 to
31 March 2025, with
business plans already
well progressed and
final determinations
due in December 2019
Setting our regulatory contract
Water and wastewater companies in England and
Wales operate within five-year regulatory periods
known as Asset Management Plan periods (AMPs).
Price, service and incentive levels are set by our
economic regulator, Ofwat, prior to the start of each
regulatory period following a period of consultation
and planning known as a price review.
During the price review, Ofwat consults with
stakeholders, including water and wastewater
companies, and sets out its methodology, which
details its key areas of focus and an indication of how
prices, service and incentive levels will be set.
Companies consult with customers and other
stakeholders, including environmental and quality
regulators, and prepare a detailed business plan that
sets out the proposed price and service package they
will deliver over the period.
These plans are submitted to Ofwat, which
scrutinises and challenges them and ultimately sets
a regulatory contract for each company, known as
the final determination (FD). The FD sets the price,
in terms of total expenditure (totex) and customer
bills, level of service, and incentive package that
companies must deliver over the period. It gives
an allowed return companies can earn, which is
expressed as a percentage of Regulatory Capital
Value (RCV).
We base our plan on continuous customer insight
and bespoke research and consultation on customer
priorities, factoring in long-term planning as well
as what is needed in just that five-year period. This
means we can submit a robust and balanced plan
to Ofwat. This helps ensure we receive a regulatory
contract that targets the best overall outcomes for
our customers and all our stakeholders, and which
effectively incentivises us to continually improve our
performance.
We have just delivered the fourth year of the sixth
asset management plan period (AMP6) that covers
the 2015–20 regulatory period. The 2019 price
review (PR19) that will set the regulatory contract
for the 2020–25 period (AMP7) is well under way.
Key dates in the PR19 process can be seen on the
timeline below.
Delivering that contract
In order to incentivise companies to deliver
sustainably better and more efficient performance,
Ofwat gives companies the opportunity to earn
a higher return where they outperform their
regulatory contract, and the risk of earning a lower
return where they underperform. The opportunity
for outperformance allows us to create further value
for customers, shareholders and wider stakeholders.
We can outperform through:
›
›
›
›
›
Totex – delivering the agreed outcomes while
spending less than the allowed totex through
innovation and efficiency initiatives. Totex
outperformance is shared roughly 50:50
between customers and the company.
Outcome delivery incentives (ODIs) – beating the
stretching target levels agreed for an assortment
of measures, mainly of customer service and
environmental performance.
Customer satisfaction – delivering a great level
of customer service that is favourable relative
to the other water and wastewater companies,
currently measured through Ofwat’s quarterly
service incentive mechanism (SIM) surveys.
Financing – raising debt finance at a cost below
the industry allowed cost of debt, which forms
part of the overall allowed return.
Household retail – minimising the cost to serve
our household customers relative to the allowed
revenue for household retail activities.
We include our performance against each of the
above areas in our operational KPIs, including our
targets for the 2015–20 regulatory period. Since
the start of AMP6 we have published an Annual
Performance Report (APR), which reports our
regulatory performance in a format that helps
customers and other stakeholders understand it and
compare it with other companies in the sector. This
includes reporting of Return on Regulated Equity
(RoRE), which is made up of the base allowed return
and any outperformance/underperformance in the
above areas.
Our APRs are published in July each year at
unitedutilities.com/corporate/about-us/
performance
Information on companies’ regulatory performance
can also be found at discoverwater.co.uk
3 Sept 2018
Submission of
company business
plans to Ofwat
31 Jan 2019
Publication of Ofwat’s
initial assessment of
company business plans
11 Apr 2019
Publication of draft
determinations for fast-
track companies
AMP7 Planning and preparation
AMP6 Delivery – Year 4 of 5
31 March 2018
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United Utilities Group PLC Annual Report and Financial Statements for the year ended 31 March 2019
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Our business plan submission for 2020–25
Meeting the high hurdle to achieve a fast-track assessment
Overview
We submitted our business plan for the 2020–25
period in September 2018, and Ofwat published its
initial assessment (IAP) on 31 January 2019, in which
we were one of only three companies to achieve a
fast-track assessment. This achievement reflects the
transformation we have delivered in recent years as
well as the quality of our plan.
Our plan received the highest overall grades for
the sector, as can be seen in the table below. It was
commended as high quality and industry-leading
in many areas, including innovation, affordability
and vulnerability, customer engagement, and
resilience. We committed to deliver more for less
for customers, with stretching service level targets
alongside a significant bill reduction in real terms.
As part of the IAP, all three fast-track companies
accepted targeted actions from Ofwat. There were
areas of our plan where we were asked to commit
to even more stretching targets, such as reducing
leakage, a further 3 per cent reduction in total
expenditure, and provide more information on our
proposals. We will continue to work constructively
with Ofwat through to our final determination in
December 2019.
A fast-track assessment brings reputational, financial
and procedural benefits. Most importantly, it gives
us greater clarity earlier in the process, and we have
committed a further £100 million investment in
2019/20 to make a flying start in delivering our plan.
Ofwat published its latest annual Company
Monitoring Framework assessment, in which we
retained the highest category of ‘self-assurance’. We
have achieved this three years in a row – the only
company to do so – demonstrating the consistently
high level of trust and confidence that customers
and other stakeholders can have in the quality and
transparency of our reporting.
Ofwat’s assessment of company performance against key test areas
Water and sewerage companies
Water only
companies
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Test Area
Engaging customers
Addressing affordability and vulnerability
Delivering outcomes for customers
Securing long-term resilience
Targeted controls, markets and innovation
Securing cost efficiency
Aligning risk and return*
Accounting for past delivery*
Securing confidence and assurance
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KEY FACTS
Fast-
track
rating received for
our high quality and
ambitious plan
Lower
bills
for customers in real
terms to 2025
£100
million
additional investment
in 2019/20 to facilitate
a flying start to AMP7
* Highest possible assessment for these test areas was B
Source: Ofwat, PR19 Initial assessment of plans: Summary of test area assessment
A = High-quality, ambitious and innovative plan with evidence
C = Concerns with the plan: Plan falls short of high quality and/
that overall is sufficient and convincing
or evidence is insufficient and/or unconvincing in some areas
B = High-quality plan, not sufficiently ambitious and innovative
to be exceptional with evidence that overall is sufficient
and convincing
D = Substantial concerns with the plan: Plan falls significantly
short of required quality and/or little or no evidence, or no
convincing evidence
18 July 2019
Publication of draft determinations
for slow-track and significant
scrutiny companies, and update on
Ofwat cost of capital assessment
11 Dec 2019
Publication of final
determinations for
all companies
Jan 2020
Companies announce
whether they accept their
final determination
April 2020
Start of AMP7 period
AMP6 Delivery – Year 5 of 5
AMP7 Delivery – Year 1 of 5
31 March 2020
Stock Code: UU.
unitedutilities.com/corporate
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Our business plan submission for 2020–25
High quality and sector leading across a range of areas
Innovation
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Our approach to innovation is deeply embedded throughout the entire organisation and we were the
only company to receive the highest possible grade in the sub-test for innovation. We are delivering
technology and processes that are not seen elsewhere in the industry.
We have delivered enhanced capabilities through our pioneering Systems Thinking approach, which has
delivered both efficiency and improved performance, underpinning the transformation we have delivered
in recent years. Our business plan includes significant savings to be delivered from our innovation
initiatives.
We are actively working with global innovators, from small start-ups to large, established corporations,
reaching far beyond the water sector. Through our Innovation Lab, we have gained unprecedented access
to very small businesses with very big ideas – companies across the world that would normally struggle to
interact with a large utility.
Read more about our Innovation Lab on page 37
We will exit the current regulatory period as a high-performing and efficient company, and we have
achieved this in part by being at the frontier of innovation and technology.
“United Utilities
shows the most
embedded
innovation culture,
with an ambitious
and sector-
leading approach
to innovation
capability”
Source: Ofwat, PR19 IAP
– Overview of company
categorisation
Affordability and vulnerability
Our ambitious and innovative approach to addressing affordability and vulnerability is seen by Ofwat as
sector-leading and we received the highest available grade in this key test area.
Our plan represents a strong value for money proposition, supported by over 80 per cent of customers.
Average customer bills are lower with a real reduction of over 10 per cent between 2020 and 2025 supported
by targeted financial assistance for those who need it most, while service and environmental quality continue
to improve.
Our region is home to some of the most deprived communities in England and Wales. We have worked
hard to put in place some of the most innovative and ambitious affordability schemes in the industry,
and have taken a lead on transforming the sector’s approach to supporting customers in vulnerable
circumstances. Our plan will push the industry frontier through innovative affordability schemes, such as
our Lowest Bill Guarantee, which gives confidence to customers that a meter would save money, as well
as water.
This year we hosted the second North West Affordability Summit, working alongside charities, local
authorities and support agencies to find ways to help customers in need. At this second summit we
launched the North West Hardship Hub, a one-stop-shop portal for cross-sector information and financial
assistance schemes to help the money advice community find the right support for vulnerable people.
Read more about this North West Hardship Hub on page 57
“United Utilities’
plan includes
ambitious,
innovative and
sector-leading
proposals to make
customers’ bills
affordable and on
providing support
for vulnerable
customers”
Source: Ofwat, PR19 IAP: United
Utilities company categorisation
Customer engagement
Our high-quality approach to customer engagement was recognised by Ofwat in its assessment, as was
our ambition and innovation in bringing research findings together with other sources of customer
data to gauge customer support for our plan. One test area Ofwat asked us to improve was delivering
outcomes for customers, with more evidence on some performance commitments and commit to more
challenging targets to align with the results of customer feedback and the industry frontier.
Our plan reflected unprecedented engagement with customers, regulators and other stakeholders.
Over 140,000 people from all walks of life were involved in informing our plan through over 90 bespoke
engagement exercises. We used a range of research techniques, including online surveys, co-creation
events and online panels tailored to the target audience. Our use of new techniques, such as immersive
research and behavioural economics, to get better insight into customers’ preferences and to supplement
stated preference approaches, was highlighted by Ofwat as ambitious and innovative. Over 2 million
individual data points, from day-to-day interaction with customers, were used to create our plan.
The independent customer challenge group, YourVoice, monitored our performance during the current
regulatory period and was deeply involved in challenging our plan for 2020–25.
Read more on pages 22 and 23 about how we used this engagement to help shape our business plan
“United Utilities’
plan reflects high-
quality customer
engagement and
participation.
It uses a range
of research
techniques . . .
tailored to the
target audience”
Source: Ofwat, PR19 IAP
– Overview of company
categorisation
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United Utilities Group PLC Annual Report and Financial Statements for the year ended 31 March 2019
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Resilience in the round
We have seen record-breaking extremes of weather in the last few years that have tested the industry.
Learning from this, we have already made significant progress in enhancing operational resilience, and we
are investing an additional £250 million in the current regulatory period to improve this further.
Read more about our response to these challenges on page 30
We were assessed as an industry leader in our approach to securing long-term operational, corporate
and financial resilience. Our Systems Thinking approach has been fundamental to this assessment, and
our robust capital structure, appropriate level of gearing, prudent financial risk management and strong
pensions position contribute to the strength of our long-term resilience.
Our plan proposed a major water resilience scheme in Manchester and the Pennines, which will mitigate the
most significant operational risk that we face. Ofwat recognises the need for investment to deliver resilience
and welcomed the fact that we have embraced the direct procurement approach in our proposal. Given its
scale and complexity, this will be addressed outside the constraints of the fast-track timetable.
As a contribution to national resilience, we devised a large-scale north-south water transfer scheme some
time ago. Ofwat is proposing to allow up to £25.7 million to further investigate this scheme in collaboration
with two other water companies to determine whether it would be a strong value-for-money proposition.
“United Utilities has
a sector-leading
approach to
resilience . . . and
set the standard for
other companies to
reach”
Source: Ofwat, PR19 IAP
– Overview of company
categorisation
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Aligning risk and return
Our plan provides for a fair balance of risk and return, with rewards available for the delivery of stretching
performance. We have a responsible corporate structure aligned with industry-leading environmental
performance and strong financial resilience, and we provided strong evidence about the financeability of
our proposed business plan.
We committed to provide £71 million of company funding over the period toward financial assistance
schemes for customers in need, building on our sector-leading approach to affordability and vulnerability.
In addition, we proposed a clearly defined benefit sharing mechanism through our ‘CommUnity Share’
scheme, which offers to match benefits for customers if dividends are much higher than assumed in our
business plan. We will consult with customers and stakeholders, under the supervision of the independent
customer challenge group, YourVoice, about how this funding will be used, with transparency about how
this funding would be used for customer benefit.
This builds on the voluntary reinvestment of over £600 million that we have already committed across the
current and previous regulatory periods. Ofwat recognises that this approach puts us among the leading
companies in terms of voluntary benefit sharing with customers.
“United Utilities’
plan demonstrates
high quality
and ambition
in its approach
to aligning the
interests of the
company and its
investors with
customers”
Source: Ofwat, PR19 IAP –
Summary of test area assessment
Stretching service levels and efficient cost
Driving efficiency is a key focus for management and Ofwat found ours to be one of the most efficient plans
when compared with its own view of efficient costs.
Our business plan represented a reduction of over £1 billion in expenditure compared with AMP5 (covering
2010–15), driven by innovation, use of market mechanisms, and the significant improvement that we have
made in efficiency in recent years. All three fast-track companies were asked to reduce their cost proposals
by about 3 per cent. This compares with the industry average that was 15 per cent above Ofwat’s view of
efficient costs.
In household retail, we have substantially reduced our cost base in recent years, primarily through tackling
levels of household bad debt, and we were pleased to see that our cost projections aligned with Ofwat’s
own assessment.
There are 14 common Outcome Delivery Incentives (ODIs) for the industry, where targets are based on
upper quartile performance expectations, alongside a suite of innovative, company-specific measures.
The targets for common ODIs were updated with Ofwat’s latest view based on plan submissions, and may
change further as the price review process continues for all companies.
“United Utilities
provides a
high-quality
plan and made
strides towards
cost efficiency
compared to the
last price review”
Source: Ofwat, PR19 IAP
– Summary of test area
assessment
Stock Code: UU.
unitedutilities.com/corporate
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If it matters to you,
it matters to us
We asked over 140,000 customers and stakeholders
across our region what matters most to them, and
used this feedback to help shape our business plan
for 2020–25. These are just a few examples of what
they told us and how we responded.
Read more online at unitedutilities.com/corporate/about-
us/our-future-plans/our-proposed-business-plan/
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YOU TOLD US…
Providing extra support for those
in need matters
THAT’S WHY…
We’ve introduced payment breaks
and pledged to help 250,000
customers out of water poverty
YOU TOLD US…
Replacing old pipes matters
THAT'S WHY…
We’ve committed to a
long-term aim of
eliminating lead pipes
across the network
YOU TOLD US…
Protecting the environment
matters
THAT'S WHY…
We’re playing our part in
improving the quality of the
region’s river and bathing waters
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YOU TOLD US…
Reducing leaks matters
THAT'S WHY…
We’ve increased our team of
leak detectives across the region
– including our team of leak
detection sniffer dogs
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YOU TOLD US…
Lower bills matter
THAT'S WHY…
We’ve proposed our largest ever
bill reduction of over 10 per cent,
reducing average bills in real terms
by 2025
YOU TOLD US…
Reducing internal
flooding matters
THAT'S WHY…
We’ve pledged to drive down the
amount of internal sewer flooding
incidents over the next five years
Stock Code: UU.
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Our business model
We consult and plan for short, medium and long-term horizons
We provide essential water and wastewater services to millions of customers every day, and this relies
on a variety of key resources. How we manage these is influenced by external drivers and relationships
with a variety of stakeholders.
Read more about our key resources
and the impact of external drivers
on pages 28 to 34
Consultation with customers and other stakeholders forms an integral part of our planning process
across the short, medium and long term, and our work delivers a range of long-term benefits for many
different stakeholder groups. This value creation feeds back into the continuous cycle of what we do.
Read more about our planning
horizons on pages 48 to 50
Our external drivers and relationships
Natural environment
Technology and innovation
› The natural environment is constantly changing, and we must
› New technologies and innovative ideas present
adapt and prepare for future impacts such as climate change and
population growth. Our use and return of water to the environment
is a continuous cycle, and returning water cleanly and safely, as well
as managing our catchment land effectively, allows this cycle to
begin again from the best starting point.
opportunities for us to make things faster, better,
safer and cheaper. These can come from all over,
which is why we encourage innovation externally and
internally at all levels of the business, from our annual
CEO Challenge and dedicated innovation team to our
Innovation Lab.
Stakeholders
› Our work and the huge areas
of land we manage puts us at
the heart of communities in
our region, and impacts a large
variety of stakeholders. We
build relationships and consult
with them in developing and
executing our plans.
Natural resources
Assets
› We rely on natural sources of water that
› Our significant capital investment
we collect for treatment, and manage large
areas of catchment land in a sustainable
way. We rely on watercourses where we
return wastewater safely and cleanly to the
environment, and we process bioresources
from wastewater to generate renewable
energy, which helps to reduce our carbon
footprint and energy costs.
programme helps to grow our business
while building resilience and maintaining
and enhancing sustainable long-term
assets. We use telemetry across the
network to manage our assets as one
integrated network from our Integrated
Control Centre as part of our Systems
Thinking approach.
Regulatory environment
› Sustainable business
means preparing for future
market reforms as well as
meeting current regulatory
commitments. We place great
value on our relationships
with economic, quality and
environmental regulators,
engaging actively and influencing
where we can.
People
Our key
resources
Financing
› We rely on employees and suppliers
to deliver our services to customers.
We are committed to attracting, developing,
training and motivating a diverse and skilled
workforce. We build effective relationships
and work with suppliers who share our
values. We have management incentives
based on performance and a long-term
incentive plan.
›
Financing allows us to preserve
intergenerational equity for customers
while funding long-term capital
investment. We maintain a robust
capital structure with an appropriate
level of gearing level and prudent risk
management. We have long-term debt
locked in at good relative value and
maintain access to a range of markets.
We proactively engage with equity and
credit investors.
Political environment
Economic environment
› We engage with regional and national politicians as well as policy
makers, through regular meetings and conferences, in relation
to areas such as our local investment schemes, our economic
contribution to the North West, and key policy issues affecting the
water industry.
› We are impacted by market rate movements, such
as interest rates and inflation, and seek to manage
these prudently to reduce risk as far as practical.
We operate in an area with high levels of extreme
deprivation, so helping vulnerable customers is
particularly important for us.
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We deliver the outcomes set out in our regulatory contract
What we do is set out in our regulatory contract, which details the price and service
package we will deliver in each five-year period split out by price control areas
– wholesale water, wholesale wastewater and household retail. The fourth price
control, non-household retail, sits within our joint venture, Water Plus.
How we do it is set out in our strategic themes, and everything we do is
underpinned by our values and culture, and our governance and risk management.
Our pioneering Systems Thinking approach to operating our business is a
competitive advantage.
We review progress on outcomes we
have promised to deliver for customers
in the regulatory period, and we measure
our performance against operational KPIs
as well as financial measures.
These outcomes and KPIs fit within the
framework of our three strategic themes.
How we operate
Our outcomes and KPIs
What we do
Read more about
what is involved
in the provision
of wholesale and
retail services in
our water cycle on
pages 12 and 13
The best service
to customers
Outcomes
›
Provide great water;
›
Dispose of wastewater; and
Deliver a service customers can rely on.
›
KPIs
› Wholesale ODI composite;
›
›
SIM – qualitative; and
SIM – quantitative.
At the lowest
sustainable cost
Outcomes
›
Value for money; and
›
KPIs
›
Improved efficiency.
Totex outperformance;
›
›
Financing outperformance; and
Household retail cost to serve.
In a responsible
manner
Outcomes
›
Protect and enhance the environment;
›
Support local communities; and
Support employees in a safe workplace.
›
KPIs
›
Leakage;
›
›
EA performance assessment; and
Dow Jones Sustainability Index.
How we do it
Read more about
our strategy on page
15, and more about
our competitive
advantages on page 17
We review and measure our progress
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We create long-term value for a range of stakeholders
The work we do delivers a wide range of benefits to a variety of stakeholders,
creating long-term sustainable value for many people.
Read more on pages 39 to 46
Responsible business runs through everything we do, as evidenced by our
business principles.
Read more at unitedutilities.com/
corporate/responsibility/our-approach
For shareholders
› Many of our shareholders are pension funds and
charities and the income that we provide is relied
on by millions of people every day. We manage
risk prudently and provide an appropriate return,
investing in our assets for growth and sustainability
For customers
› Through innovation and efficiency we provide a
great service at a lower cost. We support thousands
of vulnerable customers through a wide range of
assistance schemes
For employees
› We focus on attracting, developing and retaining a
diverse workforce, and ensuring that we look after
their health, safety and wellbeing. To help ensure
the next generation of skilled employees, we run
graduate and apprenticeship programmes
For the environment
› We maintain and enhance reservoirs, catchment
land, rivers and bathing waters that provide a home
for wildlife, areas for recreation, and a major pull
for tourism. We strive to reduce our environmental
impact and generate renewable energy
For communities
› We build partnerships and work with schools to
develop skills and help people back to work. We
encourage employee volunteering programmes to
help create better places, stronger communities, and
accomplish more to address local issues together
For suppliers
› We invest in the North West’s infrastructure and
generate jobs, skills and income through our supply
chain that supports the local economy. We treat all
suppliers fairly and are a signatory to the Prompt
Payment Code
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t e r m h o rizons
d l o n g -
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ult and plan for sh ort, m
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Open the flap to see our
business model in full
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28
Our business model
Key resources and the impact of external drivers
Natural resources
We rely on a variety of natural resources to
deliver water and wastewater services, and
we impact those natural resources through
our operations, such is the circular nature of
the water cycle. We also generate renewable
energy from the sun and wind.
We rely on natural sources of water to supply
customers. We hold abstraction licences for
a number of reservoirs, rivers and boreholes
that permit us to take water from the
environment in a safe and sustainable way,
which we then treat, store and transport
across the region.
Nearly half the water we abstract originates
from land we own and manage. Run-off
from this land impacts the quality of the
water, so managing it well helps us provide
reliable and clean water, reducing risk and
increasing our resilience. We help protect
habitats and species designated as nationally
and internationally important, many of which
make their homes on this land.
We rely on watercourses to take effluent back
into the environment after extensive cleaning
to ensure it meets environmental consents.
This protects the health of the natural
environment, which enhances recreational
value for our communities, protects rare
species and wildlife habitats, and provides
economic benefits such as underpinning the
local tourism industry.
We extract bioresources from wastewater,
using anaerobic digestion to break it down
into biogas and biosolids. Biogas is used
to generate renewable energy through
combined heat and power plants, reducing
our energy costs and carbon footprint.
Biosolids are treated to provide a valuable
source of nutrients and organic matter as
high-quality fertiliser for farmers.
Impact of external drivers
Natural environment
Our long-term planning looks far into the
future to ensure we are prepared for the
challenges of a changing natural environment.
The most significant anticipated impact comes
from climate change, and in particular the
long-term changes in average temperature
and rainfall. Water companies must adapt to
meet the challenges climate change presents,
and this creates both risks and opportunities.
The main opportunity is the potential for
water sharing. Our region typically receives
higher average rainfall than other parts of
the country, meaning the availability of raw
water tends to be less constrained than in the
comparatively drier south. Ofwat indicated
in its initial assessment of company business
plans for 2020–25 that it would provide us
with £25.7 million funding for feasibility and
planning work with respect to a potential
north-south transfer of water as part of the
development of strategic water resources
options for the south and south east.
The main risks are the impact of prolonged
severe dry periods, which constrain water
resources, and intense periods of heavy
rainfall, which increase the risk of flooding
and pollution incidents.
Our response to climate change risk can
be split into two areas: mitigation and
adaptation.
› Mitigation – reducing carbon emissions
to minimise our contribution to climate
change.
The key contributor to climate change is an
increase in greenhouse gases. There is global
scientific agreement that as a result of human
activity the amount of greenhouse gases in
the atmosphere is increasing and affecting
the global climate. We have been driving
down our carbon footprint (net operational
emissions in 2018/19 were over 70 per cent
lower than 2005/06) and have plans to reduce
it further, mainly through our energy strategy.
We have assessed our operational sites for
their potential to generate renewable energy
through either solar panels or wind turbines.
We are working on plans to substantially
increase our renewable energy production
across the current regulatory period to 2020,
mainly from solar, and this year we generated
the equivalent of over 20 per cent of our
electricity consumption through renewable
energy. This provides environmental benefits
as well as energy cost savings.
The anaerobic digestion of bioresources
reduces our carbon emissions as well as
saving energy costs and producing a high-
quality fertiliser. Our advanced digestion
facility at Davyhulme wastewater treatment
works is one of the largest of its type, making
the site energy self-sufficient, with surplus
energy exported to the national grid.
›
Adaptation – improving the resilience in
our water and wastewater business.
The potential effect of climate change on
our future water resources is considered in
our 25-year Water Resources Management
Plan, and we published two adaptation
reports in 2011 and 2015 outlining our
holistic, integrated and partnership approach
to a range of short, medium and long-term
challenges including climate change.
Read more about our long-term planning
on page 48
It is predicted that climate change will result
in the North West experiencing higher
daily temperatures all year, and a shift in
our rainfall from summer to winter. More
occurrences of heavy rainfall are expected,
with higher rainfall in winter but more
frequent and/or severe drought events
predicted in summer.
We have first-hand experience of the impacts
of extreme weather events on our operations
and customers – during 2018 we experienced
two weather extremes, with a deep freeze
followed by rapid thaw in the early part of the
year, and then extremely hot, dry weather
coupled with significantly increased demand
for water over the summer.
Read more about these weather extremes in our
business insight on page 30
Coping with extreme hot, dry periods requires
action in relation to both supply and demand.
Supply is managed by ensuring we continue
to have resilient water resources and
infrastructure capable of moving water
efficiently around the region. We have an
integrated supply zone covering the majority
of our region operated using our Systems
Thinking approach. This helps us to manage
water supply and demand and, where there
is any potential shortfall, we bring more
supplies online to meet demand. Generally
this system is proficient, but there are areas
that require further improvements to deal
with future challenges. Our West East Link
Main pipeline runs between Manchester and
Liverpool, allowing transfer of water across
our region, and the extreme dry weather in
2018 gave us cause to increase the capacity
of this pipeline, as well as bringing additional
groundwater sources online, both of which
increased our resilience.
Demand is managed by encouraging and
supporting customers to use water efficiently.
We have increased our efforts in this area
and ran a number of high profile campaigns
in summer 2018 when demand was much
higher than normal. We encourage customers
to save water through education initiatives
to raise awareness, sharing water saving tips
on our website and through social media,
and providing free water-saving devices. We
work with external partners to expand our
messaging further afield, and have increased
the number of water meters installed, with
44 per cent of households in our region now
fitted with meters.
Coping with periods of intense heavy rainfall
requires action to cope with excess surface
water drainage while minimising the risk of
sewer flooding, pollution and spills.
Traditional interventions, such as storage tanks
and enlarging sewers, are costly and subject
to constraints for space, particularly in urban
areas with little permeable ground. Innovation
is needed to find new solutions, which is why
we have increased our focus on the use of
sustainable drainage solutions in recent years,
working with partners to transform hard-grey
areas into living planted places.
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Our operations produce sludges, excavated
materials and general office waste, which we
are committed to managing in a sustainable
way. Less than five per cent of our waste goes
to landfill, we use recycled products where
practical, and are working to reduce the use of
plastics. We look for ways to reduce our use of
raw materials to minimise our environmental
impact and increase efficiency.
Stakeholders
Our catchment land is open to the public
with an estimated nine million visits a
year, providing access to the beauty and
recreational benefits that the natural
environment offers, and boosting the local
tourism industry.
Much of our catchment land is managed
by tenant farmers, or in partnership with
other organisations such as the RSPB and
Wildlife Trusts. We are increasingly looking
at integrated catchment solutions, taking
a holistic view of issues and solutions
within catchments, working with others to
improve the lakes, rivers and coastal waters
in our region, and often utilising the natural
environment as part of the solution. We have
a long history of doing this through our award-
winning sustainable catchment management
programme (SCaMP), which has shown we can
manage our catchment land to protect and
enhance water quality and to provide other
benefits such as an improving biodiversity.
We are one of many organisations with a
role to play in boosting the quality of bathing
water along the North West coast. With
strict bathing water standards, we continue
to work with partners to improve the quality
of rivers and coastal waters, and we give the
public real-time information on bathing water
quality.
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Technology and innovation
Innovation is one of our core values, and we
embrace new treatment technologies and
efficient approaches that use less resources.
The development of connected technologies
and Systems Thinking enables greater control
and flexibility to operate our networks and
assets to reduce our environmental impact.
Regulatory environment
Our regulatory framework shapes the way we
manage natural resources and our interaction
with the environment, and we work with our
environmental regulators to agree long-term
plans. The Environment Agency (EA) assesses
water companies’ performance across a basket
of measures including regulatory compliance,
pollution incidents and improvement plans.
Political environment
Many of our environmental regulations are
based on EU legislation; therefore, there
may be changes after the UK leaves the EU.
The UK government published its 25-year
Environment Plan for England and Wales in
2017, setting out its environmental ambitions.
This plan, subject to any changes following exit
from the EU, influences our activities and long-
term investment plans.
The influence of devolved metro mayors in
our region is starting to impact development
and spatial planning, including the natural
environment. Maintaining a close working
relationship helps us work together to improve
the natural environment in the region.
Management and measurement
We have an ISO-accredited environment
management system that covers the whole
business, and is externally certified through
six-monthly surveillance visits.
We have a comprehensive set of
environmental strategies covering our
approach to carbon management, waste and
resources, biodiversity and water use.
Our environmental policy is available
on our website at: unitedutilities.com/
corporate/responsibility/environment
We manage our own woodland in a
sustainable way to protect water quality,
conservation, access, recreation and timber,
and have been Forest Stewardship Council®
(FSC®) certified since 2003.
A number of our operational KPIs are directly
linked to the protection and enhancement of
the natural environment, such as leakage, EA
performance assessment, and some of our
wholesale outcome delivery incentives, such
as measures of our contribution to improving
rivers and bathing waters, and pollution
incidents.
See how we are performing against our operational
KPIs on pages 52 and 53
We measure and report on our wider
environmental performance. Those most
relevant to our stakeholders can be found on
page 55, and information is available on our
website at: unitedutilities.com/corporate/
responsibility/environment/environment-
performance
Global politics also has an impact on what we
do. See page 46 for how we are contributing
to the UN’s Sustainable Development Goal to
‘Ensure access to water and sanitation for all’.
The principal risks and uncertainties that
relate to this key resource are ‘Health, safety
and environmental risk’, ‘Water service risk’
and ‘Wastewater service risk’.
Read more about how we manage risk on pages
68 to 76.
The best service to customers
At the lowest sustainable cost
rs.
In a responsible manner
Customers have told us they value the natural
environment and want us to protect and
enhance the region’s natural resources as
part of our activities, and this was one of the
outcomes that we committed to deliver as
part of our business plan for the 2015–20
regulatory period. Many of our outcome
delivery incentives are directly linked to
the environmental impacts of our water
and wastewater services and to protecting
and enhancing the environment. We help
customers do their bit for the environment
and save money on their bills through our
water-saving initiatives and ‘what not to flush’
campaigns to prevent sewer blockages.
Our embedded innovation culture helps us
find new ways of working that simultaneously
reduce costs and protect natural resources.
Our approach to catchment management aims
to address issues at source rather than through
increasingly expensive treatment methods.
This approach, as well as our renewable energy
generation, makes us less reliant on power and
chemicals, which reduces treatment costs as
well as carbon emissions and use of natural
resources. The work we do to prepare our
network to sustainably cope with extreme
weather and the challenges of climate change
can save repair and recovery costs as well as
ensuring a more resilient service for customers.
Managing our dependency, use and impact
on natural resources is a key expectation of
many of our stakeholders. Our monitoring
and management of leakage from our water
network is a crucial part of responsible water
management. We comply with abstraction
licences and environmental discharge consents
set by independent regulators to safeguard the
responsible management of the environmental
impact of the water and wastewater services
we provide. In addition, our efforts to reduce
our carbon footprint and use of plastics makes
an important contribution to protecting and
enhancing the natural environment and
mitigating climate change.
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Business insight
Responding to extreme weather conditions
Keeping the taps flowing during a year when weather conditions swung
from blizzards to the longest heatwave since 1976
“Intense hot and
dry conditions
followed on from
several weeks
of freezing
conditions during
the Beast from
the East”
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From sub-zero temperatures, high winds and blizzards
to the longest heatwave since 1976, 2018 was a year
of extreme weather challenges. As we worked to
maintain water supplies, tackle leakage and encourage
customers to play their part by using water wisely, we
faced intense media scrutiny.
Between May and August 2018 there was
significantly lower rainfall than average, and this was
felt most acutely in North West England. It was the
driest start to the summer since modern records
began in 1961 and soaring temperatures contributed
to a huge demand for water. At the height of the
hot weather in June the demand for water rose by
500Ml/d – 25 per cent more than usual.
At one stage there was a possibility that we might
have had to impose a temporary use ban if the
extreme dry weather and increased demand had
continued. Due to our own efforts, and those of our
customers who responded to our calls to use water
efficiently, this was avoided and we successfully
maintained an unrestricted service.
The high demand caused localised problems with
low pressure which we overcame using our fleet of
alternative supply vehicles (ASVs). From the end of
May to the beginning of September our ASVs worked
24 hours a day to pump into the supply network and
help maintain water pressure.
These intense hot and dry conditions had followed
on from several weeks of freezing conditions during
the 'Beast from the East' in March. Pipe movements
caused by the frozen ground resulted in high levels
of background leakage, and as the ground continued
to dry out over the summer this exacerbated the
issue further. Customer calls about leaks increased as
they became easier to spot against the dry ground.
In response to the rising levels of leakage we had
already recruited additional leak detection and repair
crews and by mid-July we were repairing 750 leaks a
week with double the number of teams working 24
hours a day.
To minimise any impact on customers we invoked our
Drought Management Plan which sets out a series of
pre-agreed actions that must be followed once certain
trigger levels are crossed in our impounding reservoirs.
This included pumping water from the south of our
region through the West East Link Main to ease
pressure on our key reservoir at Haweswater. We
also carried out a number of capital projects to bring
back into service borehole supplies that had not been
used for many years. We increased communication
with customers to ask them to use water wisely,
through regional and national media, and we applied
to the Environment Agency for drought permits so
that we could increase levels of water abstraction.
Our mitigation plan continued through the winter
– by March 2019 reservoir levels had recovered to
normal levels and we met our leakage target.
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Our business model
Key resources and the impact of external drivers
Assets
Our network assets and treatment works are
essential to delivering water and wastewater
services to customers and protecting public
health, and our energy assets enable us to
generate energy, which helps reduce costs and
minimise our environmental impact.
We are investing around £3.9 billion across the
2015–20 period, and we expect to continue
with a substantial investment programme for
the foreseeable future to meet increasingly
stringent environmental standards and to
maintain and improve our assets and services.
Impact of external drivers
Natural environment
We must build increased resilience into all our
assets to cope with the anticipated impacts of
a changing climate in the long term, including
improvements to flood defences. Our assets
must be prepared to continue to comply
with increasingly challenging environmental
constraints in areas such as water abstraction
and wastewater treatment levels.
Economic environment
When making strategic investment decisions
we must consider the impact on customers’
bills and ensure we maintain affordability.
A phased, long-term approach to address
all of the concerns and interests of our
many stakeholders, including environmental
regulators, ensures that the necessary work
can be delivered without the costs placing
too much pressure on customer bills. For
example, we have agreed to spread some of
the environmental spend required by current
legislation over the next 15 years.
Regulatory environment
Many of our assets are very long-term in
nature, such as our impounding reservoirs
that can last hundreds of years. Through our
economic regulation framework we earn a
return, received through revenue, based on
a measure of the value of our capital asset
base, Regulatory Capital Value (RCV). This
mechanism allows us to share the cost of
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building these long-term assets between the
generations that will benefit from them.
Our RCV is over £11 billion, but the gross
replacement cost of our fixed assets (including
all our reservoirs, treatment works and pipes),
i.e. the estimated amount it would cost for
another company to build similar assets and
networks, is around £90 billion.
Stakeholders
Many of our reservoirs are areas of natural
beauty and we permit the public to enjoy
access to this land, bringing recreational
and health benefits. Other assets, such as
our wastewater treatment plants, are close
to residential areas and we work hard to
minimise odours and other impacts.
New infrastructure projects, such as our
West Cumbria pipeline, can impact local
communities and we go to great lengths to
consult in the planning stage.
Political environment
UK government priorities, including those of
the National Infrastructure Commission, will
impact the planning of large infrastructure
projects. We anticipate an increase in the
North West’s population of around one million
by 2045 (more than the population of a large
city such as Liverpool). We are planning to
ensure our services and infrastructure are able
to meet the needs of this growing population,
including new connections and higher demand
on our water and wastewater networks.
See page 46 for how we are contributing to the
UN’s Sustainable Development Goal to ‘Build
resilient infrastructure, promote sustainable
industrialisation and foster innovation’
Technology and innovation
It is important we have the right systems and
procedures in place to monitor and control our
assets efficiently and effectively. We embrace
the opportunity that new technology and
innovation presents. This is at the heart of our
Systems Thinking approach.
The new Nereda process has transformed
the wastewater treatment process, our use
of robots in managing the water network has
improved efficiency and customer service, and
we are using drones to inspect assets with
restricted access, which improves health and
safety as well as reducing time and costs.
We use technology for renewable energy self-
generation, for example our Davyhulme sludge
recycling centre employs a groundbreaking
configuration of thermal hydrolysis to
maximise energy generation from sludge; and
we built Europe’s largest floating solar array on
our reservoir in Godley, Greater Manchester.
Technological advances can give rise to new
risks as well as opportunities. Cyber crime has
been on the increase in recent years and, as
the holder of customer information, is a threat
we take very seriously.
Read more about our approach to ‘Mitigating the
risk of cyber crime’ on page 71
Management and measurement
Our asset management policy, available to all
employees on our intranet, details how we will
operate, maintain and invest in our assets with
the aim of delivering our customer promises
and associated outcomes, as agreed at the
price review for the current regulatory period.
We monitor the condition and performance
of our assets and assess the risk to service
provision. Our proactive and reactive
maintenance programmes, and focus on asset
health performance measures, ensure we are
managing our assets in the most efficient way.
Our wholesale outcome delivery incentives,
which feature as one of our operational KPIs,
include measures of asset health such as the
resilience of our impounding reservoirs and
maintaining our wastewater treatment works.
The principal risks and uncertainties that
relate to this key resource are ‘Security risk’,
‘Water service risk’, ‘Wastewater service
risk’, ‘Compliance risk’, and ‘Supply chain and
programme delivery’.
Read more about how we manage risk on pages
68 to 76
The best service to customers
At the lowest sustainable cost
In a responsible manner
Maintaining and enhancing our assets is
essential in order for us to provide the best
service to customers. Since privatisation
in 1989, we have invested billions in our
assets and this has provided substantial
benefits to customers, including reduced
supply interruptions, reduced sewer flooding
incidents, and improved water quality.
We manage our assets in a holistic way that
seeks to minimise whole life costs, helping
us deliver efficient total expenditure (totex)
without compromising on quality of service or
long-term resilience. This approach helps us
to save future operating costs, reduce future
customer bills, and continue to operate in a
sustainable manner.
We are committed to managing and operating
our assets in a way that continues to create
long-term value for all our stakeholders.
Effective capital investment helps us to
meet increasingly stringent environmental
standards, which helps to enhance the region’s
environment, improving bathing waters and
protecting indigenous wildlife and habitats.
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Our business model
Key resources and the impact of external drivers
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People
We support thousands of jobs in the
North West, including a growing graduate
programme and we have been named one of
the top 100 apprenticeship employers, helping
to secure a legacy for the future in our region.
We believe that the most effective decision-
making comes from access to a diverse range
of people with a broad set of viewpoints.
Fundamental to the performance we deliver
is a skilled, engaged and motivated team
of employees, suppliers and contractors.
We provide comprehensive training and
development opportunities for our employees.
Competitive wages, benefits and long-term
incentives have been shown to enhance
quality of work, increase employee retention,
and reduce absenteeism, as well as providing
societal benefits. Employee retention also
helps ensure efficient and effective training
and higher levels of performance.
Impact of external drivers
Stakeholders
We are committed to protecting the health, safety
and wellbeing of our people. This is fundamental
to their welfare and to the reputation and
performance of the company, and remains
an 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 workplace wellbeing charter.
We promote diversity and equal opportunity
to drive a comprehensive and balanced skill
set, and we recruit and promote employees
on the basis of merit. Over the last few years,
we have been striving to improve diversity
across all types of role and all levels within our
business. We established a Gender Equality
Network in 2015 to provide role models,
mentoring and opportunities. We target
diverse shortlists and attraction campaigns for
our apprentice and graduate schemes.
Women are represented at all levels of our
company. Over a third of our combined board
and executive team is female. See chart.
Link to our strategic themes
Group board1
Executive team2
7
3
2
2
Senior managers3
Wider employees4
35
6
3,491
1,891
1) Group board as at 31 March 2019.
2) Executive team excludes CEO, CFO and COO, who are
included in group board figures.
3) As at 31 March 2019, there were 11 male and 3
female employees appointed as statutory directors of
subsidiary group companies but who do not fulfil the
Companies Act 2006 definition of ‘senior managers’.
4) Employees of each sex as at 31 March 2019.
Further information on diversity can be found on
page 98
Applicants with disabilities are given equal
consideration in our application process, and
disabled colleagues have equipment and
working practices modified for them as far as
possible where it is safe and practical to do so.
See page 46 for how we are contributing to the UN’s
Sustainable Development Goal to ‘Promote inclusive
and sustainable economic growth, employment and
decent work for all’
Economic environment
The availability of skilled engineers depends on
economic and social conditions. Our award-
winning apprentice scheme and graduate
programme help 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. Our employees are
paid a competitive base salary plus benefits and
the opportunity to join the employee healthcare
scheme and our share incentive plan.
We work with suppliers and contractors whose
business principles, conduct and standards align
with our own. Our key suppliers have committed
to our sustainable supply chain charter. We
support the appointment of a small business
commissioner to investigate companies who do
not treat suppliers fairly, are a signatory to the
Prompt Payment Code, and will fully comply with
rules on reporting payments to suppliers.
Technology and innovation
We have an embedded culture of innovation,
and it is one of our core values. We encourage
ideas from our people as well as from outside
our business, both ad hoc and formally through
programmes such as our annual CEO challenge.
Management and measurement
We measure employee engagement through
an annual survey, and regularly achieve
engagement levels higher than the UK
norm. We monitor and measure employee
performance through annual reviews, and
employees at all levels of the company
participate in the bonus scheme, so they
benefit from company success. The bonus
performance measures are the same for
all employees as those for the executive
directors, and can be found on page 132.
We maintain a comprehensive A–Z suite of
policies, which are available to all employees
on our intranet. 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.
We convened a cross-company working group
to draft our human rights policy statement
and assess risks and potential impacts on
our stakeholders. These are mapped to, and
managed within, our corporate risk register.
Our human rights policy can be found on our
website, and this has links to other related
policies including our modern slavery policy
and slavery and human trafficking statement,
and sustainable supply chain charter.
Read more at unitedutilities.com/corporate/
responsibility/our-approach/human-rights
The principal risks and uncertainties that
relate to this key resource are ‘Health, safety
and environmental risk’ and ‘Resource risk’.
Read more about how we manage risk on pages
68 to 76
The best service to customers
At the lowest sustainable cost
In a responsible manner
Our employees and our supply chain act as the
face of our business, and therefore are a crucial
part of delivering the best service to customers
across our entire business. Customer focus
is one of our core values that we encourage
our people to live by, and we recognise great
customer service from individuals, such as
through participation in the WOW! Awards.
Comprehensive training and development
opportunities for our employees help to
improve our internal skills base and therefore
quality of work at an efficient cost, as well
as creating a more engaged workforce.
Management has a range of incentives that focus
on performance over a number of years, rather
than just the current year, to encourage the
delivery of benefits over the longer term.
We work with schools, including encouraging
the next generation of women into science,
technology, engineering and mathematics
careers, and with our supply chain partners
to give young people not in education,
employment or training the chance to gain
hands-on experience and basic skills training
in the workplace. We are a signatory to the
Prompt Payment Code for our suppliers.
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Business insight
Creating a healthy workplace
Working hard to improve the wellbeing of our employees
In January we were named one of Britain’s Healthiest
Workplaces 2018, following the largest and most
comprehensive workplace wellbeing survey in the UK.
Britain’s Healthiest Workplace 2018 incorporated
data from 129 organisations and 26,432 employees,
and ranked United Utilities as the third most
improved organisation. The award recognised our
increased efforts over the past four years to improve
the wellbeing of our employees. This includes helping
employees quit smoking, offering discounted gym
membership, nutritional programmes, and training
mental health champions and first aiders.
In 2018 we were reaccredited with the Workplace
Wellbeing Charter, reflecting our continued
commitment to health and wellbeing. We fully met
90 of the 95 standards set out in the charter, which
are based on best practice, research and commercial
benefit.
We picked up two employee wellbeing accolades
at the Reward and Employee Benefits Association
(REBA) awards. We won the award for Physical
Wellbeing for our “superb reductions in inactivity
rates” among employees, made possible by initiatives
including standing desks and walking meetings. At
our Warrington headquarters we have an onsite gym,
health kiosks so staff can accurately measure their
weight and blood pressure, incentives for employees
who stay smoke-free for six months, and we
organised activity challenges including a Mighty Hike,
Billion Step and Walking Home for Christmas.
We won the prize for Best Mental Wellbeing, for
a company with 5,000 employees or more, for
identifying specific issues in our workforce, setting
out a clear approach to building a supportive culture,
and for putting good data analytics in place to
measure progress. The judges praised our ‘mental
health selfies’ as an excellent way of encouraging
staff to engage with their own mental wellbeing, and
were impressed by the support network we have
built for mental health first aiders.
In May 2018 we joined other businesses, including
Barclays, PwC and BNFL Sellafield, along with football
clubs and mental health charities in an initiative
aimed at ending the stigma of talking about mental
health in the workplace. ‘This is Me’ launched in
Manchester to coincide with the start of Mental
Health Awareness Week. The campaign challenges
the stigma around mental health at work aiming to
break the culture of silence by supporting people to
tell their own personal stories.
Approximately one in four people in the UK
experience a mental health problem each year. As a
responsible business, we have an obligation to get
involved and take an active interest in the wellbeing
of our staff and create an environment where those
in need can get help and support.
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Our business model
Key resources and the impact of external drivers
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Financing
As a result of the long-term nature of our
assets and the need to spread the cost
between the generations of customers that
benefit from them, it is necessary to raise
financing in order to fund this investment.
We adopt a prudent approach to managing
financial risks, with clear and transparent
hedging policies, and our debt portfolio has a
very long average life. We maintain a robust
and sustainable capital structure, balancing
both equity and debt financing, which helps us
maintain a strong and stable investment grade
credit rating. This enables efficient access to
the debt capital markets across the economic
cycle, long-term financial resilience, and
reduces our exposure to fluctuating market
conditions and regulatory changes.
Impact of external drivers
Economic environment
Changes in economic conditions and financial
markets can influence our ability to create
value through financing. We mitigate some
of the impact through our financial hedging
strategies, including our approach to hedging
inflation and interest rates.
Interest rates have been comparatively low
in recent years, and through our interest rate
hedging policy we have progressively locked
in these lower rates on our debt portfolio,
benefiting our future cost of debt.
Our revenue and regulatory capital value (RCV)
are linked to RPI inflation during the current
regulatory period. Our inflation hedging policy
aims to maintain around half our net debt in
index-linked form (where it is economic to do
so), as this provides a partial economic offset
for our inflation exposure. Periods of lower
inflation mean lower growth in revenue and
the RCV, but also lower finance costs, and the
reverse is true in periods of higher inflation.
Market sentiment can impact our financing.
While much of this can be outside of our direct
control, we can help inform and influence
investor opinion through regular engagement.
Link to our strategic themes
Regulatory environment
Our ability to raise efficient financing at a cost
cheaper than many of our peers provides the
potential to outperform the industry-allowed
cost of debt, and we have a long track record
of aligning our financial risk management
policies with the regulatory model.
We maintain an appropriate level of gearing,
measured as net debt to regulatory capital
value (RCV), within a target range of 55–65 per
cent, which is broadly in line with regulatory
assumptions for the ‘notional company’.
Our inflation hedging policy aligns with the
current RPI-linked regulatory framework,
and we have evolved our policy and began
introducing CPI-linked debt in line with Ofwat's
transition towards CPIH inflation for the
2020–25 period. We issued the first ever CPI-
linked notes by a UK utility in 2017 and have
continued to increase our CPI exposure where
there are good relative value opportunities,
but we expect our index-linked debt to remain
mostly in RPI-linked form until CPI or CPIH
debt and swaps become available in sufficient
size at an economic cost.
Our interest rate hedging policy is to fix
nominal debt out to 10 years on a reducing
balance basis, reducing our exposure
to market fluctuations while managing
uncertainty in Ofwat's approach to setting the
cost of debt at future price reviews. For 2015–
20 we also substantively fixed all our nominal
debt to the end of the period once the cost of
debt was known, but we will not do this for
2020–25 as a result of Ofwat's introduction of
indexation on new debt.
Stakeholders
As a FTSE 100 listed company, we have open
and transparent reporting around all of our
equity and debt financing arrangements,
which helps to build trust with long-term
investors as well as our regulator.
We have proactive engagement programmes
with equity and debt investors, through
which we update them on developments in
our business and seek their views, which we
consider in our strategic planning.
Technology and innovation
New innovative ways of raising finance often
emerge, for example accessing pockets of
untapped investor demand via our Euro
Medium Term Note (EMTN) programme,
CPI-linked financing, and green bonds have
become more prevalent in recent years. We
monitor and assess these developments
and continue to maintain access to a broad
and diverse range of sources of finance in a
number of markets, across which we seek the
best relative value when issuing new debt.
Management and measurement
We have clearly articulated financial risk
management policies, covering credit, liquidity,
interest rate, inflation and currency risk.
Read more about our financial risk management
policies on pages 190 to 197
We maintain relationships with a diverse
range of banks, and we periodically refresh
our EMTN programme to enable efficient debt
issuance under pre-agreed contractual terms.
The board delegates authority to the CFO,
allowing us to respond quickly to attractive
financing opportunities.
We aim to avoid a concentration of refinancing
in any one year, and fund long-term where
possible. We monitor liquidity forecasts, with
a policy of having available resources to cover
the next 15–24 months of projected cash flows
to ensure forward funding needs are met.
As part of our planning process, we review key
credit ratios against required thresholds for
our target credit ratings. Performance against
these ratios is regularly monitored, and we
maintain relationships with the credit rating
agencies to understand methodology changes.
The principal risk that relates to this key
resource is ‘Financial risk’.
Read more about how we manage risk on pages
68 to 76
The best service to customers
At the lowest sustainable cost
In a responsible manner
Customers benefit from receiving service
improvements earlier as a result of our ability
to pre-fund investment in long-term assets,
and keeping finance costs down helps us to
ensure bills remain affordable. The financial
resilience we build through our financial risk
management helps to ensure we can continue
to provide great service long into the future.
Locking in long-term debt and swaps at good
relative value helps keep our finance costs
low, and we monitor liquidity and headroom
regularly to maintain adequate funding. Our
approach and financial risk management
reduce our risk exposure and help ensure the
sustainability of our ability to efficiently finance
our business.
Our environmental, social and governance
performance and robust capital structure give
equity and debt investors confidence in the
long-term sustainability of our business, which
reduces their investment risk. We do not use
offshore financing vehicles, and our open and
transparent reporting is trusted by Ofwat who
rated us ‘self-assurance’ three years in a row.
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Business insight
Introducing artificial intelligence to our network
Using self-learning technology to bring to life the benefits of Systems Thinking
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“HARVI has
shown huge
potential to
help reduce
our operational
costs”
We are the first water company in the UK to
introduce large-scale artificial intelligence into
operational systems.
Every day we pump water from our service reservoirs
to customers. The calculation of pump schedules
(when to turn pumps on and off) is manually
intensive and requires skilled analysts for several
hours a day. This manual process cannot cope with
the many variables required to make balanced
decisions, and energy use is too complex to calculate
manually. Our water leadership team recognised the
need to find a better solution and this was set as one
of the challenges in our Innovation Lab.
We worked with a Canadian start-up company,
EMAGIN, through our Innovation Lab last year to
apply HARVI (Hybrid Adaptive Real-time Virtual
Intelligence), a real-time analytics dashboard, to our
water network pump scheduling.
HARVI uses artificial intelligence and machine learning
to assess vast amounts of data on a wide range of
factors such as weather, demand for water, pump
performance and electricity prices.
This is used to help our system operators make
decisions on the most cost-effective and efficient way
to run water pumps, detect burst pipes and minimise
the risk of discoloured water.
We tested this innovative technology in Oldham,
Greater Manchester – one of the 33 zones in our
region. Oldham was chosen as we needed a test
site that was large enough to deliver real benefit
to customers, had an identified opportunity for
delivering further efficiencies, and already had
Systems Thinking capability. Oldham District Metered
Zone produces 55 mega litres of drinking water a day
for over 180,000 domestic customers, has Systems
Thinking capability by way of remote monitoring and
control technology, and is one of our high energy
intensive zones. In the 12-week trial, taking into
account the optimum times to pump water across our
network, HARVI demonstrated it could achieve energy
savings of 22 per cent.
Water networks are complex systems, and technology
like this is going to play an integral role in the further
development of our Systems Thinking approach,
helping us make more sense and better use of large
amounts of data. It will also free up our people to
be more proactive, which will have a direct impact
on levels of service for customers. Water companies
need to be thinking in this way and embracing new
technology if we are to meet customers’ expectations
on value and reliability.
HARVI has shown huge potential to help reduce our
operational costs through the Innovation Lab pilot
phase. We are now working with EMAGIN to develop
a plan to roll this technology out in phases to the rest
of our water network.
Stock Code: UU.
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Our business model
Internal drivers
Systems
Thinking
Governance and
risk management
Values and
culture
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Our pioneering approach to operating our
business, which we call Systems Thinking, is
one of our competitive advantages and we
set out more detail on this on page 17.
Systems Thinking is one of the main
drivers of the operational performance
improvements we have delivered in
recent years, as well as helping us achieve
significant cost savings.
We have embedded this way of thinking
throughout our business, to put in place the
telemetry backbone across our network,
to gather and analyse data, and to set up
our Integrated Control Centre (the ‘digital
brain’ of our network) to remotely monitor
and control our assets from our head office.
This time and investment has given us a
significant advantage.
The best way to demonstrate what Systems
Thinking means in practice and the benefits
it delivers is to give detailed operational
examples.
Since 2015, we have included business
insights in each year’s annual report
covering our integrated control centre,
our network sensors and telemetry
backbone, our system-wide approach to
sludge treatment, and our use of artificial
intelligence to deliver advanced water
network management.
This year, read more on page 35 about how
we are rolling out artificial intelligence across
our entire water network through a platform
that can assess vast amounts of data on
a wide range of factors such as weather,
demand for water, pump performance and
electricity prices. This was an idea developed
through our Innovation Lab, and helps
make decisions on the most cost-effective
and efficient way to run water pumps,
detect burst pipes, and minimise the risk of
discoloured water.
Good governance lies at the heart of all
successful organisations and leads to better
management decisions. We strive to operate
in a manner that reflects the highest standards
of corporate governance, accountability and
transparency. Our company structure and
governance standards are designed to ensure
our board continues to observe sound and
prudent governance in compliance with the UK
Corporate Governance Code.
Read more about our approach to governance
in our Governance report on pages 80 to 144
Our board members have diversity in terms of
experience, skills and personal attributes, and
in terms of age, gender and ethnicity, helping
to bring a breadth of views in considering
strategic decisions and priorities.
We have an anti-bribery policy that all our
employees must follow, and processes in
place to monitor compliance with the policy.
We operate an independently provided,
confidential reporting helpline and web portal
for employees to raise matters of concern
in relation to fraud, dishonesty, corruption,
theft, security and bribery, and all claims are
fully investigated. Our audit committee has
oversight of the policies and procedures in
relation to anti-bribery and fraud.
Our anti-bribery policy is available to view
online at: unitedutilities.com/corporate/
about-us/governance
Our employees and representatives of our
suppliers must comply with our sustainable
supply chain charter. This explains that
we will not tolerate corruption, bribery or
anti-competitive actions, and we expect our
suppliers to comply with applicable laws
and regulations and, in particular, never to
offer or accept any undue payment or other
consideration, directly or indirectly, for the
purposes of inducing any person or entity
to act contrary to their prescribed duties.
Given the complex legal and regulatory
environment within which we operate,
and the critical nature of our infrastructure
and service provision, we are exposed to a
broad variety of risks. Mitigating exposure to
potential risks helps us improve our resilience.
Accepting some level of risk is a normal and
necessary consequence for a commercial
organisation in order to run the business in
a cost-effective way. However, as you would
expect of the provider of an essential service,
we adopt a prudent approach to managing
risks to our business.
See pages 68 to 76 for what we consider to be
our principal risks and uncertainties, and how we
manage and mitigate these
Our core values of customer focus, integrity
and innovation start at the top and cascade
through all levels of our business. They are
interrelated – innovating to improve our
services and acting with integrity in the
way we conduct our activities helps us to
continually improve customer service.
Customer focus
We have instilled a customer-centric
approach right across our organisation,
and this has been a key driver of the major
improvement in customer service. Putting
customers at the heart of what we do has
helped deliver benefits for shareholders and
wider stakeholders.
Integrity
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
employee engagement surveys, intranet, and
social media collaboration tool ‘Yammer’.
Innovation
Innovation is a critical enabler in creating value.
We welcome new ideas and technologies from
all levels of our business with employees given
the opportunity to develop and present ideas
to senior management, from our supply chain,
and from industries across the world, including
via our Innovation Lab, as detailed on the next
page.
See how our core values underpin our strategic
themes and contribute towards delivering our
purpose and working towards our vision on
page 15.
The culture of our company is a
combination of our values, attitudes and
behaviours, manifested in our operations
and relations with all our stakeholders.
Read more about how we create value for
stakeholders on pages 39 to 46
See how we are contributing to the UN’s
Sustainable Development Goal to ‘Promote
just, peaceful and inclusive societies and
institutions’ on page 46.
The United Utilities way of doing things is to
behave as a responsible business and is set
out in our ‘Business Principles’ document,
which can be found on our website at:
unitedutilities.com/corporate/about-us/
governance/business-principles
Read more about our board’s approach to values
and culture on page 92 and 93
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Business insight
Accelerating the drive for new ideas
Running our Innovation Lab is helping us find new ways of improving services
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finding and
proving new
innovations
that we are
repeating it.”
Water companies have been challenged to push the
boundaries of ‘business as usual’ during the price
review process for the next regulatory period. To
deliver more for less, we have to do things differently.
›
›
The biggest challenge is how to find new innovations
when, historically, it has been difficult for new entrants
to implement their ideas in the water industry. Our
procurement processes are set up to define the scope
of the services we want very precisely, which can
be counterproductive to creativity. To address this,
last year, we ran the UK water industry’s very first
Innovation Lab, working with technology accelerator
partner L Marks.
Our first challenge was to loosen the procurement
constraints. We used EU Innovation Partnership
Procedure legislation to develop a revolutionary new
procurement framework for the industry, which won
the Utility Week award for Supply Chain Excellence.
This allowed us to procure ideas rather than specific
services. The Innovation Lab did not look for fully
formed new services or technologies. We were clear
from the outset that we wanted ideas that could
be nurtured and co-created with and for the water
industry.
We defined five areas where we had identified a
challenge in need of a solution:
›
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›
Connected customer: such as smart devices and
‘Internet of Things’ – water is lagging behind
other utilities in this area.
Proactive customer: providing better and more
timely updates for customers when they need to
hear from us.
Predictive asset maintenance: finding less
invasive ways to monitor performance of our
assets without needing to dig them up or switch
them off.
Safe and healthy worker: protecting our
employees when they are working alone, at
night, or in dangerous locations.
Future of water: this final category was
intended to be a ‘catch all’ to attract ideas,
however radical, that could have applications
for the water industry.
The Innovation Lab provided a safe, supportive
environment for the shortlisted suppliers to access
our sites, data, systems, experts and experienced
senior employees. It helped foster a culture where
we work together to bring these ideas to fruition.
We advertised the Lab to some 1,500 fledgling,
small and large businesses and received applications
from 80 organisations. We narrowed that down to
a shortlist of 22 ideas from UK and international
applicants. Seven finalists joined us at our head office
for an intensive 10-week Lab process. Five of these
suppliers were new entrants to the UK water sector.
So far, we have signed contracts with three of
the suppliers. UK-based firm Typhon is installing
a power-efficient LED UV system for water
treatment. Canadian firm EMAGIN is rolling out its
artificial intelligence platform HARVI to all of our
water pumping stations across the North West.
Manchester-based Datatecnics is rolling out its
intelligent pipe system that uses printed electronics
and artificial intelligence to report pipe integrity and
predict pipe failures.
This process has proved so successful for finding and
proving new innovations that we are repeating it. We
launched our second Innovation Lab in April 2019
to find more great ideas that we can co-create with
their originators for the benefit of our company, our
customers and other stakeholders, and the water
industry as a whole.
Stock Code: UU.
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Business insight
Alerting communities to what not to flush
Local campaign delivered dramatic results in drive to reduce sewer flooding
“In 2018 we
trialled a new
community-
focused
approach to
reducing sewer
flooding”
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Every year there are 25,000 sewer blockages across
the North West and around 1,000 homes and 6,000
gardens are affected by sewer flooding.
Things like wipes and nappies do not just disappear
down the u-bend and dissolve, they clump together
and can cause havoc in the sewers, causing distress
for people whose homes and gardens have been
flooded by blocked sewers.
As well as blocking sewers, many of these items can
end up in our rivers and on our beaches, which has
far-reaching impacts on nature and the environment.
In 2018 we trialled a new community-focused
approach to reducing sewer flooding in Burscough,
Lancashire, an area with flooding issues mainly due
to sewer blockages caused by wet wipes.
For a six-month period, our customer team went out
and about meeting customers and working with the
community to spread the message about what not
to flush and showing them how we can all do our bit
to help.
The campaign delivered excellent results, with an
impressive 90 per cent reduction in wet wipes and
other non-flushable items entering our sewers.
As part of the campaign we:
›
›
›
Sent a ‘Burscough Better Together’ leaflet to
Sent a ‘Burscough Better Together’ leaflet to
Sent a ‘Burscough Better Together’ leaflet to
6,000 residents in the area;
6,000 residents in the area;
6,000 residents in the area;
›
›
›
›
›
Held a number of events in supermarkets, a
Christmas fayre, and a heritage weekend in the
summer;
Engaged with local children by holding ‘Mad
Science’ assemblies in primary schools and a talk
at the village holiday club;
Visited food outlets to talk to owners about their
methods of dealing with fats, oil and grease;
Provided local nurseries and baby groups with
potty training packs containing advice and
information about not flushing wipes;
Placed adverts in local magazines about the
importance of not flushing wet wipes; and
› Worked closely with other agencies, such as West
Lancashire District Council and the Environment
Agency, to discuss local flooding issues and
future developments in Burscough.
Our network teams carried out regular cleaning
across the area and looked at ways to reduce the risk
of further flooding.
The Burscough project worked so well that we
are planning to roll it out to other problem areas,
engaging with customers and communities to help
change behaviours around ‘what not to flush’.
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How we create value for stakeholders
Identifying who our stakeholders are and engaging to understand what matters
to them helps enable us to create long-term value
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Suppliers
Regulators
Who are our
stakeholders?
Politicians
Media
Environment
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Customers
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Shareholders
Communities
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w
e create
Employees
Why stakeholder engagement matters
Our purpose is to provide great service to
customers and communities in the North
West, creating long-term value for all of
our stakeholders. To create this value, it is
important to understand our stakeholders and
what matters to them.
Politicians and the media can influence
our priorities and the perceptions of our
stakeholders. During the year there has been
increased focus on the water sector, from
several perspectives including corporate
governance, resilience and levels of leakage.
The provision of water and wastewater
services creates a deep connection between
the company and the communities we serve.
Our work generates value for the North West
economy, for example through job creation
and delivering environmental improvements,
which underpin the region’s tourist economy.
We rely on shareholders to finance our
activities, and we agree commitments
with economic, quality and environmental
regulators about what we will deliver within
given time frames.
We recognise that we do not operate in
isolation and it is not our decision alone to
determine what the region needs us to deliver.
This is why it is essential we engage with
stakeholders across the North West, so we can
identify shared solutions to shared challenges.
Understanding what matters to stakeholders
will only be achieved by building strong,
constructive relationships and engaging
regularly. We value the diverse perspectives
that a broad range of stakeholders,
representing different and often competing
interests, can bring to our decision-making.
The relationships we build are subject to
robust governance to ensure the insights
generated are taken into account in decision-
making at executive and board level.
Read more on page 152. This is important
to building trust. The board’s corporate
responsibility committee meets four times
a year and stakeholder engagement is one
of its standing agenda items. The chair of
the independent customer challenge group,
YourVoice, attends board meetings to provide
its perspective.
The following pages detail how we engage
with, and are influenced by, each of our key
stakeholder groups, and the value we create
for them. Our analysis of what matters most
to stakeholders, and how these issues affect
our ability to create long-term value in line
with our purpose statement, is set out in our
material issues matrix on page 45.
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How we create value for stakeholders
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Shareholders
How we engage with and are influenced by shareholders
It is important that shareholders have confidence in the company and how it is managed, given
their investment in the business. By providing updates on our strategy and performance, we
can assist in their understanding and decision-making. Similarly, engagement with shareholders
gives us a broad insight into their priorities, which influences our own decision-making and our
strategic direction.
Through our investor relations programme, we actively engage with shareholders and sell-
side analysts who write research reports on our company and industry. Details of this can be
found on page 99. Regular engagement activities are supplemented by ad hoc events, such as
the webcasts held this year in relation to the price review process for the 2020–25 period. We
complete several investor-led indices on environmental, social and governance matters, such as
the Dow Jones Sustainability Index.
Top three material issues for shareholders*
Customer service and
operational performance
Political and regulatory
environment
Financial risk
management
Customers
How we engage with and are influenced by customers
To deliver a great service in a way that customers value, we need to listen and engage with them
in building new solutions. We engage with customers through a variety of channels, including
webchat, text and social media. We get feedback on customer interactions every day, and conduct
more detailed weekly research on key themes that are important to them. We have changed how
we communicate and deliver services based on customer feedback, such as the introduction of
our customer app and redesign of customer bills. Our business plan for 2020–25 was shaped by
unprecedented levels of customer engagement.
Read more on pages 19 to 23
The independent customer challenge group, ‘YourVoice’, aims to ensure customers are at
the heart of our business planning engagement, and the Chair regularly attends our board
meetings. YourVoice continues to provide challenge and critical support on our delivery of
commitments for the 2015–20 period as well as contributing to our business plan for 2020–25.
Top three material issues for customers*
Customer service and
operational performance
Affordability and
vulnerability
Leakage and water
efficiency
Communities
How we engage with and are influenced by communities
Our work puts us at the heart of local communities, places where customers and employees
live and work. When communities come together, whether that is around a particular issue or
location, they can often make powerful representations to the company. We seek to develop
strong relationships based on mutual trust, respect and an understanding of the impact our
work has on everyday lives. We play a constructive role in tackling issues through engagement
and investment, and by identifying the water-related issues that matter most to communities
we can develop solutions in partnership with them.
We engage through facilitated workshops and community partnerships, such as the North
West Hardship Hub to help customers in vulnerable circumstances. Read more on page 57.
Issues raised by communities can present opportunities to improve what we do or to help
others, while others can be complex and difficult to handle, with competing interests between
different stakeholder groups, and require time and effort to work through.
Top three material issues for communities*
Land management
and access
Community
investment
Trust, transparency
and legitimacy
*
Read about how we manage our material issues on page 45
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Strategic themes
Best service to customers
At the lowest sustainable cost
Material issues
External factor
Internal factor
In a responsible manner
Both an external and internal factor
How we create value for shareholders
Short-term
›
Since many of our shareholders are pension
funds, charities and employees, the income
we provide through dividends is relied on
by millions of people every year
› We are committed to high ethical
standards of business conduct, strong
corporate governance and acting with
integrity so shareholders can have
confidence in the way we do business
› We maintain a high level of quality and
transparency, enabling shareholders to
have trust and confidence in what we
report. This was recognised by Ofwat,
which has rated us in its top 'self-
assurance' category three years in a row
Long-term
›
Our shareholders have placed their money
into our business as a long-term investment
and we provide an appropriate sustainable
return through a combination of short-term
dividend income and long-term growth
› We plan far into the future and invest in our
infrastructure to ensure the sustainability
of the business and the services we provide
› We manage risk prudently so shareholders
can have confidence in our stability and
resilience in the round
›
Our innovation culture drives continuous
improvements, enabling us to be at the
frontier of our industry and ahead of peers
Link to strategic themes
Our regulatory return varies dependent
on our performance for customers,
aligning shareholders’ interests with
delivering the best service to customers
By reducing costs in a sustainable way
through innovation and efficiency, we can
target outperformance of our allowed
expenditure in the long term without
compromising operational performance
Our strong corporate governance,
prudent risk management, and clear and
transparent reporting help create a lower
risk investment and build trust
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How we create value for customers
Short-term
› We focus on delivering a reliable service so
customers can simply get on with their lives
and not have to worry about their water
and wastewater services
› When they do need to contact us,
we provide a helpful service, talking
and listening to customers so we can
understand and meet their expectations
› We maintain bills that are good value for
money through innovation and efficiency
› Where customers are struggling with
affordability and vulnerability, we provide
tailored support through Priority Services
and payment assistance schemes
Long-term
›
Our water and wastewater services make a
major contribution to the long-term health
and wellbeing of customers in our region
Link to strategic themes
Engaging with customers helps us
understand what they value most so that
we can target our services accordingly
›
Through long-term financing and the
regulatory framework, we are delivering
multi-million pound infrastructure projects,
to improve our services and resilience for
the long term. We ensure the cost of this is
shared fairly and affordably between those
that benefit now and in the future
› We focus on earning the trust of customers,
for example by keeping personal details
safe and through transparent reporting,
to ensure they can have complete peace
of mind
By achieving sustainable cost reductions
we can provide an efficient service,
keeping bills low and enabling us to help
vulnerable customers
Customers value a company they can
trust, and they care about protecting
vulnerable people in society. They value
the support we provide through our many
assistance schemes
How we create value for communities
Short-term
› We look after beautiful landscapes and
beaches and open our land to the public,
which supports the regional tourism
industry and gives communities the
health and wellbeing benefits through
access to relaxation and recreation
› We encourage employees to volunteer
on projects that address local issues,
helping to create better places and
stronger communities
› Working in partnership with others
means we can accomplish more
together to tackle mutual issues, such as
partnering to develop employability skills
for those who need it most
Long-term
›
The health and wellbeing benefits
through our provision of access to nature
for recreation and relaxation helps
reduce the burden on health services
› We make a significant contribution to the
regional economy through our activities,
the people we employ, and the money
we spend in our supply chain
› We work with teachers and children to
raise awareness about water and the
natural environment, giving the next
generation an understanding of the true
value water brings and how we can all
play our part in protecting the services
nature provides
Link to strategic themes
Customers live and work in the local
communities we serve and so they value
the work we do to tackle issues together
By operating at the lowest sustainable
cost we are able to continue investing in
local communities for the long term
As they encompass a breadth and depth
of people, communities bring a variety of
views and issues to our attention, helping
us find the most balanced approach in the
best interests of all
Stock Code: UU.
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How we create value for stakeholders
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Employees
How we engage with and are influenced by employees
Our employees are the face of the company and we could not deliver our services without
them. It is essential we build productive relationships based on trust, develop our employees
and keep them engaged and motivated so we can meet the stretching objectives we set
ourselves. Employees know our business better than anyone, with a diverse range of views
and experience, making them well placed to identify opportunities for improvement.
We have a highly engaged workforce who take pride in their work, value opportunities to
learn new skills, and maintain an open and honest dialogue with unions and the business. Line
managers play a vital role in supporting employees, with regular one-to-one meetings, and our
engagement survey regularly scores above the UK norm. Our new ‘employee voice’ will ensure
their perspective is heard by the board. We have employee-led networks such as for gender,
LGBT and disability, and encourage employees to share innovative ideas via many forums.
Top three material issues for employees*
Health, safety and
wellbeing
Diverse and skilled
workforce
Employee relations
Environment
How we engage with and are influenced by the environment
We rely on the environment as one of our key resources so it is important for the sustainability
of our business that we protect and enhance it. For example, climate change will affect how
much water is available and stakeholders are concerned about the resilience of supplies and
look to water companies to adapt and take the necessary steps to reduce flood risk.
Given the environment has no voice of its own, we engage with interested groups such as
environmental regulators, non-governmental organisations, customers and communities.
We conduct facilitated workshops with stakeholders to understand their priorities and have
undertaken a large number of customer research projects. We work with environmental
partners across the North West to identify new ways to deliver improvements, and engage
with several groups to explore opportunities to deliver shared environmental outcomes.
Top three material issues for the environment*
Resilience
Environmental
impacts
Climate change
Suppliers
How we engage with and are influenced by suppliers
As well as employees, we rely on suppliers to deliver our services, and the availability of goods
and services in the market influences our strategy and how we operate. Good relationships
with suppliers help ensure projects are delivered on time, to good quality, at efficient costs,
and can bring innovative approaches and solutions that create shared value.
We engage through supplier workshops, including targeted sessions on innovation, and
suppliers sign up to our sustainable supply chain charter and support the commitments set out
within it, as they recognise the importance of acting responsibly. They often suggest new ways
we can meet some of our own responsible business targets. Feedback from suppliers revealed
it can be difficult to access the company, especially when they have new products and services
that could help us be more efficient and deliver better service. We established our Innovation
Lab to help address this issue.
Read more on page 37
Top three material issues for suppliers*
NW regional
economy
Responsible supply
chain
Human rights
*
Read about how we manage our material issues on page 45
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Strategic themes
Best service to customers
At the lowest sustainable cost
Material issues
External factor
Internal factor
In a responsible manner
Both an external and internal factor
How we create value for employees
Short-term
› We have a strong focus on health, safety
and wellbeing. We firmly believe that
nothing we do is worth getting hurt for,
and we aim to ensure all employees go
home safe and well at the end of the day
› We invest in training and development to
enable our employees to grow their skills
and to help keep them motivated
›
›
Listening to our employees helps create
an engaged workforce, increasing job
satisfaction, and through employee
communications and conferences
we update our people on business
developments so they feel part of a team
Long-term
›
Looking after the health, safety and
wellbeing of our employees in the short
term, by encouraging them to lead fitter
and healthier lives and work in ways
that reduce accidents, creates long-term
health benefits which, in turn, reduces
the burden on healthcare services
Health, safety and wellbeing extends to
mental as well as physical health, and we
promote awareness of stress and other
mental health issues, promoting an all-
round healthy lifestyle in the long term
› We provide pension offerings that help
support employees in later life
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Well-trained, engaged and motivated
employees who take pride in their work
have the ability and drive to deliver the
best service to customers
Encouraging innovative ideas from
employees can lead to cost reductions,
and improving employee satisfaction
reduces turnover which ensures training
and development costs are efficient
We take a responsible approach to
protecting the health, safety and
wellbeing of our employees
How we create value for the environment
Short-term
› We meet increasingly stringent
environmental consent levels, which
help to improve the quality of rivers and
bathing waters and so support tourism in
the region
› We manage our land in a way that
safeguards habitats for indigenous
wildlife, as well as protecting wildlife that
makes its home in rivers and other water
bodies
› We have invested in new infrastructure,
such as our West East Link Main, to allow
us to transfer water around the region
more efficiently to avoid depletion of
individual water sources
Long-term
›
Our investment in renewable energy
generation is reducing our carbon
footprint and contribution to climate
change
› We innovate and invest in new
technologies to solve environmental
challenges for future generations
› We are working on campaigns to educate
the public and younger generations on
water usage to protect this valuable
resource and reduce usage over time
› We plan far ahead to ensure our activities
and investment enhance the long-term
resilience of the environment
Link to strategic themes
Customers care about the environment so
providing the best service to customers
involves protecting the places they live
and love
Many of the ways we protect the
environment also help us reduce cost, for
example renewable energy generation
reduces our energy costs as well as our
carbon footprint
We manage water and wastewater in
a responsible way that protects the
environment and enhances its resilience
How we create value for suppliers
Short-term
› We spend significant amounts with
our suppliers each year to help deliver
maintenance and enhancement projects
across our asset base, and this helps
support thousands of jobs in our region
›
By investing in our infrastructure we are
helping to keep the economy flowing.
We generate jobs through our capital
programme and provide income for
workers in the region
Long-term
›
Supporting jobs through our supply
chain in the short term catalyses the
development of skills and jobs in the
North West, providing a stimulus to
benefit the regional economy in the long
term
›
Working together to develop innovations
and new technologies means we can
identify solutions that will make our
services better in the future
› While our operations and suppliers are
mainly UK and European, they work
closely with us to address human rights,
in particular modern slavery
› We act with integrity, giving suppliers
confidence in the way we do business,
which translates to transparency and
fairness for our suppliers
Link to strategic themes
Working on our behalf, suppliers are a
face for our business. Ensuring they are
motivated to deliver good quality work
is enormously important to us when
delivering the best service to customers
Ensuring our suppliers deliver efficient
cost is integral to delivering a sustainable
low cost for customers, and the shared
value of developing innovations together
with suppliers can assist with this
Working with responsible suppliers helps
us achieve more and succeed together in
tackling environmental and social issues
Stock Code: UU.
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How we create value for stakeholders
Politicians
How we engage with and are influenced by politicians
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Politicians influence the long-term national water strategy and environmental priorities, as
well as other matters that affect how all businesses operate. Engagement with national and
local government, as well as elected representatives and devolved administrations, on topics
of public interest helps us to understand their issues so we can seek solutions to shared
environmental, social, economic and governance issues.
We engage with regional and national politicians in different political parties on topics of
shared interest. We play an active role in trade association Water UK.
Top three material issues for politicians
Political and regulatory
environment
Leakage and water
efficiency
Trust, transparency
and legitimacy
Regulators
How we engage with and are influenced by regulators
Through proactive, constructive engagement with economic, quality and environmental
regulators, we agree to deliver commitments over specified time frames. Read more about
our regulatory environment on page 16. We actively engage to shape the policy and regulatory
framework within which we operate, covering customer, economic, environmental, social
and governance matters. These priorities need to be balanced and viewed over a long-term
horizon and maintaining relationships is key to this. The priorities and objectives of regulators
can change over time so active engagement to provide our perspective around future policy is
important to us.
We hold regular meetings with all our regulators, including working on joint projects such as
Natural Course, which aims to build capacity to protect and improve the North West water
environment.
Read more at naturalcourse.co.uk
Top three material issues for regulators
Political and regulatory
environment
Resilience
Trust, transparency
and legitimacy
Media
How we engage with and are influenced by the media
The media is intrinsically linked with all our other stakeholders, being influenced by the issues
that matter to those stakeholders as well as influencing them through what it reports. It is
through the media, and increasingly its social media platforms, that many of our stakeholders
receive their information about us and our activities.
Given the essential nature of our services, it is important that coverage is fair, balanced
and accurate, and this requires effective two-way dialogue between the company and the
media. This is achieved through proactive engagement by our media team, which is available
24/7, providing content to media outlets, as well as dedicated resources to drive proactive
messaging on social media channels.
Top three material issues for the media
Political and regulatory
environment
Leakage and water
efficiency
Social media
Material issues
External factor
Internal factor
Both an external and internal factor
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Managing our material issues
Our approach to materiality
Understanding what matters most to our
stakeholders is a fundamental part of our
planning and day-to-day service delivery. We
consider these stakeholder priorities alongside
our own assessment of what has the biggest
impact on the company and its ability to
create value, and the output is presented in
the material issues matrix below.
This stakeholder materiality assessment
informs decisions about what we report
in documents such as this Annual Report.
Setting out issues in this way helps ensure
we understand key stakeholder priorities and
consider their interests in strategic decision-
making, helping us create long-term value.
In defining the strategic relevance of an
issue to the company, we have adopted the
integrated reporting framework definition
of materiality, which states: “A matter is
material if it could substantively affect the
organisation’s ability to create value in the
short, medium or long term”. Value, in this
context, may be created internally (for the
company, shareholders and employees) and
there can be external value (for customers,
communities, suppliers and the environment).
Value may also be financial or non-financial.
Our assessment of the level of interest to
stakeholders is based on a balance of views
obtained from customers, shareholders,
regulators, communities, and subject matter
experts from the company on an ongoing
basis, as well as the extensive insights
gathered for the regulatory price review
process.
We have cross-referenced and aligned
these issues with our principal risks and
uncertainties, and our approach was reviewed
by responsible business consultancy Corporate
Citizenship, which commented that “alignment
with UU’s way of creating value gives life and
credibility to the materiality matrix” and this
sends a very distinctive message about our
business model and what we value.
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Material issues matrix
We consolidated feedback from our various stakeholder groups, as detailed above, which resulted in a list of 26 material issues. These issues are
impacted by factors that may be external, internal or both — for example, affordability and vulnerability affects customers due to external social
and economic factors, and the support services we provide those customers with are an internal factor, so this issue is impacted by both. The 26
issues are plotted on the matrix below, from lower to higher in terms of level of interest to stakeholders and how much it can affect our ability to
create value.
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6
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13
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Lower
Higher
Effect on our ability to create value
Based on the poten(cid:415)al e(cid:299)ect on our ability to create value over the short, medium and long term. (cid:115)alue can be created for UU,
shareholders, regulators, employees, the public, and/or the environment. (cid:115)alue can be (cid:302)nancial and non-(cid:302)nancial.
External factors
5
10
12
15
17
21
24
26
Poli(cid:415)cal and regulatory environment
Climate change
Cyber security
NW regional economy
Natural resources
Social media
Land management and access
(cid:44)uman rights
2
9
8
11
Internal factors
Resilience
Financial risk management
Corporate governance and business conduct
Innova(cid:415)on
Data security
Energy use
Responsible supply chain
(cid:44)ealth, safety and wellbeing
Employee rela(cid:415)ons
Community investment
14
16
22
18
25
19
Both external and internal factors
1
3
4
6
7
13
20
23
Trust, transparency and legi(cid:415)macy
Customer service and opera(cid:415)onal performance
Leakage and water e(cid:312)ciency
A(cid:299)ordability and vulnerability
Sewer (cid:327)ooding
Environmental impacts
Compe(cid:415)(cid:415)ve markets
Diverse and skilled workforce
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Read our stakeholder metrics table on
page 55
Read about how the board considers
stakeholders in its decision-making in
our section 172 statement on page 152
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How we create value for stakeholders
UN Sustainable Development Goals
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KEY FACTS
17
global goals adopted
by the United Nations
to be achieved by 2030
5
identified where we
contribute most as a
business
The Sustainable Development Goals (SDGs) are a collection of 17 global goals to be achieved
by the year 2030, and were adopted by a summit of the United Nations (UN) in 2015. They are
designed to be the blueprint to achieve a better and more sustainable future for all, aiming to end
poverty, fight inequality and tackle climate change.
Since they were published, stakeholder interest has increased in the contributions companies are
making to the UN SDGs.
While our work contributes across all of the goals, we have identified five goals that are the most
material to our business and the nature of the essential services that we provide. Our approach
to operating in a responsible manner aligns quite naturally with these goals. We will increasingly
need to work in partnership with all our stakeholders in order to achieve these goals.
The following details show the steps we are taking to meet each of these five SDGs.
Read more at unitedutilities.com/sdgs
Clean water and sanitation – Ensure availability and sustainable management of water and
sanitation for all
This is our core function and the reason we exist – providing safe, resilient and affordable water and wastewater services
to customers across the North West of England.
Part of this goal is about avoiding wasting water, and we promote water efficiency through campaigns, advice, education and
free water-saving gadgets for customers.
We protect and enhance water-related ecosystems across our region.
Decent work and economic growth – Promote sustained, inclusive and sustainable economic
growth, full and productive employment and decent work for all
Our daily operations provide direct and indirect employment for thousands of people, and we are a big contributor to the
North West economy.
We provide training and development opportunities in safe, secure working environments, graduate and apprentice
opportunities, offer equal opportunities to all and value diversity among our employees. Read more on page 98.
Industry, innovation and infrastructure – Build resilient infrastructure, promote inclusive and
sustainable industrialisation and foster innovation
We invest heavily in infrastructure, including £250 million additional investment in 2015–20 to increase our resilience. Read
more about our approach to resilience on pages 50.
Ensuring the region where we operate has reliable, sustainable and resilient infrastructure for the long term requires
innovation to keep pace with an increasingly digital world. Read about our Innovation Lab on page 37.
Sustainable cities and communities – Make cities and human settlements inclusive, safe,
resilient and sustainable
We use our understanding of customer needs and priorities to deliver services that meet their expectations and engage
with communities to enhance participation in what we do. We plan far into the future to prepare for increases in the
population and new housing that will need connections for water and wastewater services.
To find out more about our community activity see
https://www.unitedutilities.com/globalassets/documents/pdf/community-activity-booklet.pdf
Peace, justice and strong institutions – Promote peaceful and inclusive societies for
sustainable development, provide access to justice for all and build effective, accountable
and inclusive institutions at all levels
We run our business with integrity, and this is one of our core values.
We have high levels of transparency in our reporting and ethical standards of business conduct and corporate governance –
those systems and processes through which our organisation is managed, controlled and held accountable.
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Business insight
Collaborating with the community to
improve reservoir safety
Throwlines have been installed around reservoirs across Greater Manchester and
Lancashire and dedicated to the memory of someone who lost their life.
We have 180 reservoirs across the North West, many
in beautiful locations. The land around our reservoirs
is a wonderful natural resource and we want to do
everything possible to encourage people to visit and
enjoy the health and wellbeing benefits of being out
in the countryside.
as part of a special pilot. The throwlines can buy
valuable time and help people keep their head
above the water until firefighters arrive to help.
Each throwline also has an information board with
advice on how to help in an emergency and accurate
location details for the fire and rescue services.
But while reservoirs are wonderful places to visit for
a picnic or walk, they are one of the worst possible
places to take a swim. As well as dangerous hidden
machinery under the surface and no lifeguard on
duty, the water can be deceptively cold. If you jump
in, the chances are you won’t be able to get out. The
water is so cold it can literally take your breath away
and force your body into a spasm known as ‘cold
water shock’.
The scheme has received widespread media coverage
and praise. Water safety campaigner Beckie Ramsay
has been raising awareness of the dangers of open
water swimming following the death of her son,
Dylan, in 2011. She said: “I hope when people see
the throwlines and the dedications written by the
bereaved families it will make them think twice. If it
stops just one youngster taking that chance it will be
a success.”
"Together we've
come up with
a new pilot
scheme which
will help prevent
loss of life."
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Despite our best efforts to raise awareness of the
dangers, there are always a few who will take a
chance. Sadly, in the last two years four people have
lost their lives swimming in reservoirs in the North
West alone.
As a responsible business, we want to do more to
prevent these needless tragedies. That’s why we’ve
been working with bereaved families, water safety
campaigners and representatives from the North
West’s fire and rescue services to identify what can
be done to help reduce the number of drowning
be done to help reduce the number of drowning
be done to help reduce the number of drowning
incidents in the region’s reservoirs.
incidents in the region’s reservoirs.
incidents in the region’s reservoirs.
Together we’ve come up with a new pilot scheme
Together we’ve come up with a new pilot scheme
Together we’ve come up with a new pilot scheme
which will help prevent loss of life. New throwlines
which will help prevent loss of life. New throwlines
which will help prevent loss of life. New throwlines
have been installed at 20 locations around eight
have been installed at 20 locations around eight
have been installed at 20 locations around eight
reservoirs across Greater Manchester and Lancashire
reservoirs across Greater Manchester and Lancashire
reservoirs across Greater Manchester and Lancashire
Mark Hutton, from Lancashire Fire and Rescue
Service, added: “We are really pleased to see a major
utility provider deciding to install water safety boards
and by doing so recognising just how important
they can be in preventing loss of life, both in terms
of the important safety messages they convey, and
also their life-saving function in the event of an
emergency.”
If the throwline pilot scheme is a success we will
consider rolling it out to other reservoir sites around
the North West.
the North West.
the North West.
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Our planning horizons
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Our approach to planning
Our three business areas – wholesale water,
wholesale wastewater, and household retail –
align with the distinct price controls in Ofwat’s
regulatory model. Each area undertakes long,
medium and short-term planning.
Long-term (25+ years) planning identifies
requirements to cope with challenges and
opportunities in line with our strategy. This
influences our medium-term planning, which
sets out how we will deliver the commitments
agreed for each five-year regulatory period.
Short-term (one year) planning enables us to
monitor and measure progress towards those
regulatory commitments. We retain flexibility
in these short-term plans to ensure we meet
those commitments in the most effective and
efficient way as circumstances change.
25+ years – reflecting the long-term nature
of our business, which provides an essential
service to customers,
and helping us to
define what we need
to deliver in each
five-year regulatory
period to ensure
long-term resilience
5 years – reflecting the regulatory review
periods within which our revenue allowances
are set, and helping us move towards
achievement of
our long-term
goals
1 year – reflecting the annual targets we
set to help move us towards achievement
of our five-year goals
Our plans take into account the internal and
external drivers and relationships shown in
our business model, and we consult with and
consider the interests of all our stakeholders.
We continuously assess our performance
against our plans using key performance
indicators (KPIs) and other performance
metrics of interest to our stakeholders.
Read more about how we create value for
stakeholders on pages 39 to 46
Read more about how we measure our
performance on pages 51 to 55
Long-term planning
(25+ years)
In order to maintain a reliable, high-quality
service for customers far into the future, 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.
Over the next 25+ years we will face many
challenges and opportunities, including:
›
›
›
›
Climate change;
Population growth;
The UK’s exit from the European Union;
A more open, competitive market;
› More stringent environmental regulations;
›
›
Developments in technology; and
Combining affordable bills with a modern,
responsive service.
There is a section of our website that deals
with our future plans, where we examine the
challenges ahead and how we will focus our
resources and talents in order to meet them.
Read more online at unitedutilities.com/
corporate/about-us/our-future-plans
This includes our 25-year Water Resources
Management Plan (WRMP). Our current plan
was published in 2015 covering the 2015–40
period, and we consulted with stakeholders
during the year on our new draft WRMP
covering the 2020–45 period. These long-
term plans set out the investment needed to
ensure we have sufficient water to continue
supplying our customers, taking into account
the potential impact of climate change.
We create long-term value for stakeholders by:
›
›
›
›
›
›
Systems Thinking and innovation;
Long-term planning and responding to
challenges and opportunities, including
management of water resources;
Sustainable catchment management;
Disciplined investment, based on a
sustainable whole-life cost modelling
approach, to ensure the resilience of our
assets and network;
Investing in our employees to maintain a
skilled, healthy and motivated workforce;
Close collaboration with suppliers; and
› Maintaining a robust and appropriate mix
of debt and equity financing.
We will extend our integrated
water supply network into
West Cumbria
2020+
2022
2025
We will continue to contribute
to improving bathing water
quality
We will halve the risk of
requiring drought permits to
augment supply
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Medium-term planning
(5 years)
Each five-year business plan aims to help
us work towards our long-term plans and
ultimately to achieve our vision.
We submit a balanced plan to Ofwat in order
to agree a regulatory contract that allows for
the best overall outcomes for our customers,
shareholders and the environment.
Read more about our economic regulation
on page 18
Once each 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.
In the 2015–20 period we are delivering:
The best service to customers
›
Improving customer service further,
fixing issues proactively before they
impact customers, reducing the number
of complaints, and improving our
communication channels
At the lowest sustainable cost
› Minimising our total costs on a sustainable
basis, enhancing debt collection activities
to deliver a more efficient retail service,
raising low-cost finance and managing
financial risk to reduce volatility
In a responsible manner
› Meeting regulatory commitments to
protect and enhance the environment,
increasing our renewable energy
generation to reduce our carbon footprint,
and providing the best support for
vulnerable customers
Wholesale water
Our wholesale water team are:
› Maintaining high levels of reliability and
water quality, and reducing the number
of times customers need to contact us;
› Making better use of technology for
remote monitoring and control of assets;
› Maintaining leakage at or below the
sustainable economic level;
Wholesale wastewater
Our wholesale wastewater team are:
› Making better use of technology,
automation and control to drive better
customer service at lower costs;
›
›
Reducing the number of customers’
properties exposed to sewer flooding,
working in partnerships to deliver cost-
effective schemes and promoting the use
of more sustainable drainage systems;
Improving bathing water quality and
working with other organisations
Household retail
Our household retail team are:
›
›
Continuing to improve the customer
experience by being more proactive,
anticipating problems before they
materialise, and improving our
communication channels in line with
customer preference;
Further reducing the number of customer
complaints, and resolving them whenever
we can to avoid the need for referral to
the Consumer Council for Water;
›
›
›
›
›
›
›
›
Limiting the customer impact of
increases in operating costs, such as
chemicals and rates, by making cost
savings elsewhere through continuous
improvement in operational efficiency;
and
Linking 150,000 customers in West
Cumbria to Thirlmere reservoir to protect
sensitive ecology in their previous water
source and ensure a long-term, reliable
supply of drinking water.
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to support them in delivering
improvements to our region’s beaches;
Improving water quality in rivers and
lakes and engaging with others in our
innovative catchment management
approach;
Increasing the production of renewable
energy from waste; and
Constraining the costs of taking
responsibility for all private sewers and
private pumping stations in the region.
Reducing the debt burden for customers
and the company by engaging with those
who are struggling to pay, helping them
return to sustained payment behaviour;
Expanding our assistance offerings,
including the social tariff, and contributing
to our trust fund, ‘Restart’, which has
proven effective in helping customers in
difficulty return to regular payment; and
Reducing the cost to serve our
customers.
Our plans for the 2020–25 period are set out in our business plan submission.
Read more on pages 19 to 23
We will work to enable future
national water trading
75
We will install additional water
meters to achieve coverage of
around 75 per cent of households
2025+
2030
2045
We will work with others to
achieve ‘Blue Flag’ beaches
along our coastline
Stock Code: UU.
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Our planning horizons
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Short-term planning
(1 year)
Short-term planning helps us work towards
our medium and long-term goals and is
important to monitor and assess our progress
against these. This approach helps us ensure
the long-term resilience and sustainability of
our business through short and medium-term
goals that we can monitor and measure our
progress against.
Before the start of each financial year, we
develop a business plan for that year, which is
reviewed and approved by the board. This sets
our annual targets, which are designed to help
deliver further improvements in service delivery
and efficiency, and to help move us towards
achievement of the five-year goals.
Performance against these annual targets
determines annual bonuses for executive
directors and employees right through the
organisation. To avoid short-term decision-
making and ensure management is focused on
the long-term performance of the company,
as well as these annual targets executive
directors are also assessed against three-year
performance, covering total shareholder return,
sustainable dividends and customer service,
through long-term incentive plans. Details of
the 2018/19 annual bonus and vested long-
term incentive plans for our executive directors
are shown on pages 132 and 135.
The executive directors hold quarterly business
review meetings with senior managers across
the business to monitor and assess our
performance against our annual targets, helping
to ensure that we are on track to deliver our
targets for the year, and longer term.
It is vital that we retain flexibility within this
short-term planning so we can adapt to meet
challenges that may arise during each year,
and deliver high-quality and resilient services
to customers in the most effective and cost-
efficient way possible.
This may involve bringing enhancements
forward to deliver improvements for
customers early, investing further into the
business to maintain service or delaying
projects to occur later in the regulatory period
in order to prioritise expenditure and allow
our people to spend their time dealing with
any unexpected challenges that arise.
For example, during 2018/19 we needed to
allocate additional resources to deal with
the impact of extreme weather events. We
entered the year having experienced a deep
freeze followed by a rapid thaw, which had an
impact on our levels of leakage, and it was not
long before we entered a period of intense
hot, dry weather that depleted reservoir levels
and saw a surge in water demand.
In response, we substantially increased our
leak detection teams and allocated resources
to bring additional water resources into
operation and increase pumping around the
region to balance risk and support the worst
affected areas. This resulted in us needing to
commit to additional expenditure, as detailed
on page 62, but was managed in a way that
maintained service for customers and we
successfully met our leakage target for the
year despite these challenges.
Our approach to resilience
As detailed on page 21, in its initial assessment
of our business plan for 2020–25, Ofwat
commended our approach to resilience as
sector-leading and said we set the standard for
other companies to aspire to.
Operational resilience
The main risks to the resilience of our
operational assets are the potential for failure
of ageing infrastructure and the challenges
presented by predictions for climate change
and population growth.
Innovation is a critical enabler for resilience,
and our Systems Thinking approach gives us
an advantage. Sensors across our network
and remote monitoring and control from the
Integrated Control Centre at head office allows
us to spot issues and respond proactively
before customers are impacted and/or the
issue becomes more serious. For example,
spotting changes in pressure in the network to
identify issues so that we can send a team out
to repair them before customers are affected.
As well as our use of innovation, we have
enhanced our approach to resilience through
lessons learned from previous events.
We introduced new incident management
procedures with detailed contingency plans
and a director-led incident review board in
response to events in 2015 and 2016. This was
instrumental in the way we coped with extreme
weather events in 2018, including both the
freeze-thaw and the hot, dry summer.
Read more about how we responded to the
challenges of climate-change on page 30
Another development in our approach as a
result of lessons learned was the introduction of
Priority Services, which offers tailored support
to the more vulnerable members of society in
emergencies.
Our business plan submission for 2020–25
contains proposals to address our biggest
operational asset risk, the Haweswater
Aqueduct that transports water from the Lake
District to Greater Manchester. Read more on
page 21.
Our draft 2019 Water Resources Management
Plan considered a range of future challenges,
including:
›
›
›
Extreme drought, freeze-thaw, and
flooding;
Climate change (100 scenarios under the
latest UK climate projections at the time
of creating the plan, UKCP09); and
Demand (population growth, economic
trends and patterns of water use).
We assessed risks over the 2020–45 planning
period and looked beyond this into the 2080s.
We published two adaptation reports, in
2011 and 2015, which outline our holistic,
integrated and partnership approach to a
range of short and long-term challenges,
including a changing climate.
Read more online at unitedutilities.com/
corporate/responsibility/environment/
climate-change/
Skills resilience
We have some key highly skilled roles, and
our talent succession pipeline is critical to the
seamless transfer of skills from one generation
of employees to another.
We have active graduate and apprenticeship
programmes, we have partnered with Teach
First, and we are an active participant in the
STEM (science, technology, engineering and
mathematics) programme encouraging the
younger generation to study and pursue
careers in these fields.
Corporate and financial
resilience
As a public listed company, we consistently
adhere to the highest levels of governance,
accountability and transparency.
Long-term financial resilience starts with
a strong and robust balance sheet and a
prudent risk management approach, and we
believe we are at the frontier in this respect.
We have maintained a responsible level of
gearing and well-controlled pension position
for many years, and our prudent financial
risk management is one of our competitive
advantages.
Read more about our competitive advantages
on page 17
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How we measure our performance
Key performance indicators and other stakeholder metrics
We have a range of key performance indicators (KPIs) encompassing the important
areas of customer service and environmental performance, as well as financial
indicators. Our operational KPIs are aligned with our strategic themes, and our
financial KPIs assess both the profitability and sustainability of our business.
Further detail on our performance against our regulatory commitments is published in July of each year in our Annual Performance Report.
In addition to our KPIs and regulatory commitments, we monitor our performance against an assortment of metrics that are of interest to our many
stakeholders, and report against these within this report and on our corporate website.
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Our key performance
indicators (KPIs)
To help measure progress on how well we
are delivering the outcomes described in our
business model and adding value for all our
stakeholders, we focus on a range of financial
and operational KPIs. Our executive bonuses
and long-term incentives are closely aligned
to our financial and operational performance
KPIs, as highlighted in the remuneration report
on page 123.
We set operational KPIs for the five-year
regulatory period. These align with our three
strategic themes, and reflect the outcomes we
have committed to deliver for customers and
other stakeholders, including the environment.
A description of these operational KPIs, our
targets for each, and our performance against
these targets can be seen on the following
pages. These operational KPIs remain
consistent with last year.
We set financial KPIs that assess both the
profitability and sustainability of our business
from a financial perspective. A description of
these financial KPIs and our performance against
these targets can be seen on page 54. We set
internal budgets for financial KPIs but we do not
have externally declared targets for these.
This year we have changed one of our financial
KPIs. We have removed revenue from the list,
recognising that the movements in revenue
are dependent on the regulatory mechanism
rather than management control, and replaced
this with total shareholder return, a measure
of movements in the share price plus dividends
over the year, which is more important for
shareholders. This measure is used for our
executive remuneration through the long-term
plan, although the time frame of calculation
and comparators are different for the one-year
KPI and the three-year incentive plan.
Annual Performance
Report (APR)
Performance against our regulatory contract
is monitored and assessed each year, and
reported within an Annual Performance
Report (APR). This has been a requirement
from Ofwat for all water companies since
the start of the current regulatory period in
financial year 2015/16, when this replaced the
previous ‘regulatory accounts’.
The majority of our operational KPIs relate to
this regulatory performance on a high level,
and it is within the APR that more detail can
be found on the components within these
measures, as well as narrative detail about our
performance during the year.
There is also financial information contained
within the APR. This relates only to the
regulated company and its appointed
activities, and is calculated and prepared in
accordance with the regulatory accounting
framework, which differs from IFRS reporting;
however, a reconciliation to IFRS reporting
is provided in our APR. For the purposes of
clarification, our financial KPIs relate to our
performance at the group level, and are
calculated in line with the definitions given in
this report.
Our APRs for previous years are available on
our external website, and the APR for 2018/19
will be published in July 2019.
Read more online at unitedutilities.com/
corporate/about-us/performance
Other performance
indicators
Our KPIs provide a snapshot of our
performance across a variety of areas, but
these are by no means the only metrics by
which we monitor and assess our performance
on a regular basis, and we report against other
metrics both internally and externally.
As discussed on pages 39 to 45, we engage
with a variety of stakeholders and this gives
us a view of what matters most to them. We
report on a selection of other stakeholder
metrics on page 55 of this report, based on
the measures shown to be of highest interest
to our stakeholders.
For example, on customer service our KPIs
are Ofwat’s measures, the qualitative and
quantitative Service Incentive Mechanism
(SIM), but our stakeholder metrics table also
reports on the level of customer complaints,
use of digital communication channels,
customers helped through assistance schemes,
and the impact of water efficiency measures.
On environmental performance, our KPIs
include performance against our leakage
target and the overall assessments by
the Environment Agency and Dow Jones
Sustainability Index, but our stakeholder
metrics table also reports on more specific
environmental performance indicators, such
as carbon footprint, proportion of waste going
to beneficial use rather than landfill, and
measures of natural capital.
We also regularly report on numerous
corporate responsibility performance
measures on our external website.
Read more online at unitedutilities.com/
corporate/responsibility/our-approach/cr-
performance
Stock Code: UU.
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How we measure our performance
Our operational KPIs
The best service
to customers
Wholesale outcome delivery
incentive (ODI) composite
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Definition
Net reward/(penalty) accrued across United Utilities’ 19 wholesale
financial ODIs, more detail of which can be found in our Annual
Performance Report.
Target
End the 2015–20 regulatory
period with around £30 million
cumulative net ODI reward.
Performance
2018/19: £19.2 million reward
(cumulative £21.4 million
reward)
Link to bonus/LTP
Bonus – direct
LTP – indirect
Status
Achieved/confident
of achieving target
2017/18: £7.0 million penalty
(cumulative £2.2 million reward)
2016/17: £6.7 million reward
(cumulative £9.2 million reward)
2015/16: £2.5 million reward
At the lowest
sustainable cost
Total expenditure (totex)
outperformance
In a responsible
manner
Definition
Progress to date on delivering our promises to customers within the
cumulative 2015–20 wholesale totex final determination allowance.
Performance
2015–20: Confident of
outperforming the final
determination allowance by
£100 million over the 2015–20
regulatory period
Totex was a new measure for
the 2015–20 period, hence no
prior years’ comparators
Target
To outperform Ofwat’s final
determination totex allowance
by £100 million over the
2015–20 regulatory period.
Link to bonus/LTP
Bonus – indirect
LTP – indirect
Status
Achieved/confident of
achieving target
Leakage –
average annual leakage
Definition
Average annual water leakage from our network quantified in
megalitres (Ml) per day.
Target
To meet our regulatory leakage
target of 462.65 Ml per day
for each year in the 2015–20
regulatory period, as set by
Ofwat.
Performance *
2018/19: Met target
2017/18: Met target
2016/17: Met target
2015/16: Met target
2014/15: Met target
Link to bonus/LTP
Bonus – indirect
Status
Achieved/confident
of achieving target
* Final figure for leakage will be
reported in our Annual Performance
Report, available on our website in July
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Service incentive mechanism (SIM) –
qualitative
Service incentive mechanism (SIM) –
quantitative
Definition
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 best attainable score.
Definition
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.
Target
To move towards the upper
quartile in the medium term.
Link to bonus/LTP
Bonus – direct
LTP – direct
Status
2018/19
Achieved/confident
of achieving target
4.53
Performance
2018/19
4.53
c tor
c tor
Target
w or st
To move towards the upper
e st
quartile in the medium term.
Performance *
2018/19
70
c tor
c tor
w or st
e st
Link to bonus/LTP
Bonus – direct
LTP – direct
Status
2018/19
Achieved/confident
of achieving target
70
c tor
c tor
w or st
e st
* Sector best and worst figures for
quantitative SIM are not yet available
for 2018/19
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w or st
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Financing
outperformance
Household retail
cost to serve
Definition
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.
Target
To beat Ofwat’s industry allowed
cost of debt.
Performance
2015–20: On track to beat
Ofwat allowance
Link to bonus/LTP
LTP – indirect
Status
Achieved/confident
of achieving target
2010–15: Exceeded our £300
million target outperformance
Definition
Cost to serve in our household retail business compared with Ofwat’s
revenue allowance (including margin).
Target
To minimise costs compared
with Ofwat’s revenue allowance.
Performance
2018/19: £5 million
outperformance
Link to bonus/LTP
Bonus – indirect
LTP – indirect
Status
Achieved/confident
of achieving target
2017/18: £9 million
outperformance
2016/17: £14 million
outperformance
2015/16: £10 million
outperformance
Environment Agency
performance assessment
Dow Jones
Sustainability Index rating
Definition
Composite assessment produced by the Environment Agency,
measuring the absolute and relative performance of the 10 water
and wastewater companies across a broad range of areas, including
pollution.
Target
To be a first quartile performer
(i.e. at least 4th) on a consistent
basis.
Link to bonus/LTP
Bonus – indirect
Status
Achieved/confident
of achieving target
Performance*
2017: Joint 1st
2016: Joint 1st
2015: Joint 2nd
2014: 2nd
2013: 2nd
* Assessment for the 2017 calendar
year was published in July 2018 and
is the most recent available.
Definition
Independent rating awarded using sustainability metrics covering
economic, environmental, social and governance performance.
Target
To retain ‘World Class’ rating
each year
Status
Achieved/confident
of achieving target
Performance
2018/19: ‘World Class’
2017/18: ‘World Class’
2016/17: ‘World Class’
2015/16: ‘World Class’
2014/15: ‘World Class’
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2
0
1
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/
1
8
4
.
4
9
2
0
1
6
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1
7
4
.
4
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4
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7
2
0
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1
6
4
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4
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5
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0
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How we measure our performance
Our financial KPIs
Underlying operating profit
Underlying earnings per share
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Definition
The underlying operating profit measure excludes from the reported
operating profit any restructuring costs and significant non-recurring
items. The group determines adjusted items consistently 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 66 to 67.
Link to bonus/LTP
Bonus – direct
LTP – indirect
Status
Close to achieving target
but more work to be done
Performance
2018/19
2017/18
2016/17
2015/16
2014/15
£685m
£645m
£623m
£604m
£664m
Definition
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 issue during the year. Underlying net finance
expense makes consistent 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 66 to 67.
Link to bonus/LTP
LTP – indirect
Status
Achieved/confident
of achieving target
Performance
2018/19
2017/18
2016/17
2015/16
2014/15
55.5p
44.7p
46.0p
47.7p
51.9p
Dividend per share
Gearing: net debt to RCV
Definition
This measure divides total dividends declared by the average
number of shares in issue during the year.
Link to bonus/LTP
LTP – direct
Status
Achieved/confident
of achieving target
Performance
2018/19
2017/18
2016/17
2015/16
2014/15
Definition
Group net debt (including derivatives) divided by UUW’s regulatory
capital value (RCV). From 2016/17 onwards this uses shadow RCV,
adjusted for actual spend, while prior years used Ofwat’s published
RCV in out-turn prices as per previous methodology.
41.28p
39.73p
38.87p
38.45p
37.70p
Target
Maintain gearing within a range
of 55 per cent to 65 per cent.
Status
Achieved/confident
of achieving target
Performance
2018/19
2017/18
2016/17
2015/16
2014/15
61%
61%
61%
61%
59%
Total shareholder return
Definition
This measure calculates the return to shareholders based on the
movement in the share price plus dividends over each financial year.
Link to bonus/LTP
LTP – direct
Status
Close to achieving target
but more work to be done
Performance
2018/19
2017/18
2016/17
2015/16
2014/15
75%
102%
120%
119%
121%
Note 1: For both our Operational and Financial KPIs, where we have declared external
targets we assess our performance against the most recent public targets. Where there
are no externally declared targets we assess our performance against our internal
budget; however, our internal budget is not disclosed. Green status indicates that we
have achieved or are confident of achieving our target. Amber status indicates that we
are close to achieving our target but there remains some work to be done. Red status
indicates that we are missing our target.
Note 2: 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 116 to 143.
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Stakeholder metrics table
We have a wide range of stakeholders who take an interest in the way we do business. The following table provides a broad set of performance
measures covering Environmental, Social and Governance issues that are of interest to our stakeholders. Further information on how we manage our
business in a responsible manner can be found in the responsibility pages of our corporate website.
Theme
Shareholders
Area
Compliance
Customers
Complaints
Fines
Digital
Customer assistance
Customer water
efficiency
Carbon and energy
Environment
Waste
Leakage
Fines
Natural capital
Employees
Employee engagement
Workforce profile
Gender pay reporting
Measure
2016 UK Corporate Governance Code
Dow Jones Sustainability Indices
Total number of domestic customer
complaints
Average speed of complaint resolution
Drinking Water Inspectorate (DWI) fines
Number of customers using online
services – My Account
Number of customers assisted by Priority
Services
Total customer water savings from
measures promoted by United Utilities
Carbon footprint
Energy used
Total waste
Waste to beneficial use
Total leakage at or below target of
462.65 Ml/d
Number of incidents resulting in fines
Enforcement undertakings
Number of trees planted on catchment
land
No net loss of biodiversity across capital
programme
Overall employee engagement
Percentage of employees with trade union
membership*
Further information
Data
metric
Compliant Directors’ report – statutory and other information
Our performance - in a responsible manner section
World
Index
7,007
Our performance - best service to customers section
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t
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3 days
2
(£150,000
and
£50,000)
860,648
Our performance - best service to customers section
Related to two drinking water incidents at Sweetloves
water treatment works in 2015
Our performance - best service to customers section
74,505
Our performance - best service to customers section
4.43 Ml/d Our key resources section
Directors' report – energy and carbon
167,856
tCO2e
976 GWh Directors' report – energy and carbon
694,846
tonnes
96%
Met target Annual Performance Report published in July
Responsibility pages of our website
Responsibility pages of our website
0
5
(£1.5m)
27,190
Our performance - in a responsible manner section
Our performance - in a responsible manner section
Responsibility pages of our website
100%
Responsibility pages of our website
81%
45%
Our performance - in a responsible manner section
Our key resources section
83% White 2% BAME 15% Non-disclosed 65% Male 35% Female <1% Disability (including long-term
health conditions)
Mean gender pay gap
Median gender pay gap
13.1%
15.3%
3.57 days Our performance - in a responsible manner section
Gender Pay Report on our website
Gender Pay Report on our website
0.152
Health and safety
Payment statistics
Employee development Average number of days of training per
FTE per year
Employee Accident Frequency Rate
(per 100,000 hours)
Contractor Accident Frequency Rate
(per 100,000 hours)
Average time taken to pay invoices
Suppliers paid on time
Match funding to charity through
employee efforts
How investment was made:
Cash £2,717,856 Time £52,409 Management costs £161,214 Total £2,931,479
Type of support:
Charitable gift £159,545 Community investment £2,610,719 Commercial initiative £0
Responsibility pages of our website
Suppliers pages of our website
Suppliers pages of our website
Responsibility pages of our website
Employee volunteering Number of hours’ employee volunteering 2,620
Community investment
(LBG data)
25 days
98.57%
£157,046
Charity
0.092
Our performance - in a responsible manner section
Our performance - in a responsible manner section
Suppliers
Communities
*Based on employees who pay their union subscriptions via their payroll.
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Our performance in 2018/19
Operational performance
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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 regulatory period with a reduction
of over 70 per cent in the overall number of
customer complaints.
We have continued to improve at a faster
rate than the industry average in AMP6,
positioning us as one of the leading water and
wastewater companies. This year, we have
again gone from strength to strength in our
customer satisfaction performance, achieving
our highest ever scores against Ofwat’s
qualitative Service Incentive Mechanism
(SIM) measure and finishing fourth out of the
water and wastewater companies for the year
overall. This performance is mirrored in the
number of complaints that we receive. Since
2015/16 we have seen a 30 per cent reduction
in complaints and a 64 per cent reduction in
repeat complaints.
During AMP6, we have developed new
services that increase the speed and quality
of the customer service we provide. These
include a new system that enables us to
proactively keep customers informed of events
on our network, increasing the hours we are
available for customers to contact us, and
increasing the channels by which they can
contact us so they do not always need to call.
We have driven an increase in digital
engagement through a new customer-centric
website, the introduction of an easy-to-use
mobile app and a substantially enhanced
social media presence on commonly used
platforms such as Facebook and Twitter. In
support of our most vulnerable customers we
launched our Priority Services proposition,
setting up dedicated teams for those that
need it most. In January, we hosted the second
North West Affordability Summit, engaging
with customers and key stakeholders.
We have received external recognition for the
improvements made in the quality of service
we deliver to customers. We are the first water
company to receive Shaw Trust Accessibility
status for our website, we received the Service
Mark with Distinction from the Institute of
Customer Service and we won three gold
awards at the UK Complaint Handling Awards.
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 three times per year. This
covers key attributes such as reputation,
trustworthiness and customer service and in
the most recent survey, we have been ranked
first for being environmentally responsible.
We are behind only Marks & Spencer and Aldi,
and ahead of seven other major organisations
across utilities, telecoms, media and banking.
Overall, performance was again good against
our wastewater measures, and significantly
improved against our water measures with a
net reward achieved in both areas.
Robust water supply – 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 with an improvement
in our water quality service index compared
with the prior year. It is tracking above our
historical average with plans in place to
deliver further improvements going forward.
We have delivered a reliable water service
and although we inevitably experience some
water no-supply incidents, our Systems
Thinking approach is helping us to reduce
the frequency and severity of such events
and respond to them in a way that minimises
customer impact.
During 2018/19, the UK experienced
unprecedented extremes of weather
beginning with a deep freeze and rapid
thaw followed by the driest summer for
our region since modern records began.
Thanks to interventions that we were able
to make, alongside the support of customers
and regulators, we were able to minimise
the impact of these events and maintain
unrestricted service to customers.
Reducing sewer flooding – we have continued
to invest heavily in schemes, projects and
programmes of work designed to reduce
the risk of flooding of customers’ homes,
including incidence-based targeting on areas
more likely to experience flooding and defect
identification through CCTV sewer surveys
and other innovative technologies. Our plan
for the 2015–20 regulatory period includes a
target of reducing sewer flooding incidents
by over 40 per cent, in line with customers’
affordability preferences, and we are making
good progress. We achieved our best ever five-
year performance on our repeat flooding and
internal operational flooding measures.
Our wastewater network will continue to
benefit from significant investment going
forward and we will continue to seek to work
in collaboration with other external flood
authorities and associated partners to address
the widespread flooding events that hit our
region, as we aim to help mitigate the effect of
changing weather patterns likely to result from
climate change.
Key performance indicators:
› Outcome delivery incentives (ODIs)
We have 19 wholesale financial ODIs, of
which ten provide the potential to earn a
reward in the 2015–20 regulatory period. In
2018/19 we have delivered our best annual
performance against ODIs resulting in a net
reward of £19.2 million, reflecting great
operational performance across the board.
We are pleased with our cumulative
performance over the first four years of
the current regulatory period, which have
resulted in a net reward of £21.4 million,
exceeding our initial expectations. WhilE a
number of our ODI measures are susceptible
to one-off events and, on the whole, our ODI
targets get tougher each year, our strong
performance to date coupled with continued
targeted investment, alongside our Systems
Thinking and innovative approach to the way
we operate, gives us confidence that we will
achieve a cumulative net ODI outcome over
the 2015-20 regulatory period of around
£30 million.
Our main areas of reward to date have
come through our performance in the areas
of private sewers, pollution and leakage.
Our main penalty has been on reliable
water service and water quality service,
although particularly pleasing this year was
a significantly improved performance against
our reliable water service index where we are
seeing the benefit of our targeted investment
and Systems Thinking approach.
›
Service incentive mechanism (SIM)
We have previously 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 over AMP6,
ending the four-year period to 2018/19
in fourth place overall for the water and
wastewater companies. This means we should
be eligible for a reward of around £16 million
assuming that Ofwat applies the same
methodology as at PR14.
Qualitative: Ofwat has undertaken the four
surveys for 2018/19 and we have improved
our score to 4.53 points, compared with 4.49
points in 2017/18, putting us in fifth position
for the year out of the 18 water companies,
and fourth position out of the 11 companies
providing both water and wastewater services.
In particular, customers scored us highly for
our billing services.
Quantitative: the quantitative assessment
measures customer contacts, and
performance is assessed on both an absolute
and relative basis. WhilE relative performance
can only be assessed in full following the
end of each financial year when the other
companies publish their respective results, on
absolute performance for 2018/19, our score
of 70 points represents a further improvement
on our 2017/18 score of 71 points. For the first
nine months of the year, of the companies that
share data on quantitative SIM, we were first
of the seven water and wastewater companies
and fourth of the 11 water companies.
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Business insight
Working together to support those in need
North West Hardship Hub gives advisers one-stop-shop for local assistance schemes
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With recent reports showing household debt is
pushing millions of UK families into the red, we
met with organisations who deal with customers in
challenging circumstances to discuss what more can
be done to support those struggling financially. We
believe that a collaborative regional partnership can go
way beyond what any one organisation can do alone.
In 2018 and 2019, we held Affordability Summits on
‘Blue Monday’ in January, which is typically the most
financially depressing calendar date of the year. These
events were attended by over 100 representatives from
across the North West, including debt advice charities,
food banks, credit unions and housing associations.
At this year’s Affordability Summit, which was held
in Manchester and opened by the Mayor of Greater
Manchester, we launched the North West financial
Hardship Hub. This is a valuable new resource for the
money advice community in our region and the first
of its kind in the country.
The Hardship Hub is simple to use and has been
developed in conjunction with experts including
Citizens Advice and housing associations. It has been
dubbed a ‘TripAdvisor’ for financial advice, and
advisers can use it to search for all the available help
in their local area and can also rate schemes and
recommend them to colleagues.
Providing support for customers in vulnerable
circumstances is more important than ever and, as a
responsible business, we have a duty to continually
responsible business, we have a duty to continually
responsible business, we have a duty to continually
strive to improve our services in order to help those
who need it most.
Some customers need additional support at times.
This could be due to age, ill health, disability, mental
health problems, financial worries or language
barriers. Our Priority Services scheme allows us to
respond quickly and considerately to their particular
needs. Priority Services free benefits are available to
all eligible customers living in the North West.
At present, Priority Services are provided by both
water and energy companies across the UK, and from
April 2020 a joint water and energy sector project
will align all existing Priority Services arrangements
in the two sectors so that customers benefit from
consistent support without needing to register with
each of their utility providers separately.
In 2018 we became the first water company to share
consented Priority Services data with the energy
sector, and successfully completed a pilot with
Electricity North West that tested single registration,
as well as the legal and operational principles that
support the joint UK project. This successful trial
will continue up to commencement of the joint UK
project in 2020.
Read more about all the financial assistance we
provide at unitedutilities.com/difficulty-paying-bill
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Key performance indicators:
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Total expenditure (totex) performance
Our totex allowance for the 2015–2020
regulatory period represented a significant
challenge compared with the costs we
originally submitted as part of our business
plan. We have not only closed the gap
to our allowance but we are now also
confident of outperforming that allowance by
£100 million. This has been achieved through
a combination of driving efficiency into our
capital programme and also through Systems
Thinking.
›
Financing outperformance
The low cost of debt we have already locked
in places United Utilities in a strong position
to deliver significant outperformance for the
2015–20 regulatory period compared with the
industry allowed cost.
›
Household retail cost to serve
We continue to deliver against a challenging
benchmark set for AMP6. Our target is
to minimise our costs compared with our
revenue allowance and we have delivered a
good performance in 2018/19, outperforming
this year’s revenue allowance (including
margin) by around £5 million. By 2020, we
are forecasting a cost to serve in line with
the regulatory cost allowance and we are
confident that our cost plans will move us
towards upper quartile performance in AMP7.
Our performance in 2018/19
Operational performance
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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 £59 million in the first
four years of the 2015–20 regulatory 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 have improved our
predictive modelling and forecasting through
better use of sensors in our network and
better analysis of other data, such as weather
forecasting, enabling us to address more asset
and network problems before they affect
customers. This reduces the level of reactive
work and improves 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. We now have over 100,000
customers on affordability schemes, almost
double the commitment we made at the
start of AMP6. Notwithstanding our industry-
leading debt management processes,
deprivation remains the principal driver of our
higher than average bad debt and we expect
this to continue to be a challenging area for us.
Reflecting our ongoing focus on bad debt
through initiatives such as our affordability
schemes, our household bad debt expense has
reduced to 2.1 per cent of revenue from 2.3
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 £484 million as at 31 March
2019, compared with a surplus of £344 million
as at 31 March 2018. Further details of the
group’s pension provision are provided in the
pensions section on pages 197 to 201.
From 1 April 2018, the majority of active
members in the defined benefit sections of
the United Utilities Pension Scheme (UUPS)
transitioned to a hybrid section comprising a
capped defined benefit element and a top-up
defined contribution component. Pension
benefits under the defined benefit element
of the new UUPS hybrid section that became
effective for pensionable service from 1 April
2018 are linked to CPI rather than RPI.
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 around £3.9 billion. We are involving our
partners much earlier in project definition and
packaging projects by type, geography and
timing in order to deliver efficiencies. Projects
are allocated on an incentive or competitive
basis leading to our partners presenting a
range of solutions, innovations and pricing.
We have accelerated our 2015–20 investment
programme in order to improve services for
customers and deliver early operational and
environmental benefits. Regulatory capital
investment in 2018/19 was £821 million.
This includes £165 million of underlying
IRE, £40 million additional capex and IRE
associated with the dry weather in the
summer of 2018 and £60 million of additional
investment made available through sharing
our net outperformance. This, combined with
£2.4 billion invested in the first three years
of the regulatory period, brings our total
spend to around £3.2 billion of our expected
£3.9 billion capital investment across the
2015–20 regulatory period.
We are also driving more effective and
efficient delivery of our capital programme
and applying a tougher measurement
mechanism to our Time: Cost: Quality index
(TCQi) score for this regulatory period. Despite
this tougher approach, our TCQi score remains
high at 95 per cent, representing very good
performance.
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Business insight
Pioneering UV LED treatment technology
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the benefit of
the global water
industry”
Game-changing innovation for water and wastewater treatment
We have been working with Typhon Treatment
Systems on a game-changing innovation for water
and wastewater treatment since 2015. In the last
year we have supported their technology to develop
it at a faster pace and move it out of the laboratory
and into a commercial product.
Typhon, a start-up business based in Penrith, has
developed a UV LED water treatment reactor
that significantly reduces the power and chemical
consumption of traditional water treatment
techniques – non-LED UV light disinfection and
activated carbon – which have been the mainstay of
water and wastewater treatment processes for the
last 20 years.
UV light is used to protect the water we use
from dangerous microscopic organisms and
hazardous chemical pollutants such as pesticides or
pharmaceuticals. Activated carbon is used for issues
that can lead to taste and smell problems in water
treatment. While both technologies are reliable
and scalable, they are difficult to control and can be
extremely costly for customers, as they have high
energy needs and carbon emissions.
We started working with Typhon to accelerate the
development of the technology by building and
providing access to a test facility on a live operational
site, giving them access to our expert asset
management, engineering, scientific and innovation
skills and supplying equipment and services to allow
the field testing to be carried out in the most efficient
manner possible. The aim of the trial was to prove
whether energy-efficient LED bulbs could be used for
UV treatment and whether these would outperform
traditional solutions.
Our work with Typhon enabled them to take a theory
and apply it across two trials over a 12-month period,
which is significantly faster than traditional water
sector technology development. The trials proved the
viability of the UV LED rig for advanced oxidation to
remove taste and smell compounds as an alternative
to conventional treatment processes.
Now proven for water treatment, we are working
hard to find the best site for our first full-scale
implementation – and encouraged to work with
Typhon to further develop and apply this technology
into wastewater applications. The Typhon system
uses smart computing to optimise the system locally.
Our Systems Thinking vision is to have all our Typhon
installations remotely monitored, controlled and
optimised.
Working together, United Utilities and Typhon
accelerated the technological development of LED
UV systems for municipal scale applications and
delivered the world’s first validated LED UV system.
We firmly believe in this technology and our
collaboration has helped prove its viability for the
benefit of the global water industry.
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Our performance in 2018/19
Operational performance
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In a responsible manner
Behaving 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, social
and governance performance across a broad
front has received external recognition.
Earlier in the 2018/19 financial year, United
Utilities retained a World Class rating in the
Dow Jones Sustainability Index for the 11th
consecutive year, again achieving industry-
leading performance status in the multi-utility/
water sector. We look at our performance
across a range of other Environmental, Social
and Governance (ESG) indices, where we also
perform well.
Leakage – we have continued our strong
operational focus on leakage, alongside our
network resilience improvements and a
range of initiatives such as active pressure
management, satellite technology and the
UK’s first leakage sniffer dogs, specially trained
to pinpoint the exact location of leaks.
One of the consequences of the extreme
weather events that we faced during 2018/19
was an increased level of pipe movements
in the ground. We significantly increased our
leakage detection and repair efforts in order
to combat the higher levels of background
leakage that resulted from this. This has
delivered good performance against our
leakage targets in what has been a very
challenging year.
Additionally, we continue to encourage
customers to save water through water
efficiency programmes as this not only enables
them to help preserve this precious resource
but can also save money on their water bill.
We are particularly grateful for customer
support in protecting our water resources
through the dry weather period.
Environmental performance – this is a high
priority for United Utilities and we were
delighted to have retained our Industry
Leading Company status in the Environment
Agency’s latest performance metrics, as
described in the KPIs section below. This is a
result of our approach to managing our assets
in an integrated way to minimise the number
of environmental incidents.
Carbon footprint – by 2020, we aim to reduce
our carbon footprint by 50 per cent compared
with a 2005/06 baseline. This year our carbon
footprint has reduced to 167,856 tonnes of
carbon dioxide equivalent, a reduction of 71
per cent since 2005/06 and we have therefore
achieved our emissions target early. This
has been as a result of purchasing certified
renewable electricity, with over 95 per cent of
the electricity we use having zero emissions.
In addition, we generated the equivalent of
173 gigawatt hours, an increase of 6 gigawatt
hours on the previous year. This illustrates
good progress in our energy strategy to use
less and generate more renewable energy.
Employees – we continue to work hard
to engage all of our employees in the
transformation of the group’s performance.
Employee engagement was at 81 per cent
this year, higher than the UK norm. We
remain focused on maintaining high levels of
employee engagement.
We have been successful in attracting and
retaining people and have continued with
our apprentice and graduate programmes for
2018/19. We now have a total of 39 graduates
and 116 apprentices across the business.
Our investment in recruiting graduates and
apprentices is already benefiting the company,
with 214 employees who have previously been
on either the graduate or apprentice scheme
having secured permanent roles across our
business.
Over the last year, we have continued
our sustained focus on health, safety and
wellbeing. We’ve started our new campaign,
Home Safe and Well, which includes a
significant focus on employee behaviour and
organisational culture in relation to Health and
Wellbeing, Personal Safety and Process Safety.
In 2018/19, we retained our Gold award status
with the Royal Society for the Prevention of
Accidents for the seventh year and our status
under the UK workplace wellbeing charter.
We have also won REBA awards for our work
on Mental and Physical Health and been
recognised by Britain’s Healthiest Workplace
for all the improvements we have made over
the last year.
Our employee accident frequency rate for
2018/19 increased to 0.152 accidents per
100,000 hours, compared with a rate of
0.101 in 2017/18. For the same period, our
contractor accident frequency rate remained
the same at 0.092 per 100,000 hours. While it
is disappointing that these accident frequency
rates have not improved since last year, they
still demonstrate an improved performance
against our historical average. We recognise
that there is always more to do, and health,
safety and wellbeing will continue to be a
significant area of focus as we strive to ensure
that everyone gets home safe and well.
Communities – we continue to support
partnerships, both financially and in terms
of employee time through volunteering with
other organisations across the North West.
Our approach to integrated catchments helps
to tackle water quality issues in lakes, rivers
and coastal waters across the North West,
and our LoveMyBeach contribution includes
employees volunteering to help 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 partnership with
Youth Focus North West has addressed one
of our region’s major issues of affordability
through co-creating the ‘managing your
money’ training module.
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.
In 2018/19 we have again met our regulatory
leakage target of 463 megalitres per day.
›
Environmental performance
On the Environment Agency’s latest annual
assessment, published in July 2018, we were
awarded Industry Leading Company status
across the range of operational metrics for the
third year running. This indicates we were in
joint first position among the nine water and
wastewater companies assessed, 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 2018/19, United Utilities retained its
World Class rating for the 11th consecutive
year.
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Business insight
Co-ordinating our efforts to fight moorland fires
Joining forces with regional stakeholders to limit damage to affected areas
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In June 2018 there was extensive media coverage
of two large moorland fires in the hills above
Manchester, showing images of the fires, the
ecological devastation they caused, and the brave
and exhausted firefighters tackling the blaze.
Between them, the fires at Stalybridge and Winter
Hill covered a huge area – the equivalent of 2,300
football pitches. Over half of the affected area is
designated as a Site of Special Scientific Interest.
Both sites are also popular recreational spots for local
communities, and much of the area is catchment
land for drinking water supplies.
The response during the fires was impressive with
emergency services, local authorities, landowners
and tenants all working together to limit the damage
as best they could. Our own land management,
emergency response and grounds maintenance
teams, along with three helicopters we hired, added
to the firefighting effort being coordinated by Greater
Manchester Fire and Rescue Service.
The fires caused significant damage to surface
vegetation and to the infrastructure used to protect
and manage the area, including fences and access
routes. The aftermath was distressing for the
organisations whose efforts to restore these valuable
landscapes had been left in ashes.
Nature itself can be quite resilient, as the green
shoots present a few weeks after the fires showed,
but the longer-term recovery and resilience of these
areas will take time to secure and achieve.
The visible surface damage is only part of the story.
Many of the benefits we all derive from these special
habitats will take longer to re-establish. Deep burns
across areas of peat caused serious releases of
sequestered carbon. The amount of CO2 released is
estimated at over 26,000 tonnes, with an estimated
value of more than £1.5 million. To restore this
peatland to a point where it is again actively locking
up carbon will take time, effort and investment.
A wide range of stakeholders have an interest in the
recovery of the moorland. Government funding has
been made available to help the restoration and
efforts to make the moorland more resilient.
The immediate response to the wildfires and the
subsequent recovery have required unprecedented
levels of partnership working and will continue to
need well-coordinated and consistent management
and communications for the foreseeable future.
We hope that restoration of ‘blanket bog’ can be
achieved so that once again it can provide the
wide range of benefits to all stakeholders. Just as
important is making sure any activities improve the
resilience of this wonderful habitat.
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Our performance in 2018/19
Financial performance
United Utilities delivered a strong set of
financial results for the year ended 31 March
2019.
Revenue
Revenue
Revenue was up £83 million, at £1,819 million,
largely reflecting our allowed regulatory
revenue changes.
As a result of Ofwat’s annual wholesale
revenue forecasting incentive mechanism
(WRFIM), we have reduced revenue by
£8 million in 2018/19 and will reduce revenue
by a further £14 million in 2019/20 (out-turn
prices). This consists of two components;
firstly reflecting actual volumes being
higher than our original assumptions during
AMP6, and secondly reductions relating
to the 2014/15 'AMP5 blind year', which
are £4 million in 2018/19 and £5 million in
2019/20.
Operating profit
Underlying operating profit at £685 million
was £40 million higher than last year. This
reflects our allowed regulatory revenue
changes, partly offset by an £18 million
increase in IRE and a £16 million increase in
depreciation. The remaining cost base has
increased by £9 million as a result of small
increases in employee costs, materials, bad
debts and property rates, partly offset by a
credit resulting from the settlement of an
historical commercial claim.
Reported operating profit decreased by
£1 million, to £635 million, reflecting the
increase in underlying operating profit being
more than offset by an increase in adjusted
items. Adjusted items for 2018/19 included
£36 million of costs associated with the dry
weather of 2018, £7 million associated with
the equalisation of pension benefits between
males and females in relation to Guaranteed
Minimum Pension (GMP) benefits, and
£7 million of restructuring costs. Adjusted
items in the prior year amounted to £9 million,
of which £6 million related to restructuring
costs.
Investment income and
finance expense
The underlying net finance expense of
£231 million was £46 million lower than last
year, mainly due to the impact of lower RPI
inflation on the group’s index-linked debt.
Interest of £84 million on non-index-linked
debt was £8 million lower than last year, due
to the lower rates locked in, including the
full year impact of re-couponing a portion of
the group's regulatory swap portfolio in the
prior year. The indexation of principal on
index-linked debt amounted to a net charge
in the income statement of £98 million,
compared with a net charge of £138 million
last year. As at 31 March 2019, the group had
approximately £3.8 billion of index-linked debt
at an average real rate of 1.3 per cent.
2018/19
2017/18
2017/18
£1,819m
£1,736m
Underlying operating profit (1)
2018/19
2017/18
£684.8m
£645.1m
Reported operating profit
2018/19
2017/18
£634.9m
£636.4m
The lower RPI inflation charge compared with
last year contributed to the group’s average
underlying interest rate of 3.3 per cent being
lower than the rate of 4.2 per cent for the year
ended 31 March 2018. The average underlying
interest rate represents the underlying net
finance expense divided by average debt.
Reported net finance expense of £205 million
was broadly in line with the £207 million
expense in 2017/18, principally reflecting a
decrease in the fair value gains on debt and
derivative instruments, from a £47 million
gain in 2017/18 to a £9 million gain in 2018/19
offset by the £39 million decrease in the
indexation charge in the year.
The group has fixed the interest rates on most
of its non-index-linked debt for the 2015–20
regulatory period.
Profit before tax
Underlying profit before tax was £460 million,
£90 million higher than last year, primarily
reflecting the £40 million increase in
underlying operating profit and the £46 million
decrease in underlying net finance expense.
This underlying measure excludes the adjusted
items, as outlined in the underlying profit
measures table on pages 66 and 67.
Reported profit before tax increased by
£4 million to £436 million reflecting the
£1 million reduction in reported operating
profit more than offset by a £1 million
reduction in reported net finance expense
including fair value movements and a
£4 million increase in our share of profits from
joint ventures.
RCV gearing(2) (%)
61%
41.28p
Total dividend per
share ordinary share
(pence)
(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 66 and 67.
(2) Regulatory capital value (RCV)
gearing calculated as group net
debt/United Utilities Water Limited
shadow RCV (out-turn prices).
Tax
In addition to corporation tax, the group
pays significant other contributions to the
public finances on its own behalf as well as
collecting and paying further amounts for its
5,000 strong workforce. The total payments
for 2018/19 were around £241 million and
included business rates, employment taxes,
environmental taxes and other regulatory
service fees such as water abstraction charges
as well as corporation tax.
In 2018/19, we paid corporation tax of
£28 million, which represents an effective cash
tax rate on underlying profits of 6 per cent,
which is 13 per cent lower than the headline
rate of corporation tax of 19 per cent. 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.
Our normal effective cash tax rate on
underlying profits is around 11 per cent with
the key reconciling items to the headline rate
of corporation tax (currently at 19 per cent)
being allowable tax deduction on capital
investment and pension payments, these
being deductions put in place by successive
governments to encourage such investment
and thus reflecting responsible corporate
behaviour in relation to taxation.
62
United Utilities Group PLC Annual Report and Financial Statements for the year ended 31 March 2019
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Summary of net debt movement
m
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In the current year the effective rate is further
reduced as a result of the phasing of quarterly
tax payments and also the impact of increased
underlying profits as the relevant quarterly
payments relate to 2017/18 whereas the
underlying profits relate to 2018/19. This
phasing of tax payments will not be an issue
going forward, as from next year the quarterly
instalment tax payment rules are being
amended to ensure that payments become
aligned with financial years.
The total tax charge for 2018/19 was
£73 million as compared to a total tax charge
of £78 million for 2017/18. For both periods,
the total effective underlying tax rate remains
in line with the headline rate (currently at
19 per cent) and subject to any legislative or
tax practice changes, we would expect this to
continue for the medium term.
The current tax charge was £42 million in
2018/19, compared with £25 million in the
previous year; the main differences relating
to timing with a corresponding equal and
opposite adjustment to deferred tax. There
were current tax credits of £3 million in
2018/19 and £7 million in 2017/18, following
agreement of prior years’ tax matters.
For 2018/19, the group recognised a deferred
tax charge of £35 million, compared with a
charge of £52 million for 2017/18. In addition,
the group recognised a deferred tax credit
of £1 million in 2018/19 and a deferred tax
charge of £7 million in 2017/18 relating to
prior years’ tax matters.
Profit after tax
Underlying profit after tax of £379 million was
£74 million higher than last year, principally
reflecting the £90 million increase in
underlying profit before tax.
The approach used to derive underlying
profit after tax is not consistent across the
industry, with the most significant difference
relating to the treatment of deferred tax.
Having considered whether to change our
calculation of underlying profit after tax to
exclude the impact of deferred tax, we have
decided to retain our current methodology,
therefore retaining comparability with our
past performance and most FTSE companies
but not our listed water peers. We will
reassess this position once we have clarity of
Ofwat’s final determination, by which time
it is also possible that there could be further
clarity on the direction of travel of the IASB’s
rate-regulated activities project which could
also have an impact on the underlying profit
measures.
Reported profit after tax was £363 million,
compared with £355 million in the previous
year, largely reflecting the £4 million increase
in the reported profit before tax.
Earnings per share
Underlying earnings per share increased from
44.7 pence to 55.5 pence. This underlying
measure is derived from underlying profit
after tax.
As noted above, we have considered whether
to change our calculation of underlying profit
after tax to exclude the impact of deferred
tax and we have decided to retain our current
methodology.
Basic earnings per share increased from
52.0 pence to 53.3 pence for the same reasons
that caused the increase in profit after tax.
Dividend per share
The board has proposed a final dividend of
27.52 pence per ordinary share in respect of
the year ended 31 March 2019. Taken together
with the interim dividend of 13.76 pence per
ordinary share, paid in February, this results
in a total dividend per ordinary share for
2018/19 of 41.28 pence. This is an increase
of 3.9 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 3.9 per cent is
based on the RPI element included within the
allowed regulated revenue increase for the
2018/19 financial year (i.e. the movement in
t
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RPI between November 2016 and November
2017).
The final dividend is expected to be paid on
1 August 2019 to shareholders on the register
at the close of business on 21 June 2019. The
ex-dividend date is 20 June 2019.
Our dividend policy targets a growth rate of at
least RPI inflation each year through to 2020,
with further details set out below.
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 2019,
the company had distributable reserves of
£3,139 million. The total external dividends
relating to the 2018/19 financial year
amounted to £282 million. The company's
distributable reserves support over 11 times
this annual dividend.
Financing headroom – supporting the group’s
cash flow, we adopt a funding/liquidity
headroom policy of having available resources
to cover the next 15–24 months of projected
cash outflows on a rolling basis.
Cash flows from subsidiaries – the directors
consider that the group’s principal operating
subsidiary, United Utilities Water Limited,
has sufficient resources to pay dividends to
United Utilities Group PLC for the duration
of the current dividend policy period to
support the external payment of dividends to
shareholders.
Financial stability – the water industry has
invested significant capital since privatisation
in 1989 to improve services for customers
and provide environmental benefits, a large
part of which is driven by legislation. Water
companies have typically raised borrowings to
help fund the capital investment programme.
Part of total expenditure is additive to the
regulatory capital value, or RCV, on which
water companies earn a return allowed by
the economic regulator, Ofwat. RCV gearing
is useful in assessing a company’s financial
stability in the UK water industry and is one
of the key credit metrics that the credit rating
agencies focus on. We have had a relatively
stable RCV gearing level over the last nine
years, always comfortably within our target
range of 55 to 65 per cent, supporting a solid
A3 credit rating for United Utilities Water
Limited (UUW) with Moody’s. RCV gearing
at 31 March 2019 was 61 per cent and the
movement in net debt is outlined in the cash
flow section below.
Stock Code: UU.
unitedutilities.com/corporate
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N
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Our performance in 2018/19
Financial performance
t
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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, during the current
regulatory period the executive directors’
long-term incentive awards have been directly
linked to a measure of sustainable dividends.
While 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 sufficiently robust to withstand
reasonable changes in assumptions, such
as inflation, opex, capex and interest rates;
and
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
regulatory 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 2019
was £832 million, and therefore broadly
consistent with £816 million in the previous
year. The group’s net capital expenditure was
£625 million, principally in the 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 includes
infrastructure renewals expenditure and is
based on capital work done in the period,
rather than actual cash spent.
Net debt including derivatives at 31 March
2019 was £7,067 million, compared with
£6,868 million at 31 March 2018. This increase
largely reflects regulatory capital expenditure,
payments of dividends, interest and tax, the
inflationary uplift on index-linked debt and fair
value movements, partly offset by operating
cash flows.
Gross debt – total carrying
value £7,815.7 million
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Fair value of debt
The group’s gross borrowings at 31 March
2019 had a carrying value of £7,816 million.
The fair value of these borrowings was
£8,905 million. This £1,089 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 decreased
from £1,140 million at 31 March 2018 due
primarily to an increase in credit spreads.
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 2019. This is the same level of gearing
as at 31 March 2018 and remains comfortably
within our target range of 55 to 65 per cent.
UUW’s senior unsecured debt obligations
are rated A3 from Moody’s Investors Service
(Moody’s), A- from Standard & Poor’s Ratings
Services (S&P) and A- from Fitch Ratings
(Fitch), all on stable outlook. United Utilities
PLC’s (UU PLC’s) senior unsecured debt
obligations are rated Baa1 from Moody’s,
BBB from S&P and A- from Fitch, all on stable
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
2019 amounted to £339 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 all of this requirement.
In January 2019, UUW’s financing subsidiary,
United Utilities Water Finance PLC (UUWF),
raised around £32 million of term funding,
via the issue of HKD320 million private
placement notes, with a seven-year
maturity, off our EMTN programme. Also in
January 2019, UUWF increased the amount
outstanding on its £350 million public bond
with a maturity date in February 2025 by an
additional £100 million, taking the total size to
£450 million. In February 2019, UUWF raised
£250 million fixed rate notes in the public
bond market with a 12-year maturity.
UUW remains one of the sector leaders in the
issuance of CPI-linked debt having previously
raised £165 million, in response to Ofwat’s
decision to transition away from RPI inflation
linkage. In April 2019, we have increased
the CPI-linkage in our debt portfolio by a
further £200 million by executing a new £100
million bank loan with a 10-year maturity, and
entering into inflation swaps against three
existing RPI-linked bonds with a notional value
of around £100 million, swapping cash flows
from RPI to CPI-linkage. As both the CPI-
linked loan and inflation swaps were executed
subsequent to the year end, neither are
included in the statement of financial position
as at 31 March 2019.
64
United Utilities Group PLC Annual Report and Financial Statements for the year ended 31 March 2019
United Utilities Strategic.indd 64
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Years
over the 2015-20 regulatory period, locking in
an average annual interest rate of around 3.2
per cent nominal (inclusive of credit spreads).
Recognising Ofwat’s intention to apply debt
indexation for new debt raised during the
2020–25 regulatory period, we will retain
the hedge to fix underlying interest costs
on nominal debt out to ten years on a
reducing balance basis, but we will no longer
supplement this with the additional ‘top-up’
fixing at the start of each new regulatory
period.
Liquidity
Short-term liquidity requirements are met
from the group’s normal operating cash
flow and its short-term bank deposits and
supported by committed but undrawn
credit facilities. The group’s €7 billion EMTN
programme provides further support.
Available headroom at 31 March 2019 was
£357 million based on cash, short-term
deposits and committed bank facilities, net of
short-term debt as well as committed facilities
and term debt falling due within 12 months.
We consider that we operate a prudent
approach to managing banking counterparty
risk. Counterparty risk, in relation to both cash
deposits and derivatives, is controlled through
the use of counterparty credit limits. Our
cash is held in the form of short-term money
market deposits with prime commercial banks.
We operate a bilateral rather than a
syndicated approach to our core relationship
banking facilities. This approach spreads
maturities more evenly over a longer time
period, thereby reducing refinancing risk
and providing the benefit of several renewal
points rather than a large single refinancing
requirement.
Since September 2018, the group has renewed
£100 million of committed bank facilities for
an initial five-year term, extended a further
£50 million by one year to 2024 and signed
£50 million of new committed bank facilities
with a five-year term. The group has sufficient
headroom to cover its financing needs into
late 2020.
Long-term borrowings are structured or
hedged to match assets and earnings, which
are largely in sterling, indexed to UK retail
price inflation and subject to regulatory price
reviews every five years.
Long-term sterling inflation index-linked
debt provides a natural hedge to assets and
earnings. At 31 March 2019, approximately
53 per cent of the group’s net debt was in
index-linked form, representing around 32
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 just under 20 years.
Our inflation hedging policy is to target around
50 per cent of net debt to be maintained in
index-linked form. This reflects a balanced
assessment across a range of factors.
Where nominal debt is raised in a currency
other than sterling and/or with a fixed interest
rate, the debt is generally swapped to create
a floating rate sterling liability for the term of
the debt. To manage exposure to medium-
term interest rates, the group fixes underlying
interest costs on nominal debt out to ten years
on a reducing balance basis. Historically, this
has been supplemented by fixing substantially
all remaining floating rate exposure across
the forthcoming regulatory period around the
time of the price control determination. In line
with this, the group has fixed interest costs for
substantially all of its floating rate exposure
Pensions
As at 31 March 2019, the group had an IAS 19
net pension surplus of £484 million, compared
with a net pension surplus of £344 million at
31 March 2018. This £140 million increase
mainly reflects the favourable impact of
updating mortality assumptions and updating
membership data based on the 2018 funding
valuations. The scheme-specific funding basis
does not suffer from volatility due to inflation
and credit spread movements as it uses a
prudent, fixed credit spread assumption.
Therefore, any 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.
The most recent pension scheme valuation
was signed off as at 31 March 2018
and confirmed the existing schedule of
contributions which aimed to eliminate the
funding deficit by December 2021 for the
United Utilities Pension Scheme (UUPS) and
by September 2024 for the United Utilities
PLC group of the Electricity Supply Pension
Scheme (ESPS). As of April 2019, the group
has prepaid at a discount the agreed deficit
recovery contributions, resulting in a one-off
contribution of around £100 million, and
has therefore eliminated any deficit on a
scheme-specific funding basis. As this took
place subsequent to the year end, it has had
no impact on the financial statements for the
year ended 31 March 2019.
Further detail on pensions is provided in notes
18 and A5 (‘Retirement benefit surplus’) of
these financial statements.
Stock Code: UU.
unitedutilities.com/corporate
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0
1
,
0
0
0
2
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0
0
0
3
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Our performance in 2018/19
Financial performance
Guide to Alternative Performance Measures (APMs)
The underlying profit measures in the table opposite represent the group’s alternative performance measures (APMs) under the definition given
by the European Securities and Markets Authority (ESMA). These measures are linked to the group’s financial performance as reported under
International Financial Reporting Standards (IFRSs) as adopted by the European Union in the group’s consolidated income statement, which can be
found on page 162. As such, they represent non-GAAP measures.
These APMs are reviewed internally by management and reported to the board, and have been presented in order to provide a more representative
view of business performance. The group determines adjusted items in the calculation of its underlying measures against a framework which
considers significance by reference to profit before tax, in addition to other qualitative factors such as whether the item is deemed to be within the
normal course of business, its assessed frequency of reoccurrence and its volatility which is either outside the control of management and/or not
representative of current year performance.
t
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Adjustments in arriving at underlying profit measures
Flooding incidents
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.
Non-household retail market
reform
The group has incurred significant costs since the year ended 31 March 2015 relating to 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.
Dry weather event
GMP equalisation
Restructuring costs
Net fair value gains on debt
and derivative instruments
An extreme period of hot and dry weather during the summer of 2018 led to significant strain being placed on
our water resources and network and as a result our reservoir levels ran extremely low. Activities were carried out
to safeguard supplies, generating significant costs which would not have been incurred under normal conditions.
Given the infrequent nature of periods of dry weather of this severity, this event is not considered part of the
normal course of business.
The group has recognised an additional part service cost in respect of its defined benefit pension schemes. This
reflects a change in benefits following a legal ruling during the year relating to the equalisation of Guaranteed
Minimum Pension (GMP) benefits between males and females. This is a one-off adjustment, which is not
representative of costs incurred in the normal course of business, is a direct consequence of the ruling and is not
expected to reoccur in future years.
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 macroeconomic 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.
Interest on derivatives and
debt under fair value option
Net fair value gains on debt and derivative instruments includes interest on derivatives and debt under fair value
option. In adjusting for net fair value gains on debt and derivatives, it is appropriate to add back interest on
derivatives 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.
Net pension interest income
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.
Capitalised borrowing costs
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.
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.
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Underlying profit
Operating profit
Reported operating profit
Flooding incidents (net of expected insurance proceeds)
Non-household retail market reform
Dry weather event
GMP equalisation
Restructuring costs
Underlying operating profit
Net finance expense
Finance expense
Investment income
Reported net finance expense
Adjustments:
Net fair value gains on debt and derivative instruments
Interest on derivatives 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
Reported profit before tax
Adjustments:
Flooding incidents
Non-household retail market reform
Dry weather event
GMP equalisation
Restructuring costs
Net fair value gains on debt and derivative instruments
Interest on derivatives and debt under fair value option
Net pension interest income
Capitalised borrowing costs
Underlying profit before tax
Profit after tax
Underlying profit before tax
Reported tax charge
Agreement of prior years’ UK tax matters
Tax in respect of adjustments to underlying profit before tax
Underlying profit after tax
Earnings per share
Reported profit after tax (a)
Underlying profit after tax (b)
Weighted average number of shares in issue, in millions (c)
Reported earnings per share, in pence (a/c)
Underlying earnings per share, in pence (b/c)
Dividend per share
Year ended
31 March
2019
£m
634.9
–
–
36.1
6.6
7.2
684.8
Year ended
31 March
2018
£m
636.4
1.7
1.0
–
–
6.0
645.1
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£m
(222.5)
17.1
(205.4)
(9.5)
30.6
(9.5)
(37.4)
(231.2)
£m
6.7
436.2
–
–
36.1
6.6
7.2
(9.5)
30.6
(9.5)
(37.4)
460.3
£m
460.3
(72.8)
(4.2)
(4.6)
378.7
£m
363.4
378.7
681.9m
53.3p
55.5p
41.28p
£m
(218.6)
12.0
(206.6)
(47.3)
23.5
(7.1)
(39.7)
(277.2)
£m
2.3
432.1
1.7
1.0
–
–
6.0
(47.3)
23.5
(7.1)
(39.7)
370.2
£m
370.2
(77.5)
0.4
11.8
304.9
£m
354.6
304.9
681.9m
52.0p
44.7p
39.73p
Stock Code: UU.
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Our risk management
Principal risks and uncertainties
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Our management of risk underpins the delivery of our purpose and strategy
and enables us to focus on providing a sustainable and resilient service for all
customers and stakeholders for years to come
In delivering our group-wide activity we are
faced with a range of risks which can threaten
the quality of the services we provide, introduce
delays and ultimately increase cost and damage
the reputation of the group. We anticipate and
mitigate these risks through an embedded risk
management framework which includes:
›
›
›
›
›
A consistent and reliable enterprise-wide
risk management process;
A governance and reporting structure
which enables the board to oversee and
direct the control of risk;
Definition of risk appetite by the board
with an overarching general risk appetite
supplemented where appropriate by
specific risk appetites for certain risks;
An ISO 31000:2018 aligned assessment and
mitigation process; and
Policies, practical guidance and training
programmes to enable our people to
identify, quantify and manage risk effectively.
Our risk identification and management
activities are continuous and ongoing, with
each functional area responsible for assessing,
articulating and controlling relevant risks.
Figure 1: Assessment and
management process adapted
from ISO 31000:2018
Identify &
assess
Monitor &
review
Consult &
communicate
Control &
mitigate
Record &
update
This includes horizon scanning of the internal
and external business environment, to identify
and review new and emerging risks that
could lead to a future impact or emerging
circumstances of existing risk that could affect
the exposure in the short to medium term.
Risk events are assessed in their current
state for the likelihood of occurrence based
on the level of threat and the vulnerability
of controls, together with the financial and
reputational impacts should the identified
events materialise. Where we are not satisfied
that the current state is consistent with our
general risk appetite, or where it could present
an unacceptable risk in relation to a specific
risk appetite, we determine an appropriate risk
exposure as a target state and develop further
mitigating controls to deliver this position
within an appropriate time frame.
In order to maintain adequate oversight of
risk, there are various steering groups and
governance forums that focus on individual
risks which then escalate and share progress to
the group audit and risk board either directly
or via the wholesale risk and resilience board.
A complete oversight of our enterprise-wide
profile is presented every six months to the
group board to highlight the nature and extent
of the current risk exposure with focus on the
most significant risks relative to the group’s
principal risks.
Figure 2: Governance and reporting process
Group board
Reviews the nature and
extent of risk, confirms the
company’s viability and
reports on effectiveness of
risk management and
internal control systems
Group audit and
Group audit and
risk board
risk board
Reviews governance,
Reviews governance,
risk and compliance
risk and compliance
matters
matters
Audit committee
Reviews the effectiveness
of risk management and
internal control systems
Wholesale risk and
Wholesale risk and
resilience board
resilience board
Monitors status of risk,
Monitors status of risk,
control and actions
control and actions
associated with wholesale
associated with wholesale
operational risk
operational risk
Corporate
risk team
Second line framework
development, advisory,
assurance and reporting
Corporate
audit team
Third line review and
assurance of risk
management and internal
control
Wholesale
Wholesale
operational risk
operational risk
First line identification,
First line identification,
analysis, evaluation
analysis, evaluation
and management of
and management of
operational risk
operational risk
Group strategic
and tactical risk
First line identification,
analysis, evaluation and
management of
strategic/tactical risk
Board/Board Commi(cid:425)ee
(cid:68)anagement Commi(cid:425)ee/Ac(cid:415)vity
Our approach is in accordance with the UK
Corporate Governance Code and incorporates
reporting to the group board for every full and
half year statutory accounting period. This
enables 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; and
› Monitor risk management and internal
control systems and review their
effectiveness.
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We categorise the nature of our principal risks
to cover potential issues within the following
four categories: Regulatory and legal; Core
operations and service provision; Functional
service and support; and Hazard-based.
Reports to the board highlight major
risks based on the highest impact business
risks across the group and wholesale
operational risks. These comprise the ten
highest scoring risks assessed on the basis
of likelihood and financial impact for each of
the two categories. In addition, the report
covers risks which were scored highly for the
severity of their impacts in their current state
(net of control effectiveness) but remote on
likelihood. The board report also highlights
risks where there could be significant
reputational impact or which relate to
significant new or emerging risks or issues, but
which are not encompassed within the other
reported categories.
Key developments
Ofwat’s Initial Assessment of Plans (IAP)
following the price review submission
recognised our leading approach to risk and
resilience. Our approach is a combination of
top-down assessment, where we consider the
impacts on strategic delivery, and bottom-
up where we consider localised operational
performance, asset health and operational
hazards. We have an established approach
for the two elements, but continue to drive
improved maturity through various initiatives
which focus on improved appreciation of
related data and information to understand
our long-term risk profile, to support decision-
making and to deliver a cost-effective and
proportionate risk management response
which drives resilience.
These initiatives include:
›
›
›
Continuation of our focus on cross-
business consideration of strategic and
tactical risks, for example an in-depth
cyber risk assessment that took place
throughout the year (see risk feature at
page 71) and Brexit contingency planning
below;
Improvement of our maturity in relation
to risk appetite – we have commenced
reporting against a general risk appetite
boundary and, where appropriate, specific
risk appetite boundaries enabling more
targeted discussions over the last year
(an approach we intend to continue to
develop and embed);
Development of the assessment and
reporting of the full distribution of
impacts, including possible maximum
and minimum outcomes as well as more
likely occurrences. This supports our
focus on long-term resilience and tests
our response and recovery plans and
expectations;
Stock Code: UU.
›
›
Ongoing development of our wholesale
risk and asset planning process to
prioritise investment and operational
management through the identification
of risks and issues and monitoring of
strategic performance requirements; and
An assurance-based strategy within the
engineering and programme management
team introducing programme and
portfolio risk responsibilities and
improving capability by focusing on
reliable risk information, ownership and
learning from risk events.
Profile features
Our risk profile, which currently consists of
around 100 event-based risks is enterprise-
wide, covering risk across the entire group and
considering both internal and external drivers.
By their nature, these risks will include many
combinations of high to low likelihood and
high to low impact.
Political and regulatory risk and uncertainty
feature prominently within the profile,
notably with the outcome of PR19 being
delivered this calendar year. The possibility of
‘renationalisation’ is a key area of uncertainty
as is the opening up to competition of
wholesale operations (including the current
focus on possible competition in bioresources
and water abstraction) and the potential for
competition covering domestic retail activities.
Our operations continue to be substantially
UK-based, but the potential impacts of
Brexit remain under review and have been
reported to the group board. In common
with other UK companies, a significant issue
is the uncertainty surrounding the effects of
any Brexit deal that the UK Government may
ultimately deliver. Our review has considered
the availability of European funding, the
availability of critical goods (including
chemicals and spare parts) through our supply
chain, the price of goods and services due
to tariff changes, exchange rate changes and
potential inflationary shifts outside current
predicted parameters, the effect to the
labour resource of both the company and our
delivery partners and our ability to collect
cash were there to be an economic downturn.
For each of these consequences, the impact
assessment considers a range of possible
impact scenarios and we have developed
a contingency plan (in collaboration with
Water UK) which has involved discussing the
implications of Brexit with our key suppliers
and capital delivery partners, as well as
considering mitigation measures such as
stockpiling and using alternative suppliers, a
large proportion of which is already built into
our multi-party frameworks.
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Following the launch of non-household retail
competition in April 2017, we have continued to
monitor our operations in the market to review
compliance risks and to ensure that we continue
to operate in a manner that complements and
promotes the ‘level playing field’.
From an operational risk perspective, the
dominance of the penalty element of Ofwat’s
outcome delivery incentive mechanism and
the continuing effects of changes to the
Environmental Sentencing Guidelines continue
to be key features of evolving 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 continue to adapt to and plan for climate
change and its significant and permanent
impacts on the water cycle, our operations
and the broader operating environment.
This includes consideration of the long-term
viability of water and wastewater services
such as water abstraction, drinking water
supply and treatment capability, drainage
and sewer capacity, wastewater treatment
and its discharge efficiency and effectiveness.
The recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD)
support and reinforce the need to consider
climate-related risks and uncertainties. These
continue to be factored into risk management
and the likely effects of future changes are a
critical consideration in our long and medium-
term risk, operational and financial planning
(see also Key resources on pages 28 to 34 and
Our approach to resilience on page 50). Our
water service and wastewater service risks
(summarised on page 73) also reflect current
key risks including the potential for extreme
weather and climate change.
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Our risk management
Principal risks and uncertainties
Figure 3: Risk map
High
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10
3
Impact
6
2 8
9
4
1
1. Political and regulatory
2. Conduct and compliance risk
3. Water service
4. Wastewater service
5. Retail and commercial
6. Financial
7. Supply chain and programme delivery
8. Resources
9. Security
10. Health, safety and environmental
5
7
Low
Low
Likelihood
High
Risk increased
Risk decreased
Risk stable
The risk map provides an indicative only view of the current
exposure of each of the principal risks relative to each
other: illustrating the likelihood of occurrence relative to the
associated internal or external drivers; whether the risk is
believed to have increased, decreased or remained stable over
the last 12 months; and the most likely impact should an event
occur.
Material litigation
The group robustly defends litigation where appropriate and seeks to
minimise its exposure by establishing provisions and seeking recovery
wherever possible. Litigation of a material nature is regularly reported
to the group board.
Beyond that reported in previous years on the Argentina multiparty
'class action' and the Manchester Ship Canal Company matters (to
which there have been no material developments), there is nothing
specific to report on material litigation.
Principal risks
The ten principal risks (combinations of relevant event-based
risks) identified in the risk map and described in more detail
in the tables which follow, illustrate where value can be lost or
gained and could have a material impact on the group’s business
model, future performance, solvency or liquidity. For each
principal risk the nature and the extent of exposure is recorded,
with alignment to our strategic themes and mitigating controls
identified. Also described are key risks worthy of note, together
with current issues and areas of uncertainty. These reflect
changing/emerging circumstances which could affect the risk
exposure of future activities and are therefore considered as part
of the ongoing mitigation.
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“We have
an extensive
employee cyber
education and
awareness
programme”
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Business insight
Mitigating the risk of cyber crime
Taking a holistic approach to our control framework
The threat
Malicious cyber activity is well publicised and we
see continuous attempts from state-sponsored and
criminal groups to breach our protective controls to
steal data. As a water utility and operator of critical
national infrastructure (CNI) we are further exposed
to the increased risk of targeted attacks intended to
cause disruptive impact to the UK.
We also need to consider the threat posed by a
complex partner ecosystem that supports our
increasing reliance upon new technologies and cloud
services that underpin our digital strategy. Equally, the
advancements in technology that make our lives more
efficient and interconnected also start to blur work/
personal boundaries, thereby increasing the threat.
The risks
The most significant cyber risks for our organisation
are:
›
›
›
›
Breach of customer, employee or sensitive
business data resulting in the data reaching the
public domain or unauthorised groups;
Critical service, technology or data unavailability
resulting in disruption to business processes and
system failures;
Loss of data integrity leading to operational/
customer impacts and exposure to the risk of
fines and penalties; and
Compromise of operational resources by
malicious groups, leading to service disruptions,
loss of supply or environmental breaches.
Cyber risk mitigation
We take a holistic view of the risks and mitigation
options to define the strategy, control framework and
plan by which we protect our data and information
assets. We deliver this through our governance
framework, which includes executive level engagement
and regular reporting to our group board.
Our security controls framework includes the
following:
›
Through the integration of our IT and Operational
Technology (OT) functions within our Digital
Services business unit, we have integrated our
›
›
›
›
›
›
security operational management practices and
implemented a single delivery programme for
our security strategy.
A security strategy covering all areas of our
business that provides the baseline for our
compliance with the Network and Information
Systems Directive (NISD). Our strategy is
underpinned by our security investment plan,
which has been set to deliver the required
control capabilities.
A cyber incident response plan that includes the
services of third party specialist forensic responders,
including government agencies, who provide support
in the event of a critical cyber incident.
A suite of testing options to validate control
effectiveness, e.g. penetration testing, audits and
scans. We periodically take this testing a stage
further and employ specialist 'Brand Damage'
experts to simulate a real attack on our business.
Through our Information Security team we
undertake assurance activities across the full life
cycle of all technology and data solutions.
To provide the most secure environments
possible for customer data and services, we
undertake comprehensive, always-on monitoring
of all critical IT systems for any unexpected
security events.
Through proactive government and industry
engagement we have developed good practice
guidance and created support communities
to foster collaboration. Our staff currently
hold the chair positions of the Water Sector
Strategic Security Board and the Water Security
Information Exchange.
› We have an extensive employee cyber education
and awareness programme that highlights areas
of risk, policies and controls to provide the
guidance and understanding of the cyber threat.
Beyond employee education, we have also
invested in specialist training and certification
for our Information Security team who hold
internationally recognised accreditations.
Stock Code: UU.
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Our risk management
Principal risks and uncertainties
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Risk exposure:
An indication of each category’s current
exposure relative to the previous year is
shown by the coloured disc surrounding
the risk number.
Increased
Decreased
Stable
Strategic themes:
The best service to customers
At the lowest sustainable cost
In a responsible manner
Regulatory and legal
1
2
Political and regulatory
risks
Potential change in the political and
regulatory environment and/or frameworks
Conduct and compliance
risk
The failure to meet all legal and regulatory
obligations and responsibilities
Main strategic theme:
Main strategic theme:
Principal/significant impacts:
Potential for increased costs of
administration, reduction in income,
margin and greater uncertainty of returns.
Potential that reduced confidence among
equity investors and difficult debt market
conditions lead to funding pressures in the
context of raising finance and refinancing
debt on an ongoing basis.
In the event of renationalisation the
business could be acquired below fair
value.
Management and mitigation:
We regularly engage in relevant
government and regulatory consultations
which may affect policy and regulation in
our industry as well as consulting with the
opposition. We also consult our customers
to better understand their requirements
and proactively consider opportunities
and threats associated with any potential
change, exploiting opportunities and
mitigating risks where appropriate. We
keep customers and the public informed.
We also provide information to the
government, regulators, customers and the
public as appropriate to help them to make
informed decisions.
Current key risks, issues and
uncertainties:
›
Potential renationalisation of the water
sector
›
›
›
Further market reform including
upstream competition in water
resources and bioresources, as well as
additional markets in future, and the
potential for the introduction
of domestic competition
Final determination of PR19 and
associated tougher regulatory targets
Brexit and potential changes to the
regulatory regime
Principal/significant impacts:
The detrimental impact to customers and
other stakeholders through inappropriate
culture, behaviour or decisions and the
potential to receive penalties of up to
10 per cent of relevant turnover and
ultimately revocation of our licence or the
appointment of a special administrator.
Management and mitigation:
Corporate social responsibility features
prominently within the group. We
work in collaboration with landowners,
environmental organisations, community
groups and other stakeholders to deliver
enhanced environmental outcomes and
engage with the community and support
agencies regarding vulnerable customers
and ensure diversity and equality of
employees and an ethical supply chain.
Legislative and regulatory developments
are continually monitored as is the
governance framework utilised by the
group. Risk-based training of employees
is undertaken and we participate in
consultations to influence legislative and
regulatory developments. Allowance 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.
Current key risks, issues and
uncertainties:
›
The effects of Brexit on legislation/laws,
enforcement and the regulatory regime
›
›
›
›
Competition law requirements in
relation to the non-household retail
market and other competitive markets
Current material litigation
Continuing high fines for
environmental offences
Data management and governance
(GDPR)
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Core operations and service provision
3
4
5
Water service risk
A failure to provide a secure supply of
clean, safe drinking water and the potential
for a negative impact on public confidence
in water supply
Main strategic theme:
Principal/significant impacts:
The potential for public health issues
associated with poor water quality.
The potential for supply interruptions that
could affect large populations within the
region for long durations.
Management and mitigation:
Mitigation is provided through core business
processes, including centralised planning and
control, quality assurance procedures, risk
assessments and rigorous sampling/testing
regimes. Optimisation of operational and
maintenance tasks together with targeted
capital interventions help to ensure services to
customers are maintained.
Our 25-year Water Resources Management
Plan defines our strategy to achieve a long-
term, best-value and sustainable plan for
water supplies in the North West including
consideration of multiple different climate
change scenarios including a 2 degree (Celsius)
global warming scenario (assessing systems
resilience).
We continue to develop innovative
solutions and invest in resilience to
further support the delivery of water and
wastewater services in the long term.
Current key risks, issues and
uncertainties:
›
›
Population growth
Extreme weather, climate change and
drought
Expected change to the abstraction
licensing regime
Drinking water safety and security
Critical asset failure
Brexit, in particular the effects of a no-
deal scenario on the chemicals supply
chain
›
›
›
›
Wastewater service risk
A failure to remove and treat wastewater
Main strategic theme:
Principal/significant impacts:
The potential for sewer flooding or serious
pollution to air, soil or water leading
to harm or disruption to the public,
businesses and the environment (wildlife,
fish and natural habitats) resulting in fines
and reputational damage.
Management and mitigation:
Mitigation is provided through core
business processes, including centralised
planning and control, quality assurance
procedures, risk assessments, rigorous
sampling/testing regimes and close
management of discharge consent
requirements. Optimisation of operational
and maintenance tasks together with
targeted capital interventions help
to ensure services to customers are
maintained.
Current key risks, issues and
uncertainties:
›
The effects of extreme weather on
overloading the sewer network
›
›
›
›
›
›
Pollution incidents
Population growth
Increased regulatory scrutiny and
penalties
Higher fine levels for environmental
offences
Climate change
Brexit, in particular the effects of a no-
deal scenario on the chemicals supply
chain
Retail and commercial risk
Failing to provide good and fair service
to domestic customers and third-party
retailers or a failure of or issue in relation
to non United Utilities Water operations or
businesses (including Water Plus)
Main strategic theme:
Principal/significant impacts:
The potential for significant losses,
regulatory penalties and long-term
reputational damage associated with poor
customer satisfaction. The potential for a
significant increase in the bad debt charge,
reducing profitability.
Management and mitigation:
For domestic retail there is a wide range
of initiatives and activities focused on
improving customer satisfaction, including
proactive incident communication,
complaints handling and use of appropriate
tariffs. Bad debt risk is managed through
the adoption of best practice collection
techniques, segmentation of customers
based on their credit risk profile and the
use of data sharing to better understand
customers’ circumstances to determine
the most appropriate collection and
support activities. Our wholesale business
maintains processes, systems, data and
organisational capacity and capability
to deal fairly with market participants
and the central market operator in the
Business Retail market in order to generate
and collect revenue. Similarly strong
governance applies to non United Utilities
Water operations and businesses.
Current key risks, issues and
uncertainties:
›
Socio-economic deprivation in the
North West
›
›
›
›
Economic downturn (due to welfare
reform, Brexit or other factor) and the
effect on domestic bad debt
Competition in the water and
wastewater market and competitor
positioning
Non-household retail competition and
the ability to treat other participants
equally
The challenges associated with being
involved in a joint venture water retail
business operating in a competitive
environment
Stock Code: UU.
unitedutilities.com/corporate
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Our risk management
Principal risks and uncertainties
Functional service and support
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7
8
Resources risk
Failing to provide appropriate resources
(human, technological or physical resource)
required to support business activity
Main strategic theme:
Principal/significant impacts:
The potential inability to recruit, retain or
deploy knowledge and/or expertise.
The potential inability to respond and
recover due to ineffective non resilient
business activity.
Management and mitigation:
Developing our people with the right skills
and knowledge, combined with delivering
effective technology are important
enablers to support the business to meet
its objectives. Employees are kept informed
regarding business strategy and progress
through various communication channels.
Training and personal development
programmes exist for all employees
in addition to talent management
programmes and apprentice and graduate
schemes. We focus on change programmes
and innovative ways of working to deliver
better, faster and more cost-effective
operations.
Current key risks, issues and
uncertainties:
›
Delivering required employee
engagement
›
›
Personal development, talent
management and succession planning
Optimising technology and innovation
Financial risk
Potential inability to finance the business
appropriately
Main strategic theme:
Principal/significant impacts:
The potential for worse credit ratings,
associated funding costs or reduced access
to debt capital markets leading to lower
liquidity and adversely impacting the
economic return on the regulatory capital
value (RCV).
Tax inefficiencies, under or overpayment
of tax, market fluctuations in inflation,
interest rates and energy prices and
a potential worsening of the pension
scheme funding position could all lead to a
significant increase in costs to the group.
Management and mitigation:
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
manage the impact of market fluctuations
for inflation, interest rates and 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.
Current key risks, issues and
uncertainties:
›
Inflation/deflation
›
Financial market conditions, interest
rates and funding costs due to
economic uncertainty (e.g. Brexit)
›
Paying an appropriate amount of tax
Supply chain and
programme delivery
Potential ineffective delivery of capital,
operational and change programmes/
processes
Main strategic theme:
Principal/significant impacts:
The potential failure to meet our
obligations and customer outcomes
resulting in an impact at future price
reviews, negative reputational impact with
customers and regulators.
Management and mitigation:
Supply chain management is utilised
to deliver an end-to-end contract
management service, including contract
strategy, tendering and category
management, which provides a risk-based
approach and relationship management
programmes for suppliers. We prioritise
our investment programmes, projects
and integrated business and asset plans.
We have created better alignment and
integration between our capital delivery
partners and engineering service providers
including alignment with our operating
model.
Our programmes 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.
Current key risks, issues and
uncertainties:
›
New partnership structure and
arrangement in AMP 7
›
›
›
Direct procurement for customers
(DPC)
Technical quality and innovation
Brexit and increased uncertainty of
availability of materials sourced from
Europe
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Risk exposure:
An indication of each category’s current
exposure relative to the previous year is
shown by the coloured disc surrounding
the risk number.
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Increased
Decreased
Stable
Strategic themes:
The best service to customers
At the lowest sustainable cost
In a responsible manner
Hazard-based
9
10
Security risk
Potential for malicious activity (physical
or technological) against people, assets or
operations
Main strategic theme:
Principal/significant impacts:
The potential for a loss of data/information
and the consequent effect on service
provision.
The potential for catastrophic damage to
UU property, infrastructure and non-
infrastructure and the consequent effect
on service provision.
Management and mitigation:
Physical and technological security
measures and awareness training
combined with strong governance
and inspection regimes aim to protect
infrastructure, assets and operational
capability. Externally, we work closely
with our industry peers, the Centre for
the Protection of National Infrastructure
(CPNI), the National Cyber Security Centre
(NCSC), the Drinking Water Inspectorate
(DWI) and Defra to shape the sector
approach to security, particularly cyber
security, and to understand how we
can best deliver the appropriate levels
of protection to our business and in
compliance with the new Network and
Information Systems Directive (NIS).
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.
Current key risks, issues and
uncertainties:
›
Cyber crime (see page 71)
›
›
›
Terrorism
Fraud
Ownership of critical national
infrastructure and national
infrastructure
Health, safety and
environmental
Potential harm to people (employees,
contractors or the public) and the
environment
Main strategic theme:
Principal/significant impacts:
The potential for serious injury or loss of
life in remote, extreme circumstances.
The potential for catastrophic damage to
private, public or commercial property/
infrastructure including the consequent
effect on water and wastewater service
provision.
The potential for serious impact on
wildlife, fish or natural habitats resulting in
significant fines and reputational damage.
Management and mitigation:
Supported by strong governance and
management systems certified to OHSAS
18001 we have developed a strong health
and safety culture where ‘nothing we do at
United Utilities is worth getting hurt for’.
We actively seek to improve health, safety
and wellbeing across the group through
targeted improvements and benchmarking
against our peers. Also certified to ISO
14001, we seek to protect and improve
the environment through the responsible
delivery of our services. This includes
helping to support rare species and habitats
through targeted engagement and activity
and commitment to reducing our carbon
emissions by designing out waste from our
operations, generating our own energy and
looking at ways to reduce our use of raw
materials. We also recognise the impact
the environment can have on our service
provision with extreme weather and climate
change being integrated into our risk,
planning and decision-making processes.
Current key risks, issues and
uncertainties:
›
Impounding reservoirs containing
significant volumes of water
›
Other critical asset failure
› Multiple hazards including process
safety, use or accidental release of
chemicals, excavation, tunnelling and
construction work
›
Fluvial and coastal flooding associated
with climate change
Stock Code: UU.
unitedutilities.com/corporate
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Our risk management
Emerging risks and issues
We monitor the internal and external business environment, to identify and review new and emerging risks to our strategy or operations and
emerging circumstances of existing risk that could affect our risk exposure in the short to medium term. If new and emerging risks or circumstances
are too far into the future or we lack sufficient detail to make a reliable quantification, they are summarised as a watching brief and reported to the
corporate responsibility committee and to the board in the six-monthly reporting cycle.
Some new and emerging risks of note are listed below, with emerging circumstances of existing risk included within the list of current key risks,
issues and uncertainties in the principal risks table on pages 72 to 75.
Emerging risk/issue
Climate change
Water scarcity
Plastics
Biosolids
Strategic
theme
Description
While not new as a risk/issue, climate change is an ever emerging risk in terms of
understanding the extent of extreme weather and the return frequency of such
events. As an organisation responsible for essential services and infrastructure, we
are required under the Climate Change Act 2008 to prepare for a changing climate
and understand and consider how we intend to manage material risks to which
climate change contributes including:
› More frequent and/or higher magnitude drought events in summer;
›
Higher rainfall in winter; and
› More occurrences of heavy rainfall.
The Environment Agency has warned of water supply shortages in England by
2050. In particular, London’s demand is expected to exceed supply in the next
decade due to relatively low rainfall, growing population and drier summers.
United Utilities has been proactive in the opportunity for the strategic transfer of
water from the North West to the South East of England, incorporating an option
in the 2019 Water Resources Management Plan (WRMP) for onward transfer in the
2030s. While this is an opportunity, it also brings a number of service, commercial
and reputational risks which we will continue to consider, monitor and manage.
There is currently considerable attention on single-use plastics and microplastic
pollution. The water industry has a role to play in understanding how this material
gets into the water environment and this may present potential operational and
reputational risks. We will continue to keep a watching brief on the situation and
are involved in research projects to better understand any risks to human health
or the environment regarding this, and will continue to monitor developments
carefully.
Biosolids to agriculture is currently recognised by the government as the best
practicable environmental option, but other jurisdictions adopt different
approaches to biosolids disposal creating a potential risk that this could extend to
the UK in the long term. We do not currently expect any change in this regard but
will continue to keep a watching brief on the situation, noting that several research
projects are underway to understand these risks and identify solutions.
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Time for a tea break
As a bit of fun, we've included a little test with the crossword below. All the answers can be found within this
Strategic Report, so please feel free to refer to the pages referenced if you are unsure of any of the answers.
6
8
9
1
7
2
5
14
3
4
10
11
12
13
16
15
17
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Across
2
Independent customer challenge group
whose chair attends our board meetings
7
8
9
Read more on page 39
Intensive process where we welcome
co-creation of new ideas
Read more on page 37
Pioneering operational approach that
gives us a competitive advantage
Read more on page 17
Company with whom we have been trialling
the use of UV LED for water treatment
Read more on page 59
10 Mental health campaign we promoted
in the year
Read more on page 33
12 Our economic regulator
Read more on page 16
14 Self-learning artificial intelligence we are
rolling out across our water network
Read more on page 35
16 Furry friends helping us detect leaks
Read more on page 23
17 Directive that sets the framework for our
security strategy
Read more on page 71
Down
1
One-stop-shop for cross-industry assistance
schemes we have set up to help the money
advice community
Read more on page 57
3
Campaign we used in Burscough to tackle
sewer flooding by changing behaviours
Read more on page 38
4
Top rating we have received three years in a
row reflecting our transparent reporting
Read more on page 19
5
Benefit-sharing mechanism we have
proposed to help communities in 2020–25
Read more on page 21
6
Rating our 2020–25 business plan received
in the initial assessment
Read more on page 19
11 Aeronautical machine we hired three of
to help tackle the moorland fires
Read more on page 61
13 Pilot scheme has installed these in 20
locations to help with reservoir safety
Read more on page 47
15 Acronym for the fleet of vehicles we used
to cope with demand over the extremely
hot, dry summer
Read more on page 30
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Governance
The corporate governance report presents
information on the board of United Utilities and its
activities, and those of the various committees.
It also 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 directors
Letter from the Chairman
Nomination committee report
Audit committee report
Corporate responsibility committee report
Remuneration committee report
Tax policies and objectives
Directors’ report
Non-financial information statement
s172(1) statement
Statement of directors’ responsibilities
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84
94
103
112
116
144
145
151
152
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Formby beach, after colleagues in our
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Corporate governance report
Board of directors
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Dr John McAdam
Chairman
Steve Mogford
Chief Executive Officer (CEO)
Russ Houlden
Chief Financial Officer (CFO)
Responsibilities: Responsible for the
leadership of the board, setting its agenda
and ensuring its effectiveness on all aspects
of its role.
Q ualifications: 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 19 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: Joined the board of ICI
plc in 1999 and became chief executive in
2003, a position held until ICI’s takeover by
Akzo Nobel. Previous non-executive roles:
senior independent director J Sainsbury
plc; non-executive director Rolls-Royce
Holdings plc; senior independent director
Electra Private Equity PLC; and chairman of
Rentokil-Initial plc until 8 May 2019.
Current directorships/business interests:
Non-executive and senior independent
director of Cobham plc and appointed
as non-executive director of Wilmcote
Holdings plc on 1 October 2018. He is also
Chairman of United Utilities Water Limited.
Independence: John met the 2016
UK Corporate Governance Code’s
independence criteria on his initial
appointment as Chairman.
Specific contribution to the company’s
long-term success: During his final year
as Chairman, John has continued to help
drive the considerable progress made by
the business throughout the tenure of his
leadership.
Responsibilities: To manage the group’s
business and to implement the strategy
and policies approved by the board.
Q ualifications: 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. 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
electronics company owned by Italian
aerospace and defence organisation
Finmeccanica, chief operating officer BAE
Systems PLC and a member of its PLC
board. His early career was spent with
British Aerospace PLC.
Current directorships/business interests:
Non-executive and senior independent
non-executive director G4S PLC. He is also
Chief Executive Officer of United Utilities
Water Limited.
Specific contribution to the company’s
long-term success: As chief executive,
Steve has driven a step change in the
company’s operational performance,
leading to fast-track status in the PR19
price review process for the 2020–25 asset
management period.
Galileo, the defence
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.
Q ualifications: 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 in other
commercial and regulated companies,
along with his extensive experience
of driving performance improvement,
provides the group with valuable expertise
in pursuing its strategy of improving
customer service and in providing our
services at the lowest sustainable cost.
Career experience: Previously chief
financial officer at Telecom New Zealand
and 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 Orange
Polska SA. Chairman of the financial
reporting committee of the 100 Group.
He is also Chief Financial Officer of United
Utilities Water Limited.
Specific contribution to the company’s
long-term success: Russ helps to drive
the transformation of the operational
performance of the business, delivers the
group’s competitive advantage in financial
risk management and ensures excellence
in reporting to shareholders and other
stakeholders.
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Board role
Chairman
Committees membership
Nomination committee
Remuneration committee
Executive Director
Corporate responsibility committee
Audit committee
Senior independent non-executive director
Treasury committee
Chair of the committee
Independent non-executive director
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Chief Operating Officer (COO)
Mark Clare
Senior independent non-executive director
Sara Weller
Independent non-executive director
Responsibilities: To develop the strategy
for, and to manage, the group’s operations.
Q ualifications: BA (Hons) Management
Studies, MSc Engineering Management,
AMP Harvard University.
Appointment to the board: August 2017.
Committee membership: None.
Skills and experience: Steve brings a strong
commercial acumen and operations focus
to the wider business. He has a proven
track record in managing networks and
using his change management skills and
broad experience across all aspects of
utilities construction, and programme and
operations management.
Career experience: Steve has a wide range
of project and contract management
experience within the infrastructure sector.
Prior to joining United Utilities in 2005,
he was operations director of Bethell plc,
the power and construction group.
Current directorships/business interests:
He is also Chief Operating Officer of United
Utilities Water Limited.
Specific contribution to the company’s
long-term success: Steve is responsible
for addressing all operational activities.
Through the close scrutiny and monitoring
of these activities he ensures that adjusting
actions are taken in order that the
company’s overall operational performance
continues to improve.
Responsibilities: 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.
Q ualifications: Chartered Management
Accountant (FCMA).
Appointment to the board: November
2013.
Committee membership: Nomination and
remuneration.
Skills and experience: Through his previous
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
in the pursuit of our strategy to improve
customer service.
Career experience: Previously chief
executive Barratt Developments plc. A
former trustee of the Building Research
Establishment and the UK Green Building
Council. Senior executive roles held in
Centrica plc and British Gas. Former non-
executive director: BAA plc and Ladbrokes
Coral PLC.
Current directorships/business interests:
Non-executive chairman Grainger plc and
non-executive director Premier Marinas
Holdings Limited. He is also an independent
non-executive director of United Utilities
Water Limited.
Specific contribution to the company’s
long-term success: As senior independent
non-executive director, Mark has led a
robust selection process culminating in the
appointment of Sir David Higgins as the
next Chairman of the company.
Responsibilities: To challenge
constructively the executive directors and
monitor the delivery of the strategy within
the risk and control framework set by the
board and to lead the board’s activities
concerning directors’ remuneration.
Q ualifications: 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
improves its service to customers.
Career experience: Previously managing
director of Argos; senior executive roles
at Mars, Abbey National and J Sainsbury
plc. Former non-executive and senior
independent director Mitchells and
Butlers plc and chair of the remuneration
committee. Other non-executive roles: the
Department for Communities and Local
Government; the Higher Education Funding
Council for England; and the Planning
Inspectorate.
Current directorships/business interests:
Non-executive director Lloyds Banking
Group plc; lead non-executive Department
of Work and Pensions; and council member
at Cambridge University. She is also an
independent non-executive director of
United Utilities Water Limited.
Specific contribution to the company’s
long-term success: As chair of the
remuneration committee, Sara has
played a key role in revising the directors’
remuneration policy being presented for
approval by shareholders as this year’s
annual general meeting.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Board of directors
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Brian May
Independent non-executive director
Stephen Carter CBE
Independent non-executive director
Alison Goligher
Independent non-executive director
Responsibilities: To challenge
constructively the executive directors and
monitor the delivery of the strategy within
the risk and control framework set by the
board and to lead the audit committee.
Q ualifications: BSc (Hons) Actuarial
Science, Chartered Accountant FCA.
Appointment to the board: September
2012.
Committee membership: Nomination,
audit (chair), treasury (chair) and
remuneration.
Skills and experience: Brian joined Bunzl
plc in 1993 as head of internal audit before
becoming group treasurer, then finance
director (Europe and Australasia). 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. Brian has been chair of
the audit committee for nearly five years and
has considerable knowledge of the company
and the specifics of the utilities sector.
Career experience: Finance director Bunzl
plc, since 2006. Prior to joining Bunzl, Brian
qualified as a chartered accountant with
KPMG.
Current directorships/business interests:
Finance director Bunzl plc, he intends to
retire from this role on 31 December 2019.
He is also an independent non-executive
director of United Utilities Water Limited.
Specific contribution to the company’s
long-term success: Brian contributes his
considerable expertise in finance to the
company primarily through the important
position of chair of the audit committee.
The industry knowledge he has gained
during the six years as a board member, and
his involvement in the second regulatory
price review of his tenure, have provided
continuity and knowledge to this vital long-
term decision-making process.
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.
Q ualifications: Bachelor of Laws (Hons).
Appointment to the board: September
2014.
Committee membership: Nomination,
audit and corporate responsibility (chair).
Skills and experience: As the chief
executive of a FTSE 100 listed company,
Stephen brings current operational
experience to the board. His public sector
experience provides additional insight in
regulation and government relations. His
day-to-day experience in the information
and technology industries ensures that the
board is kept abreast of these areas of the
company’s operating environment.
Career experience: Previously held senior
executive roles at Alcatel Lucent Inc. and
a number of public sector/service roles,
including serving a term as the founding
chief executive of Ofcom. Former chairman
Ashridge Business School. A Life Peer
since 2008.
Current directorships/business interests:
Group chief executive Informa plc and
non-executive director Department for
Business, Energy and Industrial Strategy.
He is also an independent non-executive
director of United Utilities Water Limited.
Specific contribution to the company’s
long-term success: Stephen’s experience
as a current chief executive and his work in
the public sector and government provides
valuable insight.
Responsibilities: To challenge
constructively the executive directors and
monitor the delivery of the strategy within
the risk and control framework set by the
board.
Q ualifications: BSc (Hons) Mathematical
Physics, MEng Petroleum Engineering.
Appointment to the board: August 2016.
Committee membership: Nomination,
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: Royal Dutch Shell (2006
to 2015), her most recent executive role
was 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:
Non-executive director Meggitt PLC, part-
time executive chair Silixa Ltd and a board
member of Edinburgh Business School.
She is also an independent non-executive
director of United Utilities Water Limited.
Specific contribution to the company’s
long-term success: Alison’s understanding
of large capital projects and operational
challenges provides valuable insight into
the longer-term strategic risks faced by
the business. Her role as the designated
non-executive director for workforce
engagement will provide the board with
a first-hand understanding of the views of
employees and the culture of the company.
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Paulette Rowe
Independent non-executive director
Sir David Higgins
Independent non-executive director
Responsibilities: To challenge
constructively the executive directors and
monitor the delivery of the strategy within
the risk and control framework set by the
board.
Q ualifications: MEng (Hons) Mechanical
Engineering and Management, MBA.
Appointment to the board: July 2017.
Committee membership: Nomination and
audit.
Skills and experience: Paulette has spent
most of her career in the regulated finance
industry and so provides 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 its Systems
Thinking approach.
Career experience: Previously held roles
include: managing director Barclaycard
Payments Solutions; strategy director
NBNK Investments plc; commercial and
marketing director Tesco Personal Finance;
chief executive, European Consumer
Finance and managing director Royal Bank
of Scotland. Former board member Prince’s
Youth Business Trust and former trustee
and chair of children’s charity The Mayor’s
Fund for London.
Current directorships/business interests:
EMEA Executive Facebook Inc. since July
2018. She is also an independent non-
executive director of United Utilities Water
Limited.
Specific contribution to the company’s
long-term success: Paulette shares her
experience as a senior leader in financial
services, and her current role in the
technology sector, where technological
innovations have driven improved customer
service.
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, in
time, assume the role and responsibilities of
Chairman.
Q ualifications: BEng Civil Engineering,
Diploma Securities Institute of Australia,
Fellow: the Institute of Civil Engineers and
the Royal Academy of Engineering.
Appointment to the board: 13 May 2019.
Committee membership: Nomination.
Skills and experience: Sir David has
spent his career overseeing high profile
infrastructure projects including: the
delivery of the Sydney Olympic Village
and Aquatics centre; Bluewater Shopping
Centre, Kent; and the delivery of the 2012
London Olympic Infrastructure Project. He
joined Network Rail in 2011, overseeing
the operation of the rail network during
the 2012 Olympic and Paralympic Games
and the major redevelopment of stations
including Birmingham New Street and
London King’s Cross.
Career experience: Former chief executive
of: Network Rail Limited; The Olympic Delivery
Authority; and English Partnerships. Previous
non-executive roles: chairman of High Speed
Two Limited and Sirius Minerals plc.
Current directorships/business interests:
Chairman of Gatwick Airport Limited. Non-
executive director of Commonwealth Bank
of Australia and chair of the remuneration
committee and a member of the risk
committee, he will step down in December
2019. He is also an independent non-executive
director of United Utilities Water Limited.
Specific contribution to the company’s
long-term success: Sir David’s experience
of major infrastructure projects will be
invaluable in meeting the challenges of the
next regulatory period and beyond. He will
take over as Chairman on 1 January 2020.
Board role
Chairman
Executive Director
Senior independent non-executive director
Independent non-executive director
Committees membership
Nomination committee
Corporate responsibility committee
Treasury committee
Remuneration committee
Audit committee
Chair of the committee
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Letter from the Chairman
As the board of directors, we recognise our responsibilities to our different but
mainly interrelated stakeholder groups and our wider societal responsibilities.
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Quick facts
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Dr John McAdam met the independence criteria as set out in
the 2016 UK Corporate Governance 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, seven out of the remaining ten
directors 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.
The directors’ biographies (see pages 80 to 83) include specific
reasons why each director’s contribution is, and continues to be,
important to the company’s long-term sustainable success.
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 (see page 91).
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 unitedutilities.com/corporate-governance
A copy of the Financial Reporting Council’s 2016 UK Corporate
Governance Code can be found at frc.org.uk
Dear Shareholder
Our year
We have reported strong financial performance and sustained our
improvement in operational performance contributing towards
achieving our strategic targets during 2018/19. Our 2020–25 draft
business plan for UUW was awarded fast-track status in Ofwat’s initial
assessment. Our plan reflects our strategy of providing the best service
to customers, at the lowest sustainable cost and in a responsible
manner, and in accordance with our core values. Ofwat commended
our plan in a number of areas, including customer engagement,
affordability and vulnerability, resilience and innovation. We believe our
plan demonstrates the regard the board has for our various stakeholder
groups in its decision-making. Our plan is designed to promote the
group’s long-term success and customers’ interests as well as creating
value for shareholders.
During the year, we have also had our challenges. In particular, the
prolonged hot and dry weather last summer, resulting in exceptional
demand from customers, impacted many areas of our operations.
Our approach
Our role as the board is to set the strategy of the group and ensure that
management operates the business in accordance with this strategy.
Details of the strategy and purpose are set out in the strategic report
(see page 15). We believe this approach will promote the group’s long-
term success, our customers’ interest, create value for shareholders and
take account of our other stakeholders. The board’s intention is to hand
over the business to our successors in a better and more sustainable
position for the future. Within our region, our activities often have
multiple touch points on individuals’ lives. United Utilities is a monopoly
supplier of water and wastewater services to domestic households.
Many customers are also our shareholders, either directly or indirectly
holding shares through pension scheme investments. Indeed, many of
our employees are also customers, shareholders and future pensioners
and have an interest in the group’s long-term success. As individual
directors we are mindful of our statutory duty to act in the way each
of us considers, in good faith, would be most likely to promote the
success of the company for the benefit of its members as a whole, as
set out in s172 of the Companies Act 2006 (the Act). There are times
when difficult decisions must be taken requiring each of us to exercise
independent judgement and apply reasonable care, skill and diligence
in the decision-making process. As the board of directors, we recognise
our responsibilities to our different but mainly interrelated stakeholder
groups and our wider societal responsibilities. For the first time this
year, we have included, as required by s414CZA of the Act, a s172(1)
Statement (see page 152).
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 interrelationships of the various board committees
can be found on page 87 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.
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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, we must take long-term
decisions to ensure our successors are able to operate the business
efficiently for customers, 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’s 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. Feedback is regularly shared with board colleagues.
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 was most recently put to
the shareholder vote at the AGM in 2017, when over 98 per cent of the
vote was cast in favour of the policy. At this year’s AGM we are renewing
our directors’ remuneration policy, a year earlier than expected in order
to align performance targets with the new five-year asset management
period starting on 1 April 2020. Further information and the proposed
new policy can be found on pages 124 to 130.
Looking forward
Having served on the board for over 11 years, and as the company is
preparing for the start of its new regulatory period in April 2020, I felt
now was a good time for me to hand over the reins, and I will leave the
board on 31 December 2019. The company announced on 13 May 2019
the appointment of Sir David Higgins as a non-executive director and
Chairman designate. I am grateful to Mark Clare, senior independent
non-executive director, who led a thorough search process on behalf
of the nomination committee, identifying Sir David as my successor. Sir
David is an excellent appointment, his approach and experience will fit
well with the culture at United Utilities. I have very much enjoyed my
time as a member of the board and am confident that the company is
well placed as it goes into the 2020–25 asset management period.
As always, any feedback you may have on this annual report is welcome
– please email any comments you may have to: secretariat@ uuplc.co.uk
Dr John McAdam
Chairman
Our people
At 31 March 2019, we had maintained our gender target that at least
25 per cent of the board comprised of women with three out of ten
directors on the board being women. The board aspires to achieve 33
per cent by 2020. Our current gender balance places us 33rd in the FTSE
100 in the ‘2018 Hampton Alexander Women on Boards Leadership
Index’. With regards to diversity more generally, I am satisfied that we
have an appropriately diverse board in terms of experience, skills and
personal attributes and in terms of age and ethnicity among our board
members. During the year, we have updated our board diversity policy,
and included an ethnicity objective (see page 97).
As directors, both individually and collectively, we have many years
of experience gained across a variety of industries and regulated
businesses, and so are familiar with the particular challenges of a
regulated operating environment. Although there are time constraints
for non-executive directors who also have an executive role, these
individuals bring valuable current market experience and thinking to the
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
in an industry which does not conflict with United Utilities’ business.
Twenty-nine per cent of our executive team is made up of women.
We are keen to develop our succession pipeline of 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 for
senior managers provides an excellent opportunity for both personal
and career development. 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 gender pay data can be found on page 98. Historically, our industry
has been male dominated, but we have measures in place to increase
diversity in broad terms, including gender among our employees.
The board considered the requirement in the 2016 UK Corporate
Governance Code (the Code) that the “audit committee as a whole shall
have competence relevant to the sector in which the company
operates”. It concluded that, when taking into account the skills,
knowledge, experience and professional qualifications of committee
members (see the directors’ biographies on pages 80 to 83), the Code
requirement was fulfilled. Furthermore, all members of the audit
committee are independent non-executive directors.
Our values and culture
Our aim is to behave as a responsible business, and our business
principles can be found on our website (see page 93). Our core values
of acting with integrity and focusing on our customers provide both the
framework for our business culture and the way in which our employees
go about their daily work. Behaving responsibly has been part of the
United Utilities ethos for many years.
The company has complied fully with the main and subsidiary principles
and provisions of the 2016 Code (the details of which are contained
within this corporate governance report), with which we are required
to report by the Financial Conduct Authority’s Listing Rules for the year
ended 31 March 2019. The board is working towards addressing the
details of the 2018 Code, against which it will report next year.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Code principles
Leadership
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Read more about Leadership on page 86
Effectiveness
Read more about Effectiveness on page 90
Relations with shareholders
Read more about Relations with shareholders on page 99
Accountability
Read more about Accountability on page 100
Remuneration
Read more about Remuneration on page 116
Code principle – Leadership
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. While the board retains overall responsibility,
a sub-committee structure allows these committees to probe the
subject matters more deeply and gain a greater understanding of
the detail. The committees 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
board committee meetings (with the exception of the remuneration
committee) are tabled at board meetings and the chairs of each of the
board committees report verbally to the board on their activities. The
Chairman chairs the nomination committee; all other principal board
committees are chaired by independent non-executive directors who
have particular skills or interests in the activities of those committees.
The executive team is chaired by the CEO, and its members are
the senior managers who have a direct reporting line to the CEO.
Our executive team meets monthly; it is responsible for the day-
to-day running of the business and other operational matters and
implementing the strategies that the board has set. Short biographies
of the executive team can be found on our website at
unitedutilities.com/executive-team
Introduction by Dr John McAdam
“ The penultimate year in an asset management period is always a
crucial one. The extent of the challenge and the complexities of the
decisions taken in the construction of the business plan for the next
asset management period should not be underestimated. We believe
that in the plan we submitted to Ofwat on 3 September 2018, we have
fulfilled our individual statutory duties, to act in the way that would
be most likely to promote the long-term success of the company.”
The diagram 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 CFO at
every scheduled board meeting, providing the board with an updated
overview of the business and its financial performance and position.
Operational updates are also provided to board meetings by the COO.
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 pages 100 to 111 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; and
›
Has oversight of major capital expenditure projects within UUW
which exceed £150 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
unitedutilities.com/corporate-governance
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Governance structure of the board and its principal committees and the principal management committees
Group board
J oh n
Chair:
c Ada
Chief Executive Officer
f or d
S te
M og
Principal board committees
Principal management committees
Audit committee
Chair: B
r ia n
m or
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on
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Remuneration committee
Chair: S
m or
a d
e s
on
to
Nomination committee
Chair: D
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c Ada
Executive team
Chair: S te
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is
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Chair: S te
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on
Q uarterly business review
Chair: S te
f or d,
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Chair: S te
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Chair: B
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ing
its se t
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Political and regulatory
steering group
Chair: G
e ny on,
y nor
p or
c or
f or
is
a nd
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u sine ss
is
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e sp onsib
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issu
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a ny
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Capital investment committee
f or d,
Chair: S te
M og
c om
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itte
to th
is
e sp onsib
inv
ita
e stm
f or
e nt
u th or ising
r og
e nditu
Key:
The best service to customers
At the lowest sustainable cost
In a responsible manner
Stock Code: UU.
unitedutilities.com/corporate
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Summary of board activity in 2018/19
Leadership and employees
›
Review of health, safety and well-being activities and consideration of health and safety incidents of
employees and contractors reinforcing the company’s belief that ‘nothing we do is worth getting hurt
for’ and an update on the progress of developing and implementing an improved health and safety
culture within the business branded as ‘home safe and well’;
Cross reference
Link to strategic
themes
See page 33
›
Considered board succession planning and the appointment of Sir David Higgins as an independent
non-executive director and Chairman designate;
See page 96
› Monitored progress on key aspects of the employee succession and development plans, identifying
leadership potential at all levels, developing our employer brand and our aspiration for a multi-
generational and diverse workforce;
See page 98
›
›
›
›
›
›
›
›
Reviewed and discussed: executive team succession plans and the needs of the business; the ongoing
progress in the development of our talent pipeline of senior talent to address business challenges
identified in the 2020–25 asset management period and beyond; and other emerging employee issues;
See page 95
Discussed the results of the annual employee voice and engagement survey. Reviewed and endorsed
the introduction of new workforce engagement mechanisms to ensure an accurate representation
of employees’ views are provided to the board. Alison Goligher was identified as the non-executive
director designated for engagement with the workforce;
Reviewed and amended the board diversity policy; and
Approved the changes to the all-employee share incentive plan to comply with the General Data
Protection Regulation.
Strategy
›
Reviewed the group’s corporate responsibility activities focusing on reputation management,
particularly in our communications with stakeholders;
Received regular updates at each meeting of items with a strategic component, such as emerging
changes to regulation, major capital expenditure and business structuring decisions;
–
Discussed the context of the next price review the key issues to be addressed and considered the
expectations of our key stakeholders;
Discussed the group’s preparations in relation to Brexit; and
Discussed the impact of any renationalisation of the water sector.
Governance
›
Reviewed and debated the risk profile of the group, and in particular the principal risks and our risk
appetite, including a review of the most significant operational risks;
See page 115
See page 97
–
See page 112
See page 6
See page 72
See page 69
See page 68
›
›
›
›
›
›
›
›
Reviewed the effectiveness of the risk management systems, including financial, operational and
compliance controls and reviewed the effectiveness of the internal control systems;
See page 109
Reviewed and discussed developments in cyber crime and the activities undertaken to enhance the
effectiveness of the group’s security controls;
See page 71
Reviewed the terms of reference for the audit, remuneration, treasury and corporate responsibility
committees and received post-meeting reports from the chairs of each committee summarising
discussions and actions;
–
Reviewed biannual updates on changes and developments in corporate governance and the
implementation of any changes required particularly relating to the 2018 Code;
See page 92
Reviewed and discussed the external evaluation of the board, its committees and individual directors
and conflicts of interest;
See page 90
Reviewed the performance of the external auditor and recommendation for reappointment;
See page 106
Reviewed and approved the new directors’ remuneration policy to be presented to shareholders for
approval at the 2019 AGM; and
Reviewed the approach and progress of work to identify areas where there is any risk of modern
slavery occurring in our supply chain and approval of the 2019/20 slavery and human trafficking
statement.
See page 118
See page 150
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Summary of board activity in 2018/19
Cross reference
Link to strategic
themes
United Utilities Water Limited (UUW) regulated business and its stakeholders
›
Regular review and monitoring of the progress with the business plan submission for the 2020–25
regulatory period as submitted to Ofwat on 3 September 2018, and the ongoing preparations towards
final determination in December 2019;
See page 19
› Monitored the ongoing progress of the customer experience programme and resulting improvements
See page 57
to customer service. During the year, new initiatives for customers in vulnerable circumstances were
incorporated into our accessible affordability schemes, contributing to our improved performance
scores against Ofwat’s qualitative Service Incentive Mechanism (SIM); and
›
Regular updates in relation to the 2018 extreme weather events and group’s operational response and
performance.
See page 30
Other group business
›
Reviewed progress on the group’s renewable energy generation capabilities and opportunities for
expansion and innovation including the construction of a 7.2MW ground mounted solar panel array at
Huntington water treatment works and a 4.5MW array at Preston Clifton Marsh wastewater treatment
works; and
See page 23
›
Regular reviewed of progress of Water Plus, the group’s joint venture with Severn Trent serving
commercial customers, and approved the renewal of working capital arrangements.
See page 109
Shareholder relations
›
Received and discussed a presentation by Rothschild Investor Advisory on investors’ views and
perceptions of the group in relation to, among other things: strategy; the group’s unique selling
proposition; dividend policy; and how the company compares with other listed water and wastewater
companies; and
See page 99
›
Regularly received and discussed feedback from road shows, presentations and face-to-face meetings
between investors and the CEO and/or the CFO and other communications received from large
investors.
See page 99
Financial
›
Reviewed the 2020–25 business plan and approved the 2019/20 budget;
Reviewed and approved the half and full-year results and associated announcements;
Reviewed and approved the going concern and long-term viability statement;
Reviewed and approved the company’s 2018/19 UK tax strategy;
Reviewed and approved: the annual pensions update and the guaranteed minimum payment pension
charge to address the equalisation of benefits between men and women reflecting the outcome of a
recent legal case;
–
–
See page 101
See page 144
See page 108
Reviewed and approved the company’s treasury policies; the group’s funding requirements for the year
and the potential sources to meeting these funding requirements; and managing the group’s interest
rate and other market risk exposures including the impact of Brexit;
See page 100
Approved annual insurance arrangements for 2019/20;
Reviewed progress with material litigation involving the group; and
Reviewed, discussed and approved proposals in principle relating to actuarial valuations of the United
Utilities Pension Scheme and the United Utilities PLC group of the Electricity Supply Pension Scheme.
–
See page 70
See page 5
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Key:
The best service to customers At the lowest sustainable cost In a responsible manner
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
The board table
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(cid:28)(cid:454)ecu�(cid:448)e director
(cid:94)enior independent non-e(cid:454)ecu�(cid:448)e director
(cid:47)ndependent non-e(cid:454)ecu�(cid:448)e director
(cid:18)ompan(cid:455) secretar(cid:455)
Attendance at board
and committee meetings
Eight scheduled board meetings were planned and held during the
year (2018: 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 either by themselves, or together with just
the CEO, or with the entire board and the company secretary, and 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
Steve Fraser
Mark Clare
Sara Weller
Brian May
Stephen Carter
Alison Goligher
Paulette Rowe
Board
meetings
Audit
committee
Remuneration
committee
Nomination
committee
Corporate
responsibility
committee
Treasury
committee
8/8
8/8
8/8
8/8
8/8
7(1)/8
8/8
7(2)/8
8/8
8/8
–
–
–
–
–
–
4/4
4/4
4/4
4/4
–
–
–
–
6/6
6/6
6/6
–
5(3)/6
–
2/2
–
–
–
2/2
1(1)/2
2/2
2/2
2/2
1(4)/2
–
4/4
–
–
–
–
–
4/4
4/4
–
–
–
3/3
–
–
–
3/3
–
–
–
Actual number of meetings attended/maximum number of scheduled meetings which the directors could have attended during the financial year ended 31 March 2019.
(1)
Sara Weller was unable to attend a meeting of the board and a meeting of the nomination committee due to unforeseen circumstances.
Stephen Carter was unable to attend a meeting of the board due to a conflicting commitment.
(2)
(3) Alison Goligher was unable to attend a meeting of the remuneration committee due to a conflicting commitment.
Paulette Rowe was unable to attend a meeting of the nomination committee due to a conflicting commitment.
(4)
Code principle – Effectiveness
Introduction by Dr John McAdam
“ Board colleagues have approached the evaluation process with
resolve this year, ahead of the challenges and changes posed by a
new five-year asset management period.”
Evaluation of the board and board
committees
Our board evaluation was conducted internally this year; our last
external evaluation was conducted by Lintstock consultants in 2018.
The 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 each of its principal
committees, as well as 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 2017/18 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 also asked to complete the questionnaires.
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 non-executive
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 internal analysis of the 2018/19 evaluation is as follows:
2018/19 areas of assessment
Board composition
and expertise
Commentary and actions
The composition of the board was considered to be a diverse group of high-quality non-executive and executive
directors, with a variety of skills, expertise and knowledge.
Board agenda
Board dynamics
Board support
The board was well informed about the regulatory environment within which the company operates and had a
good understanding of the views of customers, regulators and investors. The agendas were well balanced, and
site visits were welcomed and added significant value.
The relationship between the board members was appropriate. Board meetings were conducted in an
atmosphere with open communication, meaningful participation and the proper resolution of issues.
The timeliness of the distribution of board documentation was satisfactory, but could be improved. Executive
summaries of board papers were used effectively although board packs were sometimes considered to be too
lengthy.
Wider strategic oversight
The involvement of the board in the development of the strategic direction of the group was considered to be
appropriate and they were fully involved in the requirements of the price review process.
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 was rated highly with good visibility of
operational and reputational risks, and board members welcomed the opportunity for discussion on risk.
Succession planning and human
resource management
Succession plans for the board were in place with outline timescales, with the Chairman’s succession being
addressed. Succession for senior executive positions was considered to be satisfactory.
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Committees
Individual directors
The composition and performance of the audit, remuneration, nomination, corporate responsibility and
treasury committees were considered to be appropriate. The feedback to the board by committee chairs was
full and transparent and meetings chaired effectively. Specific comments/actions were identified as follows:
›
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Nomination committee: more regular meetings would be required over the next year within agreed
timescales;
Remuneration committee: overall, colleagues felt the committee was very effective;
Audit committee: the balance between detail and simplification in audit papers should continue to be
reviewed; and
Corporate responsibility committee: the implications of the outcome for the business plan submission for
the committee’s agenda should be kept under review.
The individual performance of all the directors was assessed: all the non-executive directors were considered to
be independent and effective, and all directors demonstrated the expected level of commitment to their roles.
The review of the Chairman’s performance (led by the senior independent director) concluded that Dr McAdam
continued to demonstrate an effective and unbiased perspective, notwithstanding that he would have served
for over ten years as a board director by 31 March 2019. It was agreed that Dr McAdam fulfilled 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 2019 AGM.
Stock Code: UU.
unitedutilities.com/corporate
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2017/18 evaluation recommendations
The board would benefit from more opportunities to gain better
understanding of the views of employees across the group.
Actions taken during 2018/19
During the year, the board agreed its preferred approach for
strengthening the employee voice in the boardroom with Alison
Goligher appointed as the designated non-executive director.
Allow more time for discussion of key strategic topics at the board
strategy awayday and involving experts to further the debate.
A strategy awayday was not held during the year, due to the demands of
the price review process.
Nomination committee: maintain the focus on senior board succession
over the next 12 months and ensure it was managed proactively.
Remuneration committee: consider the way in which incentives should
address the transition to the next asset management period.
The nomination committee has reviewed board succession in
accordance with the succession plan, and undertaken the recruitment of
the Chairman’s successor.
During the year, the remuneration committee decided to accelerate
its review of the directors’ remuneration policy. A comprehensive
shareholder consultation process was undertaken covering a wide
range of elements, including incentive arrangements and performance
measures for directors, a new directors’ remuneration policy will be
presented to shareholders for approval at the 2019 AGM.
Audit committee: ensure the committee was kept abreast of reporting
changes.
The audit committee received updates on the implications for the
company on the adoption of IRFS 9, IFRS 15 and IRFS 16.
Corporate responsibility committee: ensure the committee contributed
to the PR19 business plan submission process, particularly in terms of
customer priorities.
The corporate responsibility committee reviewed the draft business
plan from for the 2020–25 asset management period from a responsible
business perspective prior to submission to Ofwat. The committee
endorsed management’s approach particularly the emphasis towards
affordability and vulnerability and the impact that this would have on
the communities served.
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 91), 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 88 to 89). The board’s approach to these
matters is reflected in our strategic theme, and our corporate culture, of
behaving in a responsible manner as reflected throughout the strategic
report. Through presentations and discussions with representatives of
YourVoice, the independent customer challenge group, the board has
been kept fully aware of in-region environmental and social matters.
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 reporting requirements) 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 and Alison Goligher visited the group’s offices in Warrington
to attend different meetings with representatives of YourVoice, the
independent customer challenge group. As part of the ongoing work to
ensure the board has direct link to understand the views of employees
(see page 115) Alison spent time meeting employees in different areas
of the business to gain an understanding of everyday life and the culture
of the business.
Induction programmes are designed and arranged for any new director.
Values and culture
The best service for customers
At the lowest sustainable cost
In a responsible manner
Core value:
Customer
focus
Core value:
Innovation
Core value:
Integrity
Customers are at the heart of
everything we do, and we aim to
provide a great and resilient service at
the most efficient cost.
We continually look for new ways
to make our services better, safer,
faster and cheaper.
We make promises
knowingly and keep them,
behaving responsibly towards all
of our stakeholders.
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Values and culture
Our values underpin our strategic themes as shown in the diagram on
the opposite page. The United Utilities way of doing things is to behave
as a responsible business, and is set out in our business principles
document. A copy can be found at: unitedutilities.com/corporate/
about-us/governance/business-principles/
The board leads by example; behaving responsibly is at the root of the
board’s decision making processes and it operates in an environment
conducive to open and frank discussions. Culture, as defined by the FRC
(see below), is cultivated and cascaded throughout the business by the
CEO and his executive team. Our employees play a vital role in bringing
our values to life, particularly in relation to fulfilling the company’s
purpose of providing great service to customers in the North West,
creating long-term value for all of our stakeholders. Our culture, of
behaving responsibly, is treated as business as usual.
Board decisions and culture are interlinked. The culture of the business
is impacted by the decisions taken by the board, and the board takes
decisions in light of its understanding of the culture of the business.
During the year, the board has a number of opportunities to consider
cultural indicators and metrics particularly in relation to reporting on:
employees, customer matters and risk. While such reporting provides
the board with a good opportunity to monitor the cultural health of the
business, management is working to improve the presentation of the
information to better facilitate the board’s monitoring and assessment
of culture.
The management team continues to drive the focus on customers and
ensure this value is deeply embedded in our culture and the way we
operate. Through the ongoing work of Alison Goligher, the designated
non-executive director for engagement with the workforce, the board
will benefit from Alison’s first hand assessment of the culture of the
business.
A stakeholder metrics table (see page 55) provides data on a number of
stakeholder and cultural indicators.
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Examples of how we aim to behave responsibly towards our different stakeholders are shown in the table below. Further information on our
stakeholder engagement can be found on pages 39 to 47.
How we behave responsibly
towards our customers
Customers are at the heart of everything we
do, and we aim to provide great and resilient
service at the most efficient cost.
Our offering to customers includes:
›
›
›
›
›
‘Priority Services’ that customers can
register for if they require extra support
due to such things as age, ill health,
disability, mental health problems, financial
worries or language barriers;
‘Moving Home’ services are designed to
provide an easy way for customers in our
region to get in touch with us when they
move house;
improved communications with customers
– including making our bills easier to
understand and removing technical jargon;
a user-friendly customer website and
mobile app enabling customers to easily
access their account at any time; and
through the regular contact with
representatives of YourVoice the
independent customer challenge group,
the board receives a direct channel of
communication and customers’ views to
inform its decision making.
How we behave responsibly
towards our employees
At the heart of our operations is our ethos
of ‘nothing we do is worth getting hurt for’.
We believe the safety of our employees and
contractors is paramount.
Our offering to employees includes:
a competitive base salary;
›
›
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›
›
›
›
employee benefits;
family friendly employment policies that go
beyond the statutory minimum;
the opportunity to express their views
about the company in the annual employee
voice survey;
an internal network of mental health
awareness supporters;
employees are encouraged to improve their
well-being through exercise. Corporate
or reduced rate gym membership has
been arranged with providers across the
company’s region; and
the company funds an employee
assistance support programme providing
a confidential counselling and information
service 24/7 to assist employees with
personal or work-related problems that
may be affecting their health, well-being or
performance.
How we behave responsibly towards
our other stakeholders (shareholders,
environment, communities, and regulators)
Our engagement with our wider stakeholders
is business as usual through a number of
specialist functions/teams such as:
›
›
›
›
›
›
›
our investor relations team provides a point
of contact for equity investor queries;
the sustainability team champions
sustainability issues with the business;
our stakeholder teams provide support for
communities 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;
teams within our business are in constant
communication with our various regulators
in relation to customer, economic and
environmental factors; and
our treasury team provides a point of
contact for credit investor queries.
The culture of a company is defined by the FRC 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.’ FRC’s ‘Corporate Culture and the Role of Boards’ July 2016.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Nomination committee
Further embedding our Systems Thinking approach and increased digitalisation
continues to underpin our succession pipeline for board and senior management
Dear Shareholder
This year the focus for the nomination committee has been on the search for
my successor, and so this will be my last report on behalf of the nomination
committee. This process was led by Mark Clare in his role as senior
independent director, and was in accordance with our previously agreed
board succession plans. Further information can be found on page 96.
Our succession plan aims to ensure that the board and senior
management have the appropriate balance of skills and experience
to support the group’s strategic objectives. Our senior management
succession plans take into account the views of all board members
to ensure our plans encompass the benefit of all their skills and
experience. During the year the board has reviewed the people and
organisational capability plan ensuring that our internal talent is
identified and developed to support the delivery of our next five-year
asset management period. Further embedding our Systems Thinking
approach and increased digitalisation continues to underpin our
succession pipeline for board and senior management. 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 board and/or 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 for new board colleagues. During a board
recruitment process, the nomination committee would be supported
by Louise Beardmore, customer services and people director, as
part of her human resources responsibilities. During the year, the
committee formally met twice. The meetings discussed and reviewed
our board and executive level succession plans. Our plans address both
contingency planning needs and requirements in the short to medium
term, and incorporate a reasonable degree of certainty on timescales
for key board positions.
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 almost 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,
although the 2016 Code, under which we are reporting, excludes a board
chairman from this nine-year rule. The 2018 Code specifies that board
chairmen are now subject to the nine-year rule.
Our updated board diversity policy (see page 97) 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 variety of views
to contribute to discussions and the decision-making process.
Dr John McAdam
Chair of the nomination committee
Pictured: (back row, left to right) Alison Goligher, Stephen Carter,
Brian May, Sara Weller; (front row, left to right) Paulette Rowe,
Dr John McAdam, Mark Clare
Quick facts
›
›
›
›
›
All members of the committee are independent, thus fulfilling
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 customer services and people director, has responsibility
for human resources, and 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 –
unitedutilities.com/corporate-governance
Nomination committee members
Dr John McAdam (chair)
Sir David Higgins
Stephen Carter
Mark Clare
Alison Goligher
Brian May
Paulette Rowe
Sara Weller
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Main responsibilities of the committee
›
›
Lead the process for board appointments and make
recommendations to the board about filling vacancies on the
board, including the company secretary;
Consider the 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;
Review directors’ conflict authorisations;
Consider the request from executive directors for election to the
boards of other companies and make a recommendation to the
board; and
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).
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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 page 96) 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 time frame when an individual
might leave the business; the projected strategic needs of the business
and resulting preferred experience of any potential new board member;
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 behaving responsibly.
The committee would seek to consult with the incumbent CEO, given his
unique knowledge and perspective of the group, on his view of the needs
of the business going forwards. Neither the Chairman nor the CEO would be
involved in the appointment process of their 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 customer services
and people director 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 and attributes required. One
of these firms would be engaged to conduct the search. A longlist of
candidates would then be reviewed by the nomination committee and
those identified for a shortlist would be invited for interview, initially
with the Chairman, the CEO and the customer services and people
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 customer services and people
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.
Directors’ tenure as at 31 March 2019
Age profile
J oh n
c Ada
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f or d
u ss
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(cid:87)aule(cid:425)e Ro(cid:449)e
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r s
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r s
r s
9
1
0
2
h
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a
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1
3
40–50
9%
51–55
36%
56–60
19%
61–70
36%
ir
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(cid:28)(cid:454)ecu�(cid:448)e director
(cid:94)enior independent non-e(cid:454)ecu�(cid:448)e director
(cid:47)ndependent non-e(cid:454)ecu�(cid:448)e director
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Nomination committee
Report by Mark Clare (senior independent non-
executive director) on the appointment of Sir David
Higgins as non-executive director and Chairman
designate
The focus for the nomination committee this year has been to
identify a suitable successor to John as Chairman. The brief was to
find a candidate with the skills, experience and capability to take on
the leadership of the board as the company prepares to implement
its business plan for the next five year period and beyond, against a
backdrop of an operating environment that continues to change.
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The process to identify a new Chairman started with the appointment
of a recruitment partner, the Lygon Group in November 2018 (other
than providing executive search services on previous occasions, Lygon
Group have no other connection with the company). The brief made it
clear that we were very keen to ensure we considered and saw a diverse
range of candidates. From an extensive and diverse longlist, seven
candidates were seen in the first stage, two of whom were female.
Following a rigorous process involving all members of the board and
including a meeting with our regulator, Ofwat we decided to appoint
Sir David to succeed Dr John McAdam as Chairman. John will step
down from the board on 31 December 2019. On his initial appointment
as a non-executive director, Sir David will become a member of the
nomination committee. He will also be appointed as a non-executive
director of United Utilities Water Limited.
In recruiting Sir David, the board believes his substantial infrastructure
experience, engineering background and understanding of regulated
businesses make him an excellent appointment. We are delighted that
he has accepted the position and the board looks forward to working
under his leadership to deliver the company’s 2020–25 business plan
and beyond.
Sir David is currently chairman of Gatwick Airport Limited and a non-
executive director of Commonwealth Bank of Australia, where he chairs
the remuneration committee and is a member of the risk committee.
Sir David will step down from the Commonwealth Bank of Australia
in December 2019. Previously, he was chief executive of Network Rail
Limited and The Olympic Delivery Authority. Sir David’s full biography
can be found on page 83 .
Skills matrix of board directors
Having served on the Board for over 11 years, I would like to thank
John for the pivotal role he has played in helping drive the considerable
progress made by the business during that time, and for his wider
contribution to the sector. His commitment and contribution to the
company will be much missed and we wish him well for the future.
Membership of the principal board
committees
No changes were made to the membership of the principal board
committee during the year. On his appointment, Sir David Higgins
became a member of the nomination committee.
Board diversity
The board diversity policy (see page 97) is to “ensure the selection process
for board appointments provides access to a range of candidates. Any
appointments will be made on the basis of merit and objective criteria,
and within this context, should promote diversity of gender, social and
ethnic backgrounds, cognitive and personal strengths, but with due regard
for the benefits of diversity on the board, including gender diversity.” The
objective of the policy is for new directors to bring something different to
the board table, be it in terms of experience, skills, perspective, interests
or other attributes. As referred to above, our board diversity policy
would be brought to the attention of any executive search firm used
as part of the selection and appointment process for a board position.
Feedback would be sought from the search firm in terms of their success
in attracting potential candidates with diversity of attributes and from
any interview process conducted by other board members and taken into
consideration in identifying suitable candidates. During the year, we have
updated our board diversity policy, reflecting the recommendation of
the review of the ethnic diversity of UK boards led by Sir John Parker and
published in October 2017. We recognise the benefits of diversity, and its
contribution to the effectiveness of the board decision-making process,
and to the benefits of diversity across our entire employee population
with initiatives in place to support women in the workplace and the
ethnic imbalance of our workforce (see page 98).
Dr John McAdam
Steve Mogford
Russ Houlden
Steve Fraser
Mark Clare
Sara Weller
Brian May
Stephen Carter
Alison Goligher
Paulette Rowe
Sir David Higgins
Finance/
accounting
✓
✓
✓
Utilities
✓
✓
✓
✓
✓
✓
Regulation Government
Construction/
engineering
Industrial
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Customer-
facing
✓
✓
✓
✓
✓
✓
✓
✓
✓
FTSE
companies
✓
✓
✓
✓
✓
✓
✓
✓
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Summary of board diversity policy
A typical induction programme
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Ensure the selection process for board appointments
provides access to a range of candidates. Any such
appointments will be made on the basis of merit and
objective criteria, and within this context, should promote
diversity of gender, social and ethnic backgrounds, cognitive
and personal strengths.
Ensure that the policies adopted by the group will promote
diversity in the broadest sense 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 the Davies Report.
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 and to have at least one director of
non-white ethnicity by 2021.
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› Meet with members of the executive team discussing our
business and regulation;
› Meet with the company secretary to gain an understanding
of the group’s governance arrangements and associated
processes;
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Visit the integrated control centre based in Warrington,
to meet staff, and gain an understanding of the digital
monitoring and control of the group’s water and wastewater
network and assets;
› Meet with the corporate affairs director and head of
sustainability;
› Meet with the customer services and people director to
discuss the actions undertaken by the business to improve
service to customers and the group’s employee agenda;
› Meet with the wastewater network director and the water
and scientific services director to gain an understanding of
the wholesale operating model; and
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Visit the water and wastewater testing laboratories where
regulatory and operational samples are analysed daily providing
essential quality and compliance data.
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 precise 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 appropriately to
board discussions, the Chairman would be responsible for discussing the
matter with them and agreeing a course of action.
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, COO 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. They will also
meet with the strategy and regulation director and are required to meet
with representatives of Ofwat.
Wider succession pipeline 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 outline timescales. 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 coaching and
participating in an executive business school programme. Leadership
development centres have been delivered to identify and validate potential
for future director and senior leader positions and develop a number
of role-ready diverse candidates to provide the group with leadership
capacity in an increasingly complex environment. Senior managers are
encouraged to take on a non-executive directorship role as part of their
personal development, but it is recognised that this is very much a personal
commitment for each individual. We continue to work towards improving
our gender balance across our employee population as part of our ongoing
diversity and inclusion plan (see page 98).
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 at board meetings on matters related
to their responsibilities, and on more informal occasions. From time to
time, board members also have the opportunity to attend events and
meet with members of the apprentice and graduate population and
other employees identified as potential talent within the business.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Nomination committee
What we have done to improve diversity and inclusion in 2018/19
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Gender
Our workforce profile has remained quite static at 65 per cent male
and 35 per cent female. This is primarily due to the limited supply
of females with the relevant skills available in the market and the
legacy of a traditional male-orientated bias in science, technology,
engineering and maths (STEM) careers.
At board level, 70 per cent are male and 30 per cent are female; the
position is similar at the executive team level of 71 per cent male:29 per
cent female. Encouragingly, there is a greater female representation in
the direct reports to the executive team of 64 per cent male:34 per cent
female. The overall number of female graduates is 41 per cent. We offer
predominantly STEM based programmes and we are encouraged to see a
more gender balanced pool of future talent. The apprentice population is
18 per cent female, an increase from nine per cent since 2014/15, and this
compares favourably compared to the sector.
We are:
›
celebrating the success of those of our senior and emerging
female leaders included in the Northern Women Power List;
continuing to look for targeted development for our future female
leaders with cross company mentoring schemes and targeted
personal development to support future progression;
actively encouraging employees to join the gender equality
network within the business;
part of the 30 per cent Club campaign to achieve the target of
30 per cent female representation in senior leadership teams by
2020; and
›
›
›
› members of the EU skills diversity network and have signed a
diversity pledge alongside 32 other businesses in the sector, with
the aim of improving diversity business-wide.
Disability
In the North West, 19 per cent of the working age population are disabled
or live with a long-term health condition; less than one per cent of our
employees have declared a disability or long-term health condition. Our
ability network aims to support employees with, or those who support,
people with a disability or long-term health condition. In 2017 we gained
the government recognised Disability Confident status, and are aiming
to achieve Disability Leader status over the next 18 months. We are
committed to guarantee interviews and making reasonable adjustments
for people who are registered with a disability, and will continue to
promote this to attract candidates from the widest talent pool.
Our Time to Change campaign, normalising the stigma of mental health
and providing support to employees through our network of trained
mental health first aiders, is sponsored by Steve Fraser, COO. Similarly,
Louise Beardmore, customer services and people director, sponsors and
raises awareness of dyslexia across the business. We will participate and
promote National Dyslexia week to encourage awareness and support
employees with the condition.
Ethnicity
The Black Asian Minority Ethnic (BAME) representation of our workforce
is two per cent; 15 per cent of our workforce choose not to disclose
ethnicity. We hold Bronze status in the Business in the Community
Race for Opportunity programme. Attracting a future pipeline of
employees from multi-cultural backgrounds remains a priority. We
are in the second year of partnership with Teach First as a way to gain
access to talented young people from diverse cultural communities in
our region, particularly in areas where English is a second language.
We have strategic partnerships with universities and other education
providers, with higher levels of BAME presence in their student
population in order to improve the ethnicity of our workforce profile.
We are members of the National Apprenticeship Champions Diversity
Network Forum, which works alongside other companies in the UK,
to address the challenge of recruiting more apprentices from BAME
backgrounds. We have joined the Energy and Utility Skills Diversity Forum to
enable us to promote and contribute to the agenda in our sector.
Social mobility
During the year we signed up to the UK Government’s social mobility
pledge, committing to provide support to people from communities
with low social mobility. Youth unemployment in the North West is
higher than the national average at 11.2 per cent. We recognise that
our region’s young people come from a range of socio-economic
backgrounds which can contribute, along with personal challenges, to
the difficulties of finding work.
In collaboration with our partners, we have continued to lead our
youth programme, started in 2014, supports young people from across
our region who are not in education, employment or training (NEET)
become work ready. This collaboration has supported over 80 young
people, with 79 per cent of participants obtaining paid employment
after the programme. The Prince’s Trust measure the social value of
the programme at £150,000 per person.
Flexible working
We comply with, and often exceed, our statutory obligations to provide
flexible and part-time working patterns for our employees to reflect
stages in their individual lifecycle. We provide the opportunity for money
and credit management advice to the under 30s through to financial
management and budgeting in retirement. We are committed to
considering modifying working practices and policies to reflect what is
important to employees at different points in the employment lifecycle.
LGBT+
Identity+, our lesbian, gay, bisexual and trans employee network, has
over 500 members. Plans are in place to gain external recognition for
the excellent colleague support provided by the network, which has
an active presence in our communities often being involved, in annual
pride events across our region. We hope to encourage those involved
in our LGBT+ network to play an active role in their own communities
to promote United Utilities as an employer of choice.
Gender pay
At present, we have a higher proportion of men at more senior levels
within our organisation and more men in higher-skilled and higher-paid
roles which contributes to the gender pay gap. We have an action plan
in place which focuses on how we challenge tradition and attract more
women into these currently male dominated roles; how we develop
our female talent to increase the number of women in senior positions
and strengthen succession pipelines; and leading from the top on a
commitment to change. Our gender equality network (GENEq) aims to
support, mentor, develop, inspire and promote both men and women
in United Utilities to realise the benefits of gender equality. Our gender
pay gap figures are shown below. Further details can be found in the
full report; a copy can be found at unitedutilities.com/corporate/
responsibility/employees/diversity/
Median and mean
gender pay gap
Median and mean bonus
gender pay gap(3)
17.9%
15.3%
13.1%
National
median(1)
16.3%
Our median(2)
33.5%
Our median
bonus pay gap
Our mean(2)
Our mean bonus pay gap
93.3 per cent of males and 96.2 per cent of females received a bonus
payment. Levels are less than 100 per cent as the eligibility criteria
requires a minimum level of service to be completed during the bonus
year and therefore some new starters may not be eligible.
(1) Source: Office for National Statistics October 2018.
(2) Source: company payroll data for the month of April 2018.
(3) Source: company payroll data, bonus paid in the 12 months period preceding 30 April 2018.
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Code principle – Relations with shareholders
Introduction by Dr John McAdam
“ We welcome the opportunity to engage with investors. Face-to-face
meetings are particularly useful in gaining a better understanding of
investors’ views. Feedback from investor meetings is regularly shared
with board colleagues.”
The board as a whole accepts its responsibility for engaging with
shareholders and is kept fully informed about information in the
marketplace including:
›
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The investor relations adviser produces an annual survey of
investors’ views and perceptions about United Utilities, the results
of which are presented and discussed by the board;
The board receives regular updates and feedback on investor
meetings involving the CEO, CFO and/or investor relations team 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. Feedback
from any such meetings would be shared with all board members.
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:
›
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A regular schedule of face-to-face 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 meetings; and
Close contact is also maintained between the investor relations team
and a range of City analysts that conduct research on United Utilities.
In 2018/19, through our investor relations programme, we met or offered
to meet with 78 per cent, by value, of the overall shareholder base, of the
targetable institutional shareholder base (after 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, regulatory
changes and political risk. 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 performance against
the final determination for the 2015–20 period is a key area of interest,
and investors are also 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. Furthermore,
investors are keen to hear how we are progressing with our plans for the
2020–25 regulatory period and beyond.
Retail shareholders
Despite the privatisation process being around 30 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) while 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 also available on our website; these are the
principal ways in which we communicate with our retail 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 2018 AGM
At the 2018 AGM, votes were cast in relation to approximately 65 per
cent of the issued share capital. All 21 resolutions were passed by the
required majority.
Votes were cast in favour of the reappointment of the board directors
as follows:
Dr John McAdam
Steve Mogford
Stephen Carter
Mark Clare
Alison Goligher
99.73% Russ Houlden
99.73% Brian May
99.74% Paulette Rowe
99.73% Sara Weller
99.72%
Steve Fraser was elected with 99.55% of the votes.
99.29%
99.72%
99.74%
99.51%
Sir David Higgins will stand for election by shareholders for the first time
at the 2019 AGM as a non-executive director and Chairman designate.
Stock Code: UU.
unitedutilities.com/corporate
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Relations with banks and credit investors
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 and beyond. We are heavily reliant on successfully
acquiring long-term funding from banks and credit investors 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 £1.8 billion of loan
funding 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 £7,816 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
unitedutilities.com/corporate/investors/credit-investors
During the year, the rating agency services provided to the group were
reviewed. Moody’s Investors Service Limited, S&P Ratings Europe
Limited and Fitch Ratings Ltd were appointed to provide credit rating
services to the group for an initial three-year term. Future debt capital
market issuance by the group will benefit from solicited ratings from all
three rating agencies.
Code principle – Accountability
Introduction by Dr John McAdam
“ Risk and viability reporting are an area of key interest for investors.
Management has recommended, and the board has approved a more
detailed and informative long-term viability statement, in line with
the FRC’s guidance in its letter to audit committee chairs and finance
directors published in October 2018.”
Board’s approach to risk management
and internal control
The board discharges its responsibility for determining the nature
and extent of the risks that it is willing to take to achieve its strategic
objectives through the risk appetite framework. As a key part of the risk
management framework, risk appetite captures the board’s desire to
take and manage risk relative to the company’s obligations, stakeholder
interests and the capacity and capability of our key resources.
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.
Political risk is also closely monitored.
Review of the effectiveness of the risk
management and internal control systems
During the year, the board reviewed the effectiveness of the risk
management systems and internal control systems, including financial,
operational and compliance controls. Taking into account the principal
risks and uncertainties set out on pages 72 to 75 , and the ongoing work
of the audit committee in monitoring the risk management and internal
control systems on behalf of the board (and to whom the committee
provides regular updates, see pages 109 and 111), 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
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 (which has particular responsibility for operational and
compliance controls), the company’s risk management and internal
controls were indeed effectively monitored throughout the year.
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In the review of the effectiveness of risk management and internal
controls systems, the board also took into account the:
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Biannual review of significant risks (see page 68);
Outcome of the biannual business unit risk assessment process (see
page 110);
Activities and review of the effectiveness of the internal audit
function (see page 110);
Opinion provided by internal audit in relation to their work, that
“the governance, risk management and internal control framework
was suitably designed and effectively applied within the areas under
review”;
Self-assessment provided by management confirmed compliance
with a range of key internal policies, processes and controls (see
page 111);
Review of reports from the group audit and risk board (see page 110);
Oversight of treasury matters in particular debt financing and
interest rate management (see page 64); and
Review of the business risk management framework and
management’s approach and tolerance towards risk (see page 110).
Going concern and long-term viability
The board, following the review by the audit committee, concluded that it
was appropriate to adopt the going concern basis of accounting (see page
68). 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 below).
Assurance supporting these statements was provided by the review of:
the group’s key financial measures and contingent liabilities; the key credit
financial ratios; and 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, and include emerging and more
topical risks.
These principal risks and uncertainties are detailed on pages 72 to 75,
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, while also
highlighting the reputational and customer service impact. This 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
87) including such matters as liquidity policy, the group’s capital funding
requirements and interest rate management. The board has reconsidered
its viability assessment period. In line with the work undertaken to support
the financial resilience element of the UUW draft business plan, as
submitted to Ofwat on 3 September 2018, the board believes that under
the current regulatory and statutory framework a period of seven years
to assess the group’s long-term viability is appropriate. After review, the
board concluded that among other things, because of the nature of the
regulatory regime of the water sector and the clarity of Ofwat’s business
plan assessment process contributing to the longer-term planning horizon
for the sector, it was comfortable with the extension of the period from a
five-year to a seven-year term.
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. This assessment has been performed in the context
of the group’s prospects as considered over the longer term. Based on this
viability assessment, the directors have a reasonable expectation that the
group will be able to continue in operation and meet its liabilities as they fall
due over the seven year period to March 2026.
Basis of assessment
The long-term planning detailed on page 48 assesses the group’s prospects
and establishes its strategy over a 25-year time horizon consistent with its
rolling 25-year licence and its published long-term strategy. This provides
a framework for the group’s strategic planning process, and is key to
achieving the group’s aim of providing the best service to customers at the
lowest sustainable cost and in a responsible manner over the longer term,
underpinning our business model set out on pages 24 to 36.
In order to achieve this aim and promote the sustainability and resilience
of the business, due consideration is given to the management of risks
over the long term that could impact on the business model, future
performance, credit ratings, solvency and liquidity of the group. An
overview of our risk management approach that supports the group’s
long-term planning and prospects, together with the principal risks and
uncertainties facing the business, can be found on pages 68 to 75.
Fundamental assumptions
This viability statement is based on the fundamental assumption that
the current regulatory and statutory framework does not substantively
change, for example a change that facilitated the compulsory purchase
of the shares or assets of either UUW or the company for the
renationalisation of the water sector.
Viability assessment: resilience of the group
The viability assessment is based upon the group’s medium-term
business planning process, which sits within the overarching strategic
planning process and considers:
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the group’s current liquidity position – with £1.0 billion of available
liquidity at March 2019 covering funding requirements through to
2021, this provides a significant buffer to absorb short-term cash flow
impacts;
the group’s robust capital solvency and credit rating positions – with
a debt to regulatory capital value (RCV) ratio of around 60 per cent,
a robust pension position and current credit ratings of A3/A-/A- with
Moody’s, S&P and Fitch respectively, this provides considerable
headroom supporting access to medium-term liquidity where
required;
the group’s expected performance, underpinned by its historical
track-record – Ofwat’s Initial Assessment of Plans, published in
January 2019, scored the group’s business plan the highest across
the industry and has given good early visibility of expected cash
flows for the 2020–25 period; and
the current regulatory framework within which the group operates –
which provides a high degree of cash flow certainty over the regulatory
period and the broader regulatory protections outlined below.
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. This is despite the likely inability to secure future EIB funding
should the UK exit from the EU.
Stock Code: UU.
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From a regulatory perspective, the group benefits from a rolling 25-year
licence and a regulatory regime in which regulators – including the
economic regulator, Ofwat – are required to have regard to the principles
of best regulatory practice. These include that regulation should be
carried out in a way that is transparent, accountable, proportionate,
consistent and targeted. Ofwat’s primary duties provide that it should
protect consumers’ interests, by promoting effective competition
wherever appropriate; secure that the company properly carries out its
statutory functions; secure that the company can finance the proper
carrying out of these functions – in particular through securing reasonable
returns on capital; and secure that water and wastewater supply systems
have long-term resilience and that the company takes steps to meet long-
term demands for water supplies and wastewater services.
In addition, from an economic perspective, given the market structure
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.
Viability assessment: resilience to principal risks
facing the business
The directors have assessed the group’s viability based on the
resilience of the group and its ability to absorb a number of ‘severe
but reasonable’ scenarios, derived from the principal risks facing the
group, as set out on pages 72 to 75. Such risks include: environmental
risks such as the occurrence of extreme weather events; political
and regulatory risks; the risk of critical asset failure; significant cyber
security breaches; and the potential for a restriction to the availability of
financing resulting from a capital markets crisis. Specifically in relation
to a ‘no deal’ Brexit scenario, while this may have adverse operational
and financial impacts on the group, this risk does not represent a
significant risk to the ongoing viability of the group.
The assessment has considered the impact of these scenarios on the
group’s business model, future performance, credit ratings, solvency
and liquidity over the course of the viability assessment period. This
assessment has demonstrated the group’s ability to absorb the impact
of all severe but reasonable scenarios modelled, without the need to
rely on the key mitigating actions detailed below.
As part of the assessment, reverse stress testing of extreme theorectical
scenarios has been performed to understand the headroom in the
group’s ability to absorb all severe but reasonable scenarios.
Viability assessment: key mitigating actions
In the event of more extreme but low likelihood scenarios occurring,
there are a number of key mitigations available to the group, the
effectiveness of which are underpinned by the strength of the group’s
capital solvency position.
As well as the protections that exist from the regulatory environment
within which the group operates, a number of actions are available
to mitigate more severe scenarios, which include: the raising of new
finance; capital programme deferral; the closeout of derivative asset
positions; the restriction of dividend payments; and access to additional
equity.
Extending the viability period to seven years
Recognising the group’s expected performance underpinned by its
historical track-record, Ofwat’s positive assessment of its 2020–25
business plan which was awarded fast-track status and the protections
provided by the regulatory framework, the board considers it appropriate
to extend the viability statement to cover a seven-year period.
In determining this period, the board had regard for the increasing level
of uncertainty as the duration of the assessment period is extended and
the desire to maintain a robust viability assessment.
Governance
The analysis underpinning this assessment has been through a robust
internal review process, which has included scrutiny and challenge from
the audit committee and board, and has been reviewed by the group’s
external auditor, KPMG, as part of their normal audit procedures.
Going concern
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 note 1 to the accounts.
Read more about Our business model on pages 24 to 38
Read more about the Principal risks and uncertainties on pages 68 to 75
Read more online at unitedutilities.com/corporate/about-us/our-
future-plans/
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Corporate governance report
Audit committee
During the year, the committee reviewed and agreed with management’s
proposal to extend the company’s 2019 long-term viability period to cover-
a seven-year period.
Dear Shareholder
In my report this year I have sought to provide shareholders with an
understanding of the work we have done as the audit committee to
provide assurance on the integrity of the 2018/19 annual report and
financial statements. All directors have a duty to act in a way they
consider, in good faith, would be most likely to promote the success of
the company for the benefit of its members as a whole, and have regard
to other stakeholders as set out in s172 of the Companies Act 2006. The
directors’ responsibility statement in respect of the annual report and
financial statements can be found on page 153.
The particular role of the audit committee is to ensure that the interests
of shareholders are properly protected in relation to the company’s
financial reporting and internal control arrangements and to provide
challenge to the decisions and approach made by the management
team relating to the content and disclosures within the company’s
financial reports. As articulated in both the 2016 and 2018 versions of
the Code, “the board should present a fair, balanced and understandable
assessment of the company’s position and prospects”. The board asks
the audit committee to advise on whether in fact “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 audit committee’s role is to ensure that management’s disclosures
reflect the supporting detail or challenge them to explain and justify
their interpretation and, if necessary, re-present the information. The
committee is supported in this role by using the expertise of the external
auditor, who in the course of the statutory audit, reviews the accounting
records kept by the company to test whether information is being
recorded in line with agreed accounting practices. The external auditor
presents its findings to the shareholders as the owners of the business,
and their report is set out on pages 156 to 161. The committee reports its
findings and makes recommendations to the board accordingly.
The audit committee is responsible for ensuring that the three-way
relationship between the committee, the auditor and the company’s
management is appropriate. The external auditor must be independent of
the company. Independence is a key focus for both the external auditor,
whose staff must comply with their firm’s own ethics and independence
criteria which must be consistent with the FRC’s Revised Ethical Standard
2016, and the committee, in order to ensure the integrity of the auditing
process and the annual report and financial statements. Information on
how the committee assesses the independence of the external auditor is
set out on page 107.
In June 2018 the FRC published the 2017/18 versions of its audit quality
inspection reports (AQIRs) of the ‘big four’ audit firms, including KPMG.
The FRC, as the competent authority for audit regulation in the UK,
were critical of the firms for different reasons, but their overall view was
that there was a decline in audit quality. In response to its AQIR, KPMG
have set in place an audit quality transformation plan and invested in
face-to-face training courses for all their audit professionals, and have
expressed their commitment to continue their focus on audit quality.
The committee invited KPMG, at its meeting in September 2018, to
explain their audit quality transformation plan and the initiatives being
applied to their plans and strategy for our 2018/19 audit (see page
106). The committee welcomes this commitment and will review the
evidence of the enhancements to the processes later in the year.
Pictured: Paulette Rowe, Brian May and Stephen Carter
Quick facts
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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 and the Board is satisfied that the committee as a whole
has competence relevant to the sector and its members have an
appropriate level of experience of corporate financial matters.
Other regular attendees at meetings at the invitation of the
committee include the Chairman of the board, 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). None of these attendees are members of the committee.
The representatives from KPMG and the head of audit and risk
are each afforded time with the committee and the company
secretary to raise freely any concerns they may have without
management being present.
The committee is authorised to seek outside legal or other
independent professional advice as it sees fit, but has not done
so during the year.
Quick links
Terms of reference –
unitedutilities.com/corporate-governance
Audit committee members
Brian May (chair)
Stephen Carter
Paulette Rowe
Stock Code: UU.
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During the year, the committee reviewed and agreed with management’s
proposal to extend the company’s 2019 long-term viability statement to
cover a seven-year period (see page 109), rather than the five-year period
as in previous years. It was agreed that such an approach was appropriate
given the nature of the regulatory regime in the water sector and the
clarity of Ofwat’s business plan assessment contributing to the longer-term
planning horizon for the sector.
This is the last year when my report contains an overview of the
company’s whistleblowing arrangements (see page 111), as this work
in future will be the direct responsibility of the board, reflecting the
2018 Code; however, the committee will act upon any relevant findings
impacting its areas of responsibility as appropriate.
As chair of the committee I reiterate the board’s view (see page 85) that
the committee as a whole has competence relevant to the sector, as
disclosed in the biographies of the relevant committee members (see
pages 80 to 83). 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.
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
stakeholders, particularly our shareholders and customers.
We continue to be committed to providing meaningful disclosure of the
committee’s activities. As chair of the audit committee, I am intent on
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 can be found on page 91.
The following report was approved by the committee at its meeting held
on 14 May 2019.
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.
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Establish policies for the provision of any non-audit services by the
auditor.
Review the scope and the results of the annual audit and report to
the board on the effectiveness of the audit process and how the
independence and objectivity of the auditor has been safeguarded.
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.
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 (up until
31 March 2019), reporting fraud and other inappropriate
behaviour and to receive reports relating thereto.
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Report to the board on how it has discharged its responsibilities.
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What has been on the committee’s agenda during the year?
The committee has an extensive agenda of items of business focusing on the audit, assurance and risk processes within the business which it deals
with in conjunction with senior management, the auditor, the internal audit function and the financial reporting team. In doing so it ensures that
high standards of financial governance, in line with the regulatory framework as well as market practice for audit committees going forward, are
maintained. There were four scheduled meetings of the committee during the year. Items of business considered by the committee during the year
are set out in the table below.
− Considered the issues and findings brought to the committee’s attention by the internal audit team and satisfied itself that
management has resolved or is in the process of resolving any outstanding issues or concerns.
Cross reference
See page 109
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− Reviewed and discussed the reports from the financial reporting team on the financial statements, considered
See page 108
management’s significant accounting judgements, and the policies being applied and how the statutory audit contributed
to the integrity of the financial reporting.
− Reviewed the regulatory reporting process relating to the annual performance report for UUW as required to be submitted
to Ofwat and noted the differences between the regulatory and statutory accounts.
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− Reviewed the company’s approach to the adoption of International Financial Reporting Standards (IFRS) IFRS 9 Financial
See page 168
Instruments and IFRS 15 Revenue from Contracts With Customers which was a particular focus for the committee. Updates
on the adoption of IFRS 16 Leases, which would first impact the 31 March 2020 financial statements, were received.
− Reviewed the proposed audit strategy for the 2018/19 statutory audit, including the level of materiality applied by KPMG,
audit reports from KPMG on the financial statements and the areas of particular focus for the 2018/19 audit, and tasked
management to resolve any issues relating to internal controls and risk management systems.
See page 156
− Reviewed the basis of preparation of the financial statements as a going concern (prior to making a recommendation to the
See page 101
board) as set out in the accounting policies.
− Reviewed the long-term viability statement, in particular the extension of the period from a five-year to a seven-year term,
See page 101
prior to making a recommendation to the board.
− Reviewed the results of the committee’s assessment of the effectiveness of the 2017/18 external audit along with
See page 106
receiving a presentation from KPMG on the proposals for their Audit Quality Transformation Plan and confirmation of the
independence of the auditor and made a recommendation to the board on the reappointment of KPMG as the external
auditor at the forthcoming annual general meeting.
− Reviewed the 2018/19 annual report and financial statements and provided a recommendation to the board that they
See page 106
complied with the Code principle to be ‘fair, balanced and understandable’.
− Reviewed KPMG’s proposed audit quality improvement plan applicable to the 2018/19 statutory audit.
− Approved revised terms of reference, which would be applied from 1 April 2019, reflecting the 2018 UK Corporate
See page 106
See page 103
Governance Code prior to making a recommendation to the board.
− Reviewed the effectiveness of the risk management and internal control systems prior to making a recommendation to
See page 109
the board.
− Negotiated and agreed the statutory audit fee for the year ended 31 March 2019 and agreed the fee approach for
See page 107
subsequent years.
− Reviewed and approved the non-audit services and related fees provided by the external auditor for the year 2018 and
See page 107
approved the policy on non-audit services provided by the auditor for 2019/20.
− Monitored fraud reporting and incidents of whistleblowing.
− Biannual oversight and monitoring of the group’s compliance with the Bribery Act which the board then reviews annually.
− Approved the strategic internal audit planning approach and reviewed reports on the work of the internal audit function
See page 111
See page 111
See page 110
from the head of audit and risk.
− Reviewed the quality and effectiveness of internal audit and the effectiveness of the current co-source arrangements.
− Reviewed and approved the approach and internal audit plan for 2019/20.
− Reviewed the conclusions of the committee’s annual evaluation. The internally facilitated evaluation was undertaken
See page 110
See page 110
See page 91
as part of the overall board evaluation. The review explored: time management, the composition of the committee and
the management of the meetings; the committee’s processes and support; the agenda and work of the committee; and
the priorities for change. All elements of the workings of the committee reviewed scored well. It was concluded that the
committee continued to be effective.
Stock Code: UU.
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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”.
It was reported in the 2018 audit committee report that KPMG had
expressed its commitment to the committee to improve audit quality,
providing extra resource to supplement the usual audit team in order
to ensure additional oversight and review of the 2017/18 audit.
Consequently, KPMG provided an overview of its updated Audit Quality
Transformation Plan (AQTP) to address the improvements identified by
the FRC, in its AQIRs, to the committee in September 2018. Their AQTP
included: a more standardised audit approach; their intention to hold
companies to account for the quality of the information provided to them
in the audit process; their intention to provide more feedback to companies
on the findings of their audit and provide additional senior level support to
the KPMG audit teams during the audit. The committee will review the
evidence of the enhancements to the external audit processes later in
the year.
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 156 to 159.
KPMG presented the strategy and scope of the external audit for
the forthcoming financial year at the meeting of the committee held
in September, highlighting any areas which would be given special
consideration. KPMG report against this audit scope at subsequent
committee meetings, providing an opportunity for the committee to
monitor progress and raise any questions. Private meetings are also held at
each committee meeting between the audit committee and representatives
of the external auditor without management being present in order to
encourage open and transparent feedback by both parties.
The committee received regular updates on the calculation of
underlying operating profit measures as one of the principal alternative
performance measures (APMs). A guide to APMs can be found on
page 66. APMs are used in accordance with the ESMA guidelines and
management highlights any impact on APMs as a result of changes to
accounting methods/transactions.
On completion of the external audit process 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 external auditor, complete
a feedback questionnaire seeking their views on how well KPMG
performed the year-end audit.
The key performance indicators included in the strategic report (see
pages 51 to 54) were, among others, those used by management and
some of which reflect the regulatory measures to be monitored by
either Ofwat, the DWI or the EA during the 2015–20 period.
Additionally, the committee was satisfied that all the key events and
issues which had been reported to the board in the executive team’s
monthly board reports during the year, both good and bad, had been
adequately referenced or reflected within the annual report.
How we assessed the effectiveness
of the external audit process
The committee, on behalf of the board, is responsible for the
relationship with the external auditor, and part of that role is to examine
the effectiveness of the audit process. Audit quality is a key requirement
of the external audit process.
In June 2018, the FRC, as the competent authority for audit regulation in
the UK, published its 2017/18 Audit Quality Inspection Reports (AQIRs)
for each of the ‘big four’ audit firms, including KPMG. Such reports are
published annually. In the AQIRs, the FRC identified areas of improvement
for all four firms. KPMG was asked to make improvements in the following
areas: to ensure that the extent and rigour of challenge of management
in areas of judgement fully demonstrates professional scepticism; to
strengthen the involvement of the group audit team in component
audits; to improve the consistency and quality of audit work over pension
scheme assets and liabilities; and to enhance the audit of management
review controls, in particular for entities with long-term contracts. KPMG
was identified as having made good progress in ensuring that its policies
and procedures on independence complied with the requirements of the
FRC Revised Ethical Standard 2016 (FRC’s Ethical Standard).
Views of the respondents were sought in terms of:
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the robustness of the external audit process and degree of
challenge to matters of significant audit risk and areas of
management subjectivity;
› whether the scope of the audit and the planning process were
appropriate for the delivery of an effective and efficient audit;
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the quality of the delivery of the audit;
the expertise of the audit team conducting the audit;
that the degree of professional scepticism applied by the external
auditor was appropriate;
the appropriateness of the communication between the committee
and the external auditor in terms of technical issues;
the quality of the service provided by the external auditor;
their views on the quality of the interaction between the audit
partner, the audit senior manager and the company; and
› whether the statutory audit contributed to the integrity of the
group’s financial reporting.
The feedback was collated and presented to the committee’s meeting
in November 2018, at which the conclusions were discussed and any
opportunities for improvement brought to the attention of the external
auditor.
In summary, the committee concluded, that given KPMG’s commitment
to make improvements to its policies and processes impacting audit
quality, and in relation to the additional oversight provided in relation
to the 2017/18 audit, it was agreed that the external audit process and
services provided by KPMG were satisfactory and effective.
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How we assessed the independence
of our external auditor
There are two aspects to auditor independence that the committee
monitors to ensure that the external auditor remains independent of
the company.
Firstly, in assessing the independence of the auditor from the company
the committee takes into account the information and assurances
provided by the external auditor confirming that all its partners and staff
involved with the audit are independent of any links to United Utilities.
KPMG confirmed that all its partners and staff complied with their ethics
and independence policies and procedures which are fully consistent with
the FRC’s Ethical Standard including that none of its employees working
on our audit hold any shares in United Utilities Group PLC. KPMG is also
required to provide written disclosure at the planning stage of the audit
about any significant relationships and matters that may reasonably be
thought to have an impact on its objectivity and independence and that
of the lead partner and the audit team. The lead audit partner must
change every five years and other senior audit staff rotate at regular
intervals.
Secondly, the committee develops and recommends to the board
the company’s policy on non-audit services and associated fees that
are paid to KPMG. The EU Audit Directive (2014/56/EU) and Audit
Regulation (537/2014) (the Regulation) came into force in the UK on
17 June 2016. Associated guidance was included in the FRC’s Ethical
Standard, which prohibits 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. The FRC’s
Ethical Standard clarified that non-audit services would 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.
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The cap will first apply for the group in the year ending 31 March 2021
and, as such, our year ended 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 revised the 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 is
applied for individual items that the CFO can approve, with individual
items in excess of £10,000 requiring the approval of the committee.
Fees for non-audit services are shown in the bar chart below (2019:
£65,000) and represent 15 per cent of the total audit fees. Non-
audit services fees (2018: £80,000; 2017: £201,000) in 2017 were
considerably higher reflecting the inclusion of fees paid to Makinson
Cowell, a subsidiary of KPMG, which provided investor relations
services to the group until 31 March 2017. Investor relations services
are regarded as a prohibited service under the Regulation. Fees paid
to KPMG also include the cost of the UUW regulatory assurance work
they undertake which is separate to the regulatory audit. While this
work could be performed by a different firm, the information is in fact
more granular breakdowns of data that form part of the statutory audit,
and by KPMG undertaking the work it reduces duplication and saves
considerable cost.
Work undertaken by KPMG in auditing management’s methodology
and processes in the implementation of the new international financial
reporting standards and related disclosures and judgements is included
in the statutory audit fee.
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 continue to be independent, and
free from any conflicting interest with the group.
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Corporate governance report
Audit committee
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External auditor reappointment
We last undertook a formal tender process for statutory audit services
in 2011. KPMG commenced their appointment as auditor and presented
their first report to shareholders for the year ended 31 March 2012. The
lead audit partner must change every five years. Bill Meredith, who has
considerable audit experience of other FTSE 100 utility companies, is in
his third year in the role. The 2018/19 year-end audit has been KPMG’s
eighth consecutive year in office as statutory auditor. As previously
reported, the most recent audit tender review was undertaken in
September 2015, when it was concluded that the committee would
next undertake a competitive tender for statutory audit services for the
year ended 31 March 2022, most probably during 2020. This was felt
to be an appropriate point in the regulatory cycle, due to the benefits
of having an experienced audit team in place in the run-up to the 2019
price determination for the regulatory period commencing on 1 April
2020. United Utilities has complied fully with the provisions of The
Statutory Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014 for the year ended 31 March 2019.
As a result, the committee recommended to the board that KPMG be
proposed for reappointment at the forthcoming AGM in July 2019. There
are no contractual obligations that restrict the committee’s choice of
external auditor; the recommendation is free from third-party influence
and no auditor liability agreement has been entered into.
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
where applicable):
Capitalisation of fixed assets
Fixed assets (see page 178) represent a subjective area, particularly in
relation to costs permitted for capitalisation and depreciation policy.
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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 deemed to be appropriate; and
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.
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The committee reviewed the current levels of doubtful debt
and credit note provisioning (see page 181 for more detail). The
committee challenged management over the appropriateness 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. In addition, during the current year
the impact of the equalisation of Guaranteed Minimum Pension (GMP)
payments between males and females was reflected in the financial
statements as a significant one-off past service cost recognised in the
income statement.
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The committee sought from management an understanding as to
the factors which led to the increase in the IAS 19 net retirement
benefit surplus during the period and noted that the scheme
specific funding basis had not been impacted by this volatility.
Management presented an explanatory note (see pages 197 to
201) 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 page
197 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 – including changes
to the basis on which mortality assumptions are set – were
appropriate and fairly balanced in determining the net retirement
benefit surplus; and
The committee also reviewed the methodology used in calculating
the impact of GMP equalisation reflected in the financial
statements, which was performed by the group’s external actuary.
Having considered this together with the audit work KPMG
performed in relation to this significant past service cost, the
committee concluded that the approach taken was appropriate and
in accordance with the relevant legal requirements.
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.
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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 page 184 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.
Having assessed management’s provisioning methodology and
rationale, and having challenged the views taken by management
where necessary, the committee concluded that the provisions
management had made were appropriate. The committee reached
this conclusion based on the facts behind each provision, 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 assurance provided by KPMG who cover these as
part of their audit.
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Carrying value of loans to and investments in the
Water Plus joint venture
The group has interests relating to its Water Plus joint ventures in the
form of investments (see page 179) and loans receivable (see page
202), the recoverability of which are considered with reference to the
estimated future cash flows of the joint ventures. Management tests
whether any impairment exists in relation to the equity investments and
loans receivable if adverse changes in conditions associated with the
joint venture suggest that this is appropriate. The committee scrutinised
the impairment assessments performed by the management of Water
Plus which the group considers when making its own assessment (see
page 179). This involved reviewing the valuations that underpin the
carrying values of these amounts and challenging the methodology and
assumptions used. In reviewing these assumptions the committee met
with the Water Plus executive team in order to understand the business
plan underpinning the Water Plus valuation and consider whether it
was appropriate for management to base its impairment assessment on
this. Following robust discussion on this issue, the committee confirmed
that it was satisfied that the carrying values of these interests at the
reporting date were recoverable.
Derivative financial instruments
The group has a significant value of swap instruments, the valuation
of which is based upon models which require certain judgements
and assumptions to be made (see page 196). 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 upon the above, the committee was satisfied with the
judgements made by management.
Underlying profit adjustment
During the year the committee considered and challenged
management’s treatment of items as adjustments to underlying
profit measures and satisfied itself that those items being reported as
adjustments met the requirements of the group’s policy (see pages 66
to 67). In doing this the committee specifically scrutinised and satisfied
itself over the appropriateness of management’s decision to include
costs associated with the dry weather event experienced during the
year as an adjusting item when calculating underlying profit measures.
Going concern and long-term viability
The committee challenged and scrutinised management’s detailed
assessment of the group’s long-term viability and its ability to continue
as a going concern. In doing this the committee took into account the
risks facing the business, including those associated with the possibility
that the UK could leave the European Union without a Brexit deal, and
its ability to withstand a number of severe but reasonable scenarios.
Having considered management’s assessment the committee approved
the Long-term viability statement set out on page 101, including the
increase in the period over which the assessment is given from five
years to seven years and recommended it to the board for approval.
In reading the above significant issues considered by the committee,
shareholders might also wish to examine the auditor’s report and their
assessment of risks of material misstatement on pages 156 to 159.
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Read more about Our business model on pages 24 to 26
Read more about the Principal risks and uncertainties on pages 68 to 75
Read more online at unitedutilities.com/corporate/about-us/our-
future-plans/
The main features of the group’s internal
controls and risk management systems
are summarised below:
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 policies
and processes, systems 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 and, as such, provides an indication
of the behaviours being exhibited by employees in the areas under review.
Once any recommendations are agreed with management, the internal
audit 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,
areas of business and regulatory change, prior audit findings and the
cyclical review programme. The purpose, scope and authority of internal
audit is defined within its charter which is approved annually by the
audit committee.
Stock Code: UU.
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Corporate governance report
Audit committee
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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 and there is a documented process to manage possible
conflicts of interest with the co-sourced resource. Ensuring that PwC
remain independent in the course of its work is crucial to the integrity
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.
During the year, the committee reviewed the current operating model,
in particular the balance of in-house versus co-sourced resource, and
concluded that, while minor improvements were identified, the current
approach was satisfactory.
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, a quarterly summary dashboard providing a snapshot of the
progress against the internal audit plan tabled at each committee
meeting as well as any other periodic quality reporting requested.
An annual stakeholder survey in the form of a feedback questionnaire
is circulated to committee members, senior management and other
managers who have regular contact with the internal audit function,
including representatives from the external auditor KPMG and the
co-source audit provider PwC. The responses were anonymous to
encourage open and honest feedback, and were consistently favourable,
as were previous surveys.
Periodically, the quality and effectiveness of the internal audit
function is also assessed externally, with the most recent review being
undertaken early 2019. Taking all these elements into account, the
committee concluded that the internal audit function was an effective
provider of assurance over the organisation’s risks and controls and
appropriate resources were available as required.
Internal audit, led by the head of audit and risk, covers the group’s
principal activities and reports to the committee and functionally to the
CFO. The head of audit and risk attends all scheduled meetings of the
audit committee, and has the opportunity to raise any matters with the
members of the committee at these meetings without the presence
of management. He is also in regular contact with the chair of the
committee outside of the committee meetings.
Risk management systems
The committee receives updates and reports from the head of audit
and risk on key activities relating to the company’s risk management
systems and processes at every meeting. These are then reported to the
board, as appropriate. The group designs its risk management activities
in order to manage rather than eliminate the risk of failure to achieve its
strategic objectives.
The CFO has executive responsibility for risk management and is
supported in this role by the head of audit and risk and the corporate
risk manager and his team. The group audit and risk board (GARB) is
a sub-committee of the executive team. The GARB meets quarterly
and reviews the governance processes and the effectiveness and
performance of these processes along with the identification of
emerging trends and themes within and across the business. The work
of the GARB then feeds into the information and assurance processes of
the audit committee and into the board’s assessment of risk exposures
and the strategies to manage these risks.
Supplementing the more detailed ongoing risk management activities
within each business area, the 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, while also identifying 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. The maturity of
the risk management framework and its application across the business
is assessed on an annual basis against a defined maturity model. This
assessment provides an objective appraisal of the degree of maturity
in how the risk management system is being applied and the quality of
each risk in terms of quantification and management. The results of the
maturity assessment are reported to the GARB, and actions agreed with
business units.
An external assessment of the risk management process last took place
in 2015/16.
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During the year, the audit committee was kept fully appraised in
regular updates on the progress and findings of investigations of cases
of whistleblowing and alleged fraud and any remedial actions taken.
A number of employees have been selected and received specialist
training in order to conduct investigations of cases of whistleblowing
and alleged fraud.
The company has an anti-bribery policy to prevent bribery being
committed on its behalf, which all employees must follow, and
processes in place to monitor compliance with the policy. As part of the
anti-bribery programme, employees are also required to comply with
the group’s hospitality policy. The hospitality policy permits employees
to accept proportionate and reasonable hospitality for legitimate
business purposes only. Our employees and representatives of our
suppliers must also comply with the group’s sustainable supply chain
charter which explains that we will not tolerate corruption, bribery
and anti-competitive actions and we expect our suppliers to comply
with applicable laws and regulations, and in particular never to offer or
accept any undue payment or other consideration, directly or indirectly,
for the purposes of inducing any person or entity to act contrary to their
prescribed duties.
As part of the internal control self-assessment checklist (part of the
group’s internal control processes), senior managers in consultation
with their teams are required to confirm, among other things, that they
have complied with the group’s anti-bribery and hospitality policies. The
anti-bribery programme is monitored and reviewed biannually by the
committee.
The anti-bribery policy is available on the company’s website at
unitedutilities.com/corporate/about-us/governance
The sustainable supply chain charter is available at unitedutilities.com/
corporate/responsibility/stakeholders/suppliers
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.
Whistleblowing, anti-fraud and anti-bribery
For the year ended 31 March 2019 the audit committee was responsible
for reviewing the group’s arrangements for individuals to raise concerns
and the arrangements for investigation of such matters; and for the
company’s procedures for detecting fraud; and the systems and
controls for preventing other inappropriate behaviour. The group’s
whistleblowing policy supports the culture within the group where
genuine concerns may be reported and investigated without reprisals
for whistleblowers. From 1 April 2019, the committee no longer has the
responsibility for overseeing the group’s whistleblowing arrangements,
and the board has assumed this responsibility, reflecting the 2018 Code.
The company operates an independently provided confidential reporting
telephone helpline and web portal for employees to raise matters of
concern in relation to fraud, dishonesty, corruption, theft, security and
bribery. Furthermore, employees are encouraged to raise any matters
relating to health and safety and any activities of the business which
have caused or may cause damage to the environment, such as pollution
or other contamination. Alternatively, any matters of concern can also
be raised with their manager, their human resources business partner
or another senior manager. Employees can remain anonymous if they
wish. All concerns are investigated fully, whether they are raised with a
manager, or via the confidential helpline/web portal.
In the first instance of an incident being reported, a summary of
the allegations is passed to the fraud and whistleblowing committee
(consisting of the company secretary, customer services and people
director, commercial director and head of internal audit and risk)
to decide on the appropriate course of action and investigation
and by whom.
Stock Code: UU.
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Corporate governance report
Corporate responsibility committee
The company’s long-standing commitment to corporate responsibility has provided a
solid foundation upon which to evolve existing programmes, or develop new initiatives,
in response to the growing complexity of managing responsible business issues.
Dear Shareholder
I am pleased to report on the work of the corporate responsibility
committee in 2018/19.
The company’s long-standing commitment to corporate responsibility
has provided a solid foundation upon which to evolve existing
programmes, or develop new initiatives, in response to the growing
complexity of managing responsible business issues. In recognition
of the company’s comprehensive corporate responsibility agenda,
the committee increased the frequency of its meetings to four times
a year. This has provided it with the extra time it needs to consider
the company’s effectiveness in delivering its responsible business
commitments in a rapidly changing external environment and how
it is continuing to build legitimacy among the opinions of customers,
regulators, government and other stakeholders.
Twelve months ago, the committee agreed to a comprehensive forward
agenda of topics covering environmental, social and governance
matters. I am pleased to report on a year where the committee
discussed over 50 papers covering these topics, including papers specific
to its own governance. To prioritise topics for discussion, members
agreed to categorise items into those with a mandatory driver, those
with regulatory interest, stimulus from items of best practice and
committee governance topics.
In a year when water companies submitted their business plans for
the 2020–2025 regulatory period to Ofwat, the committee reviewed
those plans from a responsible business perspective. It concluded that
the company’s approach put much emphasis on communities, the
environment and the importance of working in partnership, especially
around catchment management. The committee welcomed the
company’s plans on affordability and vulnerability support, encouraging
it to do more to promote the good work it is already doing and the
benefits this brings to the communities it serves.
There has been considerable external interest in the water sector
from a variety of stakeholders and at each meeting the committee
has discussed the interaction between corporate responsibility,
communications and reputation. As well as reviewing key reputational
matters, the committee has considered the current debate on
nationalisation and reversing the privatisations of several sectors,
including water. In addition, it explored how the company is acting in
the best interests of customers and particularly welcomed efforts to
connect with customers in a different way, such as the # NWMatters
campaign with the message ‘if it matters to you, it matters to us’.
The committee blended items specific to the moment, most notably
the implications of Brexit on environmental and employment legislation
and the company’s approach to one of the most pressing environmental
issues, plastic, with those items with a longer term dimension, such
as gender pay reporting and natural capital. Several papers addressed
the emerging topic of valuation, exploring how wider benefits, such as
those generated by the services provided by nature, might be woven
into decision-making.
Pictured: Steve Mogford, Stephen Carter and Alison Goligher
Quick facts
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The committee comprises three directors appointed by the
board, two of whom are independent non-executive directors
The company secretary, corporate affairs director and
customer services and people director attend all meetings of
the committee
Senior operational directors attend the committee to report on
the environmental and social impact of particular topics and
initiatives
The corporate responsibility committee has existed for over
eleven years
Terms of reference – unitedutilities.com/corporate-
governance
Quick links
Terms of reference –
unitedutilities.com/corporate-governance
›
Corporate responsibility committee members
Stephen Carter (chair)
Alison Goligher
Steve Mogford
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The company’s long-standing commitment to corporate responsibility has provided a
solid foundation upon which to evolve existing programmes, or develop new initiatives,
in response to the growing complexity of managing responsible business issues.
The committee also returned to issues of continued significance to
North West England, most notably the support given to customers
on lower incomes given the ongoing social and economic challenges
in the region. In addition to the regular review of the dashboard
tracking actions to support customers in vulnerable circumstances, the
committee was pleased to see that a further affordability summit was
convened. This second event brought together the region’s affordability
stakeholders to launch the UK’s first affordability hub, to report
on progress and to identify new initiatives where groups can work
collaboratively.
It has been pleasing to see the progress made in building relationships
with the metropolitan mayors in the North West, especially in Greater
Manchester. Senior managers are engaged at several levels, including
a recently established infrastructure group, holding the vice-chair of
the natural capital group and in securing support for the Manchester-
Pennine resilience scheme.
Governance remained topical and the committee discussed the
company’s response to the 2018 UK Corporate Governance Code’s
recommendation on workforce engagement. The committee looks
forward to the regular updates it will receive on progress and greater
visibility of the work of the company’s employee networks.
The committee discussed the company’s second gender pay report and
its approach to diversity and inclusion. It acknowledged that there will
be short-term fluctuations in the statistics and that, ultimately, success
Main responsibilities of the committee
The board approved an updated set of terms of reference for the
committee in May 2019. Minor amendments were made to take into
account the 2018 UK Corporate Governance Code and the evolution of
corporate reporting with greater emphasis on integrated reporting.
The main duties are to:
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consider and recommend to the board the broad approach to
corporate responsibility taking into account the company’s desired
corporate responsibility positioning;
keep under review the group’s approach to corporate
responsibility and ensure it is aligned with the group strategy;
review corporate responsibility 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;
will only be evidenced by a sustained downward trend over time. The
committee welcomed progress on the company’s action plan, such as
the introduction of a mentoring scheme to support more female talent
on succession plans for senior leader positions, and the increasing
percentage of female apprentices, standing at 23 per cent compared to
a national average of between five per cent and seven per cent.
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 11th consecutive year and 77 per cent of the
stretching targets tracked by the committee to measure the company’s
corporate responsibility performance were achieved.
As a listed company, United Utilities complied with the 2016 UK
Corporate Governance Code and continues to drive for the highest
standards of board leadership, transparency and governance.
Stephen Carter
Chair of the Corporate Responsibility Committee
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› monitor and review compliance with the board’s approach to
corporate responsibility and scrutinise the effectiveness of the
delivery of the policy requirements;
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develop and recommend to the board corporate responsibility
targets and key performance indicators and receive and review
reports on progress towards the achievement of such targets and
indicators;
› monitor and review the steps taken by the company to support
customers in vulnerable circumstances; and
›
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.
Stock Code: UU.
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Corporate governance report
Corporate responsibility committee
Social
Affordability and vulnerability
The committee covered this topic extensively in 2018/19, reviewing
performance against 22 measures used to track progress in assisting
lower income groups. It welcomed an update on the second North West
affordability summit, where the North West hardship hub was officially
launched. Delegates were updated on the company’s new payment
break scheme where bill payments can be delayed for a set period of
time under specific circumstances, such as a temporary drop in income,
to help customers avoid falling into debt.
Diversity and inclusion, including gender pay
It was reported to the committee that there had been good progress
implementing the company’s gender plan, part of its diversity and
inclusion action plan. The committee shared the company’s ambition
to increase diversity of thought and to build a diverse workforce
representative of all the communities served. In its review of the
company’s second gender pay gap report, the committee commented
that the report would benefit from a clearer explanation that the gap
will close through the successful implementation of the company’s
diversity and inclusion strategy.
Update on community strategy
The committee was briefed on the company’s intention to revisit its
community strategy in the context of, among other issues, what the
25-year natural environment plan means for access and recreation;
the impact of the PR19 business plan and its emphasis on building a
positive connection with the communities of the North West; and that
opportunities exist to enhance reputation through more targeted and
effective engagement on current activities.
Early careers and developing young people
The committee was updated on the positive impact of current initiatives
such as the graduate and apprentice programmes, youth employment
programme and focus on STEM subjects. Because of the demands,
skills and diversity gaps of the company, coupled with the expectations
from a future workforce, the company’s review had prompted several
new initiatives including degree apprentices, a partnership with Teach
First to gain access to talented young people from diverse communities
across the region and the launch of an engineering master class with
high schools in Warrington.
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The committee’s agenda during the year:
Environmental
Climate change mitigation
With the current carbon strategy coming to an end in 2020, the
committee was updated on proposed priorities up to 2025. This
included the company’s intention to set a new science-based emissions
target and to evolve its reporting in line with expectations to achieve
net zero emissions. In addition, the strategy will include continued
focus on delivering solutions to reduce operational carbon emissions,
enhancing climate-related disclosure and, as a last resort, purchasing
green credits to achieve emissions targets. It was particularly impressed
with work to develop an organisational capability matrix for carbon,
which incorporates components from existing frameworks such as HM
Treasury Infrastructure Carbon Review and the Taskforce for Climate-
related Financial Disclosure recommendations. The updated carbon
strategy, objectives and targets will be finalised later in 2019.
Climate change adaptation
The committee welcomed the instigation of an independent review
of the company’s approach to climate change adaptation whose
scope includes a critique of the approach taken to assess the risk for
drought, peak demand, sewer flooding and pollution and flooding of
assets; a review of other potential approaches to better assess the risk,
incorporating the findings of UKCP18; and a recommendation of which
method should be adopted for each risk. The findings of this study will
feed into the third round climate adaptation report to be submitted to
Defra in the autumn of 2020.
Valuing natural capital
Some of the steps necessary to adapt to climate change were covered
as part of discussions examining how to better value the services
provided by nature. The committee was presented with an overview
of how the company is developing a strategic plan to implement a
natural capital approach. This takes into account the identification of
specific organisational barriers and challenges in implementing a natural
capital approach, such as explaining the relevance of natural capital; an
action plan to address these challenges, including how natural capital
is measured and adopted through policies and projects, such as the
company’s approach to catchment management; and the identification
of external factors and changes.
Approach to plastics
The committee reviewed the steps being taken by the company to
tackle this high profile issue. It heard how a multi-functional ‘task and
finish’ group has been established to assess the company’s touchpoints
with plastic, creating a ‘water-cycle map’ of potential impacts. The
committee supported the review of the existing evidence base and
the company’s research project with the University of Manchester
to understand how plastics interact with the wastewater treatment
process. It was explained that single use plastic had been removed from
the company’s catering outlets and that dialogue was under way with
suppliers to examine how plastic use could be reduced, in particular for
delivery of materials, water sample bottles and bottled water used in
emergency response. The company was actively supporting the refill
campaign, focusing to begin with in Greater Manchester.
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Governance
Corporate governance
›
Corporate Governance Code – In response to the introduction of
a new requirement on how companies should engage with their
workforces, the committee discussed a number of options. It agreed
that existing communication channels, such as the annual employee
opinion survey, the network of over 200 employee engagement
champions and 80 health, safety and well-being champions, and
the 920 employees involved in inclusion networks that provide
peer-to-peer support for different employee communities, should
be at the heart of the approach. The committee recommended to
the board that a non-executive director act as the designated lead
for workforce engagement and establish an employee voice panel,
supported by subgroups built from existing employee networks
and forums.
›
›
Committee evaluation – In its annual evaluation, the committee
requested that it be presented with a paper examining trends
from other companies and non-governmental organisations and to
calibrate this against the company’s current approach. This will be
discussed later in 2019.
Reporting – The committee was updated on plans to include a
stakeholder materiality matrix in the 2019 Annual Report and
noted the company’s proposal to adopt the International Integrated
Reporting Council’s definition of materiality where “A matter is
material if it could substantively affect the organisation’s ability
to create value in the short, medium or long term”. Read more on
page 45.
Reputation and engagement
›
Reputation – This topic remained a standing agenda item for
committee, allowing it time to examine the relationship between
responsible business topics and reputation. An assessment of the
company’s key reputational risks also remained a standing item.
›
Engagement – The committee discussed several papers on the
company’s approach to stakeholder engagement, including an
analysis of levels of trust following the summer’s dry weather and
stakeholder reaction to the PR19 business plan.
› Measuring and reporting CR performance – The committee
reviewed the company’s 2017/18 corporate responsibility scorecard
with 77 per cent of targets achieved. It noted that some measures
were likely to remain ‘red’ – a predicted shortfall in the sewer
flooding index and the challenging target for the water quality
service index – and the amber status given for the number of
volunteering hours due to fewer volunteering opportunities and the
switch towards the use of agencies at customer roadshows.
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Cross cutting
Brexit and regulatory convergence – environmental
and employment legislation
The committee was provided with an assessment of the likely effects
of Brexit on environmental and water regulation and employment
legislation. It focused its discussions on waste management and
agriculture, noting that company opinions were being heard in the
appropriate forums and that it would be important to continue
engagement with Defra. A limited number of employment issues caused
by Brexit were being addressed and implications for the supply chain
would be kept under review, particularly in terms of labour availability
post Brexit.
Social media policy
A paper was presented to the committee describing how the social
media landscape is ever changing with impacts on consumer behaviour
and opinion as well as the way brands interact with customers. It
discussed how the company is making use of social media and how
it governs social media with employees. The committee supported a
number of next steps including the proposed review of the company’s
social media policy and strategy.
Implementing a value framework
The committee discussed natural capital and social value approaches
which seek to place a value on what a company does beyond traditional
economic parameters. Demonstrating this can provide proof that a
company is delivering on its ‘purpose’. It supported the proposed
approach for the company to articulate more comprehensively the
value it brings to the communities it serves, to place a monetary value
on existing and new measures and to seek to incorporate value into
decision-making processes and tools.
Looking to the next year, the committee will:
in the context of discussing and agreeing the company’s corporate
›
responsibility commitments for the period 2020 to 2025, take stock
of the company’s corporate responsibility journey so far, its current
status and its ambition;
›
›
›
›
›
consider new and emerging issues which, in some cases, will be
discussed by the committee for the first time, such as digital and
responsible business, air quality, sustainable drainage, access and
recreation and green finance;
return to issues previously discussed to examine progress such as
the company’s efforts to support customers on low incomes, what
Brexit means for environmental and employment legislation, human
rights, sustainable supply chain, plastics, talent and young people,
progress on carbon strategy, community strategy and diversity and
inclusion;
discuss progress on high profile initiatives such as employee voice
and gender pay;
continue its focus on the interaction between corporate
responsibility, communications and reputation, including brand; and
consider matters of governance such as the committee’s terms of
reference.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Annual statement from the
remuneration committee chair
Our executive remuneration arrangements align to the business plan for the
new regulatory period, incentivising high standards of delivery for customers
and the creation of long-term value for all of our stakeholders.
Code principle – Remuneration
Introduction by Dr John McAdam
“ Our remuneration policy has been designed to promote the
long-term success of the company, with a significant proportion
of senior executives’ pay being performance-related.”
Dear Shareholder
After what has been a particularly busy year for the remuneration
committee, I am pleased to introduce the directors’ remuneration
report for the year ended 31 March 2019. This includes my statement,
an ‘at a glance’ summary, a revised directors’ remuneration policy which
is intended to take effect from the date of our 2019 AGM (subject to
shareholder approval) and the annual report on remuneration for the
year ended 31 March 2019.
Remuneration policy review
Although the current directors’ remuneration policy was approved by
shareholders in 2017 and was intended to run until the 2020 AGM,
during the summer of 2018 the committee decided to accelerate its
review of the executives’ remuneration arrangements (and the incentive
elements in particular) to make sure that they would be well aligned
with the proposed business plan for the new regulatory period from
2020–25 and the expectations of investors and Ofwat. It was also
important for the committee to consider how various aspects of good
governance which stem from the latest UK Corporate Governance Code
and investors’ guidance on pay might be embraced.
Between December 2018 and April 2019 we consulted directly with
major shareholders and other key stakeholders about our proposals.
That process was valuable, and allowed the committee to thoroughly
consider views on a range of areas.
Following the company’s business plan being accorded fast-track
status by Ofwat in January 2019 in its initial assessment, our draft
determination was published in April. Together with positive feedback
from stakeholders this led the committee to finalise its policy review
earlier than required. This enables us to propose a new directors’
remuneration policy at the 2019 AGM, ready for the start of the new
regulatory period in April 2020, which fully supports the business
plan goals, aligns the interests of the executive directors with those of
shareholders, and responds to the regulator’s desire for even greater
engagement to link remuneration with delivery of outcomes that are
important to customers, whilst recognising ever-evolving standards of
corporate governance.
Further information about the policy review, along with full details of the
proposed policy, are shown on pages 118 to 120 and pages 124 to 130.
Implementation of the current directors’
remuneration policy during 2018/19
Salary
The committee believes that executive directors’ salaries remain
appropriately positioned relative to the market. While our policy is
that executive directors will normally receive a salary increase broadly
in line with the increase awarded to the general workforce, Steve
Mogford, Russ Houlden and Steve Fraser each received a base salary
increase of two per cent with effect from 1 September 2018, whereas
the headline increase applied across the wider workforce was higher, at
three per cent. Salaries will next be reviewed in September 2019.
Pictured: Alison Goligher, Mark Clare, Brian May, Sara Weller (seated)
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;
and
By invitation of the committee, meetings are also attended by
the Chairman, the CEO, the company secretary, the customer
services and people director, the head of reward and pensions
and the external adviser to the committee.
Quick links
Terms of reference –
unitedutilities.com/corporate-governance
Index
Read more about the Review of the directors’ remuneration policy
on pages 118 to 120
Read more about the At a glance summary: executive directors’
remuneration on pages 121 to 123
Read more about the Directors’ remuneration policy on pages 124 to 130
Read more about the Annual report on remuneration on pages 131 to 142
Remuneration committee members
Sara Weller (chair)
Alison Goligher
Mark Clare
Brian May
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Annual bonus
Employees throughout the company participate in the annual bonus
scheme, alongside the executive directors, to ensure shared focus on
the business plan at all levels. The current bonus measures reflect the
importance of the targets set by our regulators for the period 2015–20.
Agenda for 2019/20
While it is clearly important for the executives and wider workforce
to remain focused on the delivery of the current plan in the final year
of the regulatory period, it is also important to look towards the new
regulatory period and make transitionary steps where appropriate.
The annual bonus plan will therefore operate in a similar way to
2018/19, except the measures based on Ofwat’s service incentive
mechanism will be replaced by measures based on Ofwat’s new C-MeX
approach. Details are shown on page 134.
The 2019 LTP awards will also be based on a similar structure to that
used in recent years, although the committee is considering whether
it might begin to reflect the performance measures included in the
proposed directors’ remuneration policy in the construct of the 2019
LTP awards, and major shareholders will be consulted on the proposed
approach before the awards are made. The committee will continue
to focus on setting stretching targets that drive excellent customer
service, operational and financial performance and enhance long-term
shareholder value.
Later in the year the annual bonus measures and targets for the new
regulatory period will be agreed, to ensure that, alongside the proposed
LTP structure, all incentives continue to support the business strategy
and provide appropriately stretching goals.
The committee will also continue to review how the developing
corporate governance and remuneration environment, in particular the
changes to the UK Corporate Governance Code, might be reflected in
the way the committee operates.
I hope we will receive your support for the resolutions relating to
remuneration at the forthcoming AGM.
Sara Weller
Chair of the remuneration committee
Despite the challenges presented by the extreme dry weather
conditions during the year we have seen another very good year of
customer service, operational and financial performance in 2018/19.
New approaches introduced in recent years that improve the speed
and quality of our delivery, alongside a focus on helping customers
communicate easily with us in ways that best suit their lifestyles, have
seen us continue to set ever higher standards of customer service. The
Priority Services programme and our efforts to ensure that customers in
difficult financial circumstances are supported are recognised by many,
including Ofwat, as being market-leading. Achieving our best ever score
against Ofwat’s qualitative service incentive mechanism demonstrates the
continued success of our approach to customer service and it is satisfying
that having started the regulatory period with performance levels in the
lower quartile and potentially facing financial penalties, we are now in a
position where we anticipate being eligible for a regulatory reward.
We also achieved our best ever annual performance against the
outcome delivery incentives (ODIs), reflecting good all-round
operational performance. Overall, performance was good against our
wastewater measures and significantly improved against our water
measures with a net reward achieved in both areas. ODI performance
across the whole regulatory period remains ahead of the business plan.
Underlying operating profit was better than in 2018/19 and the efficient
and effective delivery of the capital programme is reflected in our Time,
Cost and Quality index (TCQi) score which remains high at 95.4 per cent.
When considering the personal contributions of the executive directors,
amongst other achievements during the year, Ofwat’s fast-track rating
of our business plan and commendation of our high quality and industry
leading approach in many areas is testament to their performance, and
to their leadership of the wider team.
Overall company results, together with the strong personal performance
of the executive directors, has resulted in annual bonus out-turn of
around 79 per cent of maximum (compared to the 2017/18 outcome
of around 75 per cent of maximum) and a company-wide bonus pool
totalling £17 million (compared to £16 million in the prior year). Half of
the annual bonuses earned by the executive directors will be deferred
into shares for a period of three years.
Long-term incentives
The final outcome of the Long Term Plan awards, which were granted
in 2016 and whose performance is measured over the three years to
31 March 2019, is expected to be confirmed as 60 per cent later in the
summer of 2019. Again, this reflects the continued delivery of high
standards of customer service set in recent years, and the achievement
of the stretch level of sustainable dividend performance. Ongoing
uncertainty about the water sector continues to affect the share price,
and the threshold target set for relative total shareholder return over
the period was not achieved so there will be zero pay-out in relation to
that measure. The awards for the executive directors will actually vest
only after the completion of a further two-year holding period, during
which the shares will remain subject to withholding provisions. This
approach aligns the interests of the executive directors with those of
shareholders and customers.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Review of the directors’ remuneration policy
Around seven million people in the North West of England rely on
United Utilities to provide reliable and affordable year-round water
supplies to their homes, businesses and recreational spaces.
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Over the five-year regulatory period from 2020-25, our business
plan commits us to delivering affordable bills and excellent service to
customers, alongside a programme of careful investment to sustain
the region’s water quality, reduce leakage and ensure reliability of
water supply. At the same time the company must lay foundations for
longer-term resilience and the provision of water in an environmentally
sensitive and sustainable way.
When setting the remuneration arrangements for executive directors,
the committee has always adopted a prudent and responsible approach,
which aligns to company strategy.
This continues under the proposed remuneration policy, where the
potential maximum quantum of reward available is unchanged, for both
the annual bonus (which operates at all levels throughout the company)
and for the Long Term Plan (LTP). The proposed policy also ensures
that incentives for the executive directors are related to the delivery
of key business plan goals for customers, and returns for shareholders,
and operates over four and five year periods respectively when bonus
deferral and LTP holding periods are taken into account.
The proposed changes to our current policy mainly affect the way we
structure the LTP element of the executive directors’ remuneration
package. New measures are proposed, to assess performance in a
way that reflects the financial and service priorities of shareholders,
regulators and customers, while recognising the importance of both
long-term sustainability and dividend certainty.
Further details of the two equally weighted measures proposed for the
LTP are described in more detail on page 127.
Some other small changes to the policy are also proposed to reflect
recent shareholder guidance, notably in the commitment to align
pension contributions for new executive director appointments with
those that apply to the wider workforce.
The proposed policy has been developed taking careful account
of shareholder views that were sought during a comprehensive
consultation exercise between December 2018 and April 2019, involving
major shareholders and other key stakeholders. A summary of the key
elements of the review and its outcome are shown on pages 119 to 120,
with full details of the proposed policy provided on pages 124 to 130.
If approved by shareholders the new policy will take effect from the
July 2019 AGM, so it will be in place ready to support both the annual
bonus and Long Term Plan at the start of the new regulatory period in
spring 2020.
Pictured: Liverpool waterfront
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Element of policy
Long Term Plan –
introduction of
Return on
Regulated Equity
(RoRE)
as a performance
measure
Long Term Plan –
introduction of a
‘customer basket’
of performance
measures
Focus of/rationale for review
The committee proposes to replace Relative Total
Shareholder Return as the financial LTP measure with RoRE.
RoRE is the return that the company is expected to earn
relative to the equity portion of its Regulatory Capital Value.
The committee considers RoRE to be a better incentive
measure than relative TSR because it: more effectively
incentivises management in that they have strong line of
sight to the outcome; allows stretching but achievable
targets to be set, including across regulatory periods;
captures financial, operational and customer performance;
is aligned to shareholder value creation, without the
volatility of share price; and is recognised as a relevant
measure for the sector, evaluated by the analyst community.
Additionally, RoRE is used by Ofwat to assess each water
and wastewater company’s performance and is published
annually as part of each company’s Annual Performance
Report, so it is comparable across companies.
Ofwat has made it clear that during the next regulatory
period, financial rewards and penalties available to
companies should be directly linked to customer service
delivery.
The committee believes it is therefore appropriate for
a substantial part of the executive directors’ long-term
incentive to be based on the performance of a number of
customer service measures.
This ‘customer basket’ will include measures which
demonstrate the long-term health of our assets and services
and ensure the long-term resilience of our water networks.
Long Term Plan –
use of a dividend
delivery underpin
The committee recognises that providing dividend
sustainability to shareholders is important and that the
current sustainable dividends measure used in the LTP
has been effective. However, setting robust targets that
can cross into a new regulatory period poses a significant
challenge.
Balance between
annual bonus and
LTP quantum
The committee considered whether, in order to be able
to set the mix of incentives each year in consideration of
relevant developments in the external environment, it
would be advantageous to have the flexibility to vary the
mix of annual bonus and Long Term Plan awards annually
within the respective overall maximum quantums.
Position following consultation
Shareholders were supportive of the use of RoRE instead of TSR
as a performance measure in the LTP.
RoRE will therefore be used as a performance measure in the LTP,
with a weighting of 50 per cent.
See page 127 for further details.
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Shareholders understood the rationale for ensuring that Ofwat’s
focus on customer service delivery was reflected in executive
incentives.
A customer basket of measures will therefore be used as a
performance measure in the LTP, with a weighting of 50 per cent.
The basket of customer measures will include both service
measures and resilience measures, so will capture delivery of
performance for customers across a broad range of criteria.
For the service measures, we will use the new C-MeX
metrics being introduced by Ofwat as replacements for SIM.
Using our online research panel of nearly 8,000 customers, we
will also ask customers to prioritise outcomes that they think we
should focus on (e.g. reducing leakage).
and D-MeX
For the resilience measures, we will focus on metrics that
capture the long-term health and serviceability of our networks
and assets, thereby aligning executive performance pay with
building long-term resilience of our water and wastewater
services. Customers will benefit from long-term reliability in the
quality of their water supplies, and ways of working that protect
and improve the environment.
See page 127 for further details.
The committee’s use of dividends under the LTP will be modified
in the proposed framework by making delivery of our dividend
policy an overall underpin.
Vesting under the proposed LTP structure will be dependent on
the delivery of the company’s declared dividend policy during
the respective performance period (alongside the existing
underpin of the committee being satisfied that the company’s
performance on these measures is consistent with underlying
business performance).
Based on shareholder feedback the committee did not progress
further with this element and it does not feature in the proposed
policy.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Review of the directors’ remuneration policy
Element of policy
Alignment of
executive pension
contributions with
those applying
to the wider
workforce
Focus of/rationale for review
There have been growing calls from investors and proxy
bodies for pension provision for executive directors to be
aligned to the wider workforce, and this expectation of
pension alignment has now been included in the revised UK
Corporate Governance Code (Code).
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Use of discretion
Shareholders expect that remuneration committees have
the authority to exercise discretion diligently and in a
manner that is aligned with shareholders’ interests.
Recovery and
withholding
provisions
The committee is aware that the revised Code reminds
remuneration committees of the expectation that incentive
schemes will include recovery and withholding provisions
in certain specified circumstances, and the guidance to
the Code lists examples: payments based on erroneous or
misleading data, misconduct, misstatement of accounts,
serious reputational damage and corporate failure.
Our incentive scheme rules already contain recovery
and withholding provisions that can be used in cases of
misstatement of accounts, error in calculations and gross
misconduct. The rules also provide for withholding (but
not recovery) to be applied in cases of serious reputational
damage, serious failure of risk management, and such
other circumstances where the committee determines they
should apply.
Post-employment
shareholding
requirements
The policy review commenced some months ago before the
current positions held on this topic by some stakeholders
were published.
Our current approach to incentives ensures that executive
directors would continue to have significant shareholdings
for at least two years after departure, because under
our current policy they are not entitled to accelerated
vesting of their unvested share awards. This means that
long-term incentive awards within the two-year holding
period do not vest until the end of that holding period;
long-term incentive awards still in the performance
period vest no sooner than two years after departure; and
deferred bonuses do not vest until the end of the deferral
period (which could potentially be up to three years after
departure) so a former executive director could still have a
material value in unvested share awards two or three years
after departure.
Position following consultation
Shareholders were supportive of the committee’s decision to
align pension provisions for new executive to those applying
to the wider workforce, with the maximum company pension
contribution for new executive directors set at 14 per cent of
salary, or a cash allowance of 12 per cent of salary (which is of
broadly equivalent cost to the company).
The current executive directors will receive a cash allowance of
22 per cent of salary and will no longer have the option to take
any level of pension contribution instead.
The committee already has sufficient power to exercise
discretion, and in fact has exercised and disclosed the use of
such in recent years, by applying downward adjustments to the
executive directors’ bonus outcomes in 2015/16 and 2017/18.
The potential use of discretion is articulated more clearly in the
proposed policy.
The current provisions already go beyond what is typical market
practice and provide flexibility including, for example, the
ability to apply the provisions in the event of corporate failure.
Importantly, the committee is satisfied that the provisions are
fully enforceable.
The potential use of the recovery and withholding provisions is
articulated more clearly in the proposed policy.
Having carefully considered this area, including the context of the
current political uncertainty impacting our industry, we do not
intend to introduce additional post-employment shareholding
requirements as part of this policy review. The post-employment
vesting provisions that apply currently to the incentive plans
already require unvested awards to be held after departure, and
ensures they remain subject to robust recovery and withholding
provisions.
It was clear during the consultation process that some
shareholders are keen for such provisions to be introduced, but
the committee’s rationale for not doing so at the current time
was understood.
The approach will be considered again in the next policy review,
and market practice will be monitored in the meantime.
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Corporate governance report
At a glance summary: executive directors’ remuneration
Remuneration philosophy
There are three key principles of our approach to executive remuneration.
Align
to our purpose, vision and strategy
Incentivise
great customer service
Create long-term value
for all of our stakeholders
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)
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Fixed
a se
sa
e nsion
a nd
33%
ot(cid:346)er bene(cid:302)ts 7%
Performance-linked
67%
Annu
Annu
L ong
b onu s
cas(cid:346)
b onu s
s(cid:346)ares
17%
17%
a n
Short-term
50%
a se
sa
e nsion
a nd
ot(cid:346)er bene(cid:302)ts 7%
Annu
b onu s
cas(cid:346)
17%
Long-term
50%
Annu
L ong
b onu s
s(cid:346)ares
17%
a n
(1)
Based on maximum pay-out scenario for executive directors assuming the normal maximum award level of 130 per cent of salary for the Long Term Plan (LTP).
Key element
Time frame
Annual bonus – cash
Annual bonus – shares
Performance
period
Performance
period
Pay at risk
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 the withholding and recovery provisions can be found on pages 125 to 126.
Implementation of directors’ remuneration policy in 2018/19
The table below summarises the implementation of the directors’ remuneration policy for executive directors in 2018/19. For further details see the
annual report on remuneration on pages 131 to 142.
Key element
Base salary
Implementation of policy in 2018/19
›
Salary increase of 2.0 per cent from 1 September 2018 (the general employee base salary increase in 2018 was
3.0 per cent).
Benefits and pension
› Market competitive benefits package.
Annual bonus
›
Cash pension allowance of 22 per cent of base salary.
› Maximum opportunity of 130 per cent of base salary.
›
›
2018/19 annual bonus outcome of around 79 per cent of maximum.
50 per cent of 2018/19 annual bonus deferred in shares for three years.
Long Term Plan
› Withholding and recovery provisions apply.
Award of 130 per cent of base salary.
›
›
Estimated long-term incentive vesting of 60 per cent for the performance period 1 April 2016 to 31 March 2019.
These awards will vest after an additional two-year holding period.
› Withholding and recovery provisions apply.
›
Personal shareholdings for Steve Mogford and Russ Houlden remain above the 200 per cent of salary minimum
guideline. Steve Fraser is expected to reach the minimum guideline within five years of his appointment to the board.
unitedutilities.com/corporate
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Shareholding guidelines
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B
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Corporate governance report
At a glance summary: executive directors’ remuneration
Single total figure of remuneration for executive directors for 2018/19
Fixed pay comprises base salary, benefits and pension. There is no share price appreciation attributable to the value of the long-term incentives.
Further information on the single figure of remuneration can be seen on page 131.
e
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£547
0
0
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£
T ota
£486
T ota
T ota
Long-term incentives
Annual bonus
Fixed pay
Steve Mogford
CEO
Russ Houlden
CFO
Steve Fraser
COO
Key performance indicators (KPIs) performance
Annual bonus –
Year ended 31 March 2019
Long Term Plan –
Three years ended 31 March 2019
Underlying
operating profit(1)
SIM qualitative ranking
versus other WASCs
SIM quantitative
score
Wholesale outcome
delivery incentive
(ODI) composite
Time, Cost and
Quality index (TCQi)
Total shareholder
return (TSR)(2)
Underlying dividend
cover(3)
SIM ranking
versus other water
companies(4)
£838.9m
4th out of 10
69.8
£19.2m
95.4%
2.7%
1.22
5th out of 18
Key:
At or above stretch target
Between threshold and stretch targets
Below threshold target
For the purpose of annual bonus, underlying operating profit excludes infrastructure renewals expenditure and property trading.
(1)
(2) Below threshold versus the comparator group. See page 135 for further details.
(3) Average underlying dividend cover over 2016/17, 2017/18 and 2018/19.
(4)
The estimated SIM combined score ranking for 2018/19.
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 the annual
bonus can be seen on page 132 and on the LTP on page 135.
2018/19 Annual bonus outcome
Estimated 2016 Long Term Plan (LTP) outcome
Actual totals:
Actual totals:
Steve Mogford
Steve Mogford
79.0% of maximum
79.0% of maximum
Russ Houlden
Russ Houlden
78.5% of maximum
78.5% of maximum
Steve Fraser
Steve Fraser
79.0% of maximum
79.0% of maximum
Estimated total:
Estimated total:
60.0% of award vests
60.0% of award vests
Maximum
Maximum
Actual
Steve Mogford
CEO
Actual
Steve Mogford
CEO
(cid:104)nderl(cid:455)in(cid:336) opera�n(cid:336) pro(cid:302)t
(cid:94)(cid:47)M (cid:395)ualita�(cid:448)e
(cid:94)(cid:47)M (cid:395)uan�ta�(cid:448)e
(cid:104)nderl(cid:455)in(cid:336) opera�n(cid:336) pro(cid:302)t
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(cid:94)(cid:47)M (cid:395)uan�ta�(cid:448)e
Actual
Actual
Russ Houlden
Russ Houlden
CFO
CFO
(cid:116)(cid:346)olesale outcome
(cid:116)(cid:346)olesale outcome
deli(cid:448)er(cid:455) incen�(cid:448)e
deli(cid:448)er(cid:455) incen�(cid:448)e
((cid:75)(cid:24)(cid:47)) composite
((cid:75)(cid:24)(cid:47)) composite
Actual
Steve Fraser
COO
Actual
Steve Fraser
COO
i
i
(cid:87)ersonal ob(cid:361)ec�(cid:448)es
(cid:87)ersonal ob(cid:361)ec�(cid:448)es
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(cid:94)ustainable di(cid:448)idends
Rela�(cid:448)e total s(cid:346)are(cid:346)older return ((cid:100)(cid:94)R)
(cid:94)ustainable di(cid:448)idends
(cid:18)ustomer ser(cid:448)ice e(cid:454)cellence
(cid:18)ustomer ser(cid:448)ice e(cid:454)cellence
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Aligning our remuneration philosophy to business strategy
Our remuneration philosophy is aligned to our purpose, vision and strategy, thereby incentivising great customer service and the creation of long-
term value for all of our stakeholders.
The following table provides a summary of how our incentive framework in 2018/19 aligned 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 52 to 53).
Annual bonus
Alignment to strategy
Underlying operating profit
Key measure of shareholder value.
Customer service in year(1)
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)
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.
Personal
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, while
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. 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
themes
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Key:
The best service to customers At the lowest sustainable cost In a responsible manner
(1) As Ofwat transitions from using the service incentive mechanism (SIM) to C-MeX
as its primary assessment of customer service, for the 2019/20 annual bonus the two SIM
measures will be replaced by measures based on performance related to the new C-MeX
approach. See page 134 for details.
Stock Code: UU.
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Corporate governance report
Directors’ remuneration policy
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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 2019 AGM on 26 July 2019 and will take formal effect from that date, subject to shareholder approval. It is intended
that the policy will formally apply for 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.
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.
The committee also 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, including pension
provision, for the wider employee population when determining remuneration policy for the executive directors. Processes are in place for the
committee to review and consider any remuneration-related matters that may arise from the activities undertaken by the board to take account of
the ‘employee voice’.
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
Normally reviewed annually, typically effective 1 September.
Maximum opportunity
Current salary levels are shown in the annual report on remuneration.
Significant increases in salary should only take place infrequently, for
example where there has been a material increase in:
›
›
›
the size of the individual’s role;
the size of the company (through mergers and acquisitions); or
the pay market for directly comparable companies (for example,
companies of a similar size and complexity).
On recruitment or promotion to executive director, the committee
will take into account previous remuneration, and pay levels for
comparable companies, when setting salary levels. This may lead to salary
being set at a lower or higher level than for the previous incumbent.
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.
Performance measures
None.
Pension
Purpose and link to strategy: To provide a level of benefits that allow for personal retirement planning.
Operation
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.
Maximum opportunity
The maximum opportunity is aligned to the approach available to the
wider workforce, currently:
›
›
›
up to 14 per cent of salary into a defined contribution scheme;
cash allowance of broadly equivalent cost to the company (up to 14
per cent of salary less employer National Insurance Contributions at
the prevailing rate, i.e. up to 12 per cent of base salary for 2019/20); or
a combination of both such that the cost to the company is broadly
the same.
For executive directors appointed to role before 26 July 2019 a cash
allowance of 22 per cent of salary is payable.
Performance measures
None.
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Benefits
Purpose and link to strategy: To provide market competitive benefits to help recruit and retain high-calibre executives.
Operation
Provision of benefits such as:
Maximum opportunity
As it is not possible to calculate in advance the cost of all benefits, a
maximum is not predetermined.
Performance measures
None.
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›
›
›
›
›
›
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 thereon 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.
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
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 and DBP shares are subject to recovery provisions in certain
negative circumstances including: material misstatement of audited
financial results; an error in the calculation; or gross misconduct.
Additionally, withholding provisions can also apply to DBP shares in
cases of: serious reputational damage; serious failure of risk
management; or other circumstances that the committee
may determine.
Maximum opportunity
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.
Bonus outcomes are subject to the committee being satisfied that the
company’s performance on the measures is consistent with underlying
business performance and individual contributions. The committee will
exercise discretion on bonus outcomes if it deems necessary.
100 per cent of maximum bonus potential for stretch performance; up to
50 per cent of maximum for target performance; and up to 25 per cent
of maximum for threshold performance. No payout for below-threshold
performance.
Stock Code: UU.
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Corporate governance report
Directors’ remuneration policy
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Long Term Plan (LTP)
Purpose and link to strategy: To incentivise long-term value creation and alignment with the long-term interests of shareholders, customers, and
other stakeholders.
Operation
Awards under the Long Term Plan are rights to receive company shares,
subject to certain performance conditions.
Maximum opportunity
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 holding period applies after the end of the three-year
performance period so that the total vesting and holding period is at
least five years.
Vested shares accrue dividend equivalents.
Shares under the LTP are subject to recovery and withholding
provisions in certain negative circumstances, including: material
misstatement of audited financial results; an error in the calculation;
or gross misconduct.
Additionally, withholding provisions can also apply in cases of: serious
reputational damage; serious failure of risk management; or other
circumstances that the committee may determine.
The overall policy limit is 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.
Performance measures
The two performance conditions are Return on Regulated Equity and
a basket of customer measures. The weighting of each of these two
components is 50 per cent.
Any vesting is also subject to the delivery of the dividend policy during
the respective performance period, and the committee being satisfied
that the company’s performance on these measures is consistent with
underlying business performance. The committee will exercise discretion
on LTP outcomes if it deems necessary.
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; and up to 25 per
cent of awards vest for threshold performance. 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
The remuneration policy for the non-executive directors (with the
exception of the Chairman) is set by a separate committee of the
board. The policy for the Chairman is determined by the remuneration
committee (of which the Chairman is not a member).
Maximum opportunity
Current fee levels are shown in the annual report on remuneration.
The value of benefits may vary from year to year according to the cost
to the company.
Performance measures
Non-executive directors are not eligible to participate in any
performance-related arrangements.
Fees are reviewed annually taking into account the 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 in relation to extra responsibilities undertaken,
such as chairing 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.
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Notes to the policy table
Selection of performance measures and targets
Performance measures for the annual bonus are selected annually to align with the company’s key strategic goals for the year and reflect financial,
operational and personal objectives. ‘Target’ performance is typically set in line with the business plan for the year, following rigorous debate and
approval of the plan by the board. Threshold to stretch targets are then set based on a sliding scale on the basis of relevant commercial factors.
Only modest rewards are available for delivering threshold performance levels, with rewards at stretch requiring substantial outperformance of the
business plan. Details of the measures used for the annual bonus are given in the annual report on remuneration.
The proposed Long Term Plan (LTP) measures were selected by the committee following an extensive review and shareholder consultation in
2018/19, to align with the company’s key strategic goals as we look towards the new regulatory period in 2020, and be closely linked to the creation
of long-term shareholder value as follows:
Measure
Return on Regulated
Equity (RoRE)
What is it?
RoRE is the return that the company is expected to earn
relative to the equity portion of its Regulatory Capital
Value.
Key reasons for selection
›
Increasingly used by investors and analysts as it is
a good proxy for value (i.e. premium to Regulatory
Capital Value) in the sector.
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Customer basket
The return is comprehensive in that it is composed of
the company’s performance on expenditure, investment
and financing decisions, and operational and customer
initiatives undertaken over the regulatory period.
Outperformance (or underperformance) in these areas
will result in an increase (or reduction) to RoRE which
should translate into higher (or lower) returns for
shareholders through share price performance.
A basket of customer measures comprising operational
measures, service measures and resilience measures to
capture the delivery of performance for customers.
Customers have a say on which measures they consider
the most important priorities for the Company, and the
regulator’s measures of customer service are included.
›
›
Directly linked to the allowable return set by the
regulator, and is comparable across the sector.
Captures financial, operational and customer
performance.
› Motivates management as they have strong line
of sight to the outcome, for which stretching but
achievable targets can be set.
›
›
›
Outperformance will result in an increase to RoRE
which should translate into higher returns for
investors through share price performance.
Investors will be impacted by financial rewards
resulting from delivery on service commitments, and
through investments made to ensure the long-term
health and sustainability of our assets.
Customers will benefit from improvements in key
performance areas of importance to them, and from
long-term reliability in the quality of their water
supplies, and ways of working that protect and
improve the environment.
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 performance conditions 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.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Directors’ remuneration policy
Alignment of executive director remuneration with the wider workforce
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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Scenarios for total remuneration
The charts below show the payout under the remuneration policy for each executive director under four different scenarios.
Steve Mogford CEO
£000s
ix
e d
e t
x im
x im
u s
sh
r ic
r ow
th
Russ Houlden CFO
£000s
ix
e d
e t
x im
x im
u s
sh
r ic
r ow
th
Steve Fraser COO
£000s
ix
e d
e t
x im
x im
u s
sh
r ic
r ow
th
Fixed
Annual bonus
Long Term Plan
Notes on the scenario methodology:
›
›
›
›
›
›
›
‘Fixed’ is base salary effective
31 March 2019 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 2018/19;
‘Target’ performance is the level
of performance required for the
annual 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
annual bonus and Long Term Plan
(i.e. 260 per cent of salary in total);
‘Maximum performance plus 50
per cent share price growth’ shows
maximum performance plus the
impact on the Long Term Plan of a
hypothetical 50 per cent increase in
the share price;
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
(except in the fourth scenario); and
Amounts relating to all-employee
share schemes have, for simplicity,
been excluded from the charts.
Additional Long Term Plan value if share price grows by 50%
128
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1
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9
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5
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9
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.
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.
5
%
2
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0
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M
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1
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5
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%
2
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%
1
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3
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5
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1
,
7
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%
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0
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T
a
r
g
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a
u
m
2
8
.
8
%
2
,
0
0
4
2
8
.
8
%
1
4
.
4
%
2
8
%
M
a
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p
l
5
0
%
a
r
e
p
e
g
1
)
2
)
3
)
4
)
Shareholding guidelines
The committee believes that it is important for each executive director to build and maintain a significant investment in 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.
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.
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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 each 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
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 executive directors 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 appointee 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.
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 part-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.
Stock Code: UU.
unitedutilities.com/corporate
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Directors’ remuneration policy
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
Compensation for loss
of office
Summary terms
›
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.
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.
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.
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 redundancy, an augmentation may apply in relation to benefits accrued under a United Utilities defined benefit
pension scheme, in line with the trust deed and rules of the appropriate section.
Treatment of annual
bonus on termination
Treatment of deferred
bonus on termination
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.
Change of control
On a change of control, executive directors’ incentive awards will be treated in accordance with the rules of the applicable plans. In summary:
›
›
›
Bonus payments will take into account the extent to which the performance measures have been satisfied between the start of the performance
period and the date of the change of control, and the value will be prorated to reflect the same period.
Deferred bonuses 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.
Long Term Plan awards will generally vest on the date of a change of control taking into account the extent to which any performance condition
has been satisfied at that point. Time prorating will normally apply unless the committee determines otherwise.
130
United Utilities Group PLC Annual Report and Financial Statements for the year ended 31 March 2019
United Utilities Remuneration.indd 130
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Corporate governance report
Annual report on remuneration
Executive directors’ remuneration for the year ended 31 March 2019
Single total figure of remuneration for executive directors (audited information)
Fixed pay
Base salary
£’000
Pension
£’000
Benefits
£’000
Annual bonus
£’000
Variable pay
Long-term
incentives
£’000
Total
£’000
Year ended 31 March
Steve Mogford
Russ Houlden
Steve Fraser(3)
2019
754
476
440
2018
737
466
278
2019
166
105
97
2018
162
102
61
2019
28
25
21
2018
29
25
15
2019
774
486
452
2018
718
450
277(4)
2019(1)
547
345
129
2018(2) 2019
521
2,269
329
1,437
102
1,139
2018
2,167
1,372
733
(1)
(2)
(3)
The long-term incentive amount is in respect of the Long Term Plan award which was granted in June 2016 and which will vest based on performance over the three-year period
from 1 April 2016 to 31 March 2019. 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 2019, and the award for Steve Mogford and Russ Houlden will not vest until the end of an additional two-year holding period. Steve Fraser’s award was granted prior to
his appointment to the board and so no holding period applies. There is no share price appreciation attributable to these awards. See page 135 for further details.
The long-term incentive amount for the year ended 31 March 2018 is in respect of the Long Term Plan award which was granted in June 2015 and whose performance period
ended on 31 March 2018. The figures for Steve Mogford and Russ Houlden have been restated to reflect the additional dividend equivalents accrued to 31 March 2019. Their
awards are not due to vest until April 2020 following an additional two-year holding period and for the purposes of this table have been valued on the basis of the average
share price over the three-month period from 1 January 2019 to 31 March 2019 of 824.5 pence per share.
Salary, benefits, pension and annual bonus figures for Steve Fraser in 2018 reflect part-year earnings and are for the period from 1 August 2017, when he was first appointed to
the board.
(4) A bonus of around £74,000 was earned by Steve Fraser in respect of the period from 1 April 2017 to 31 July 2017 prior to him joining the board. This is not included in the table.
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Base salary
Executive director
Steve Mogford
Russ Houlden
Steve Fraser
Base salary
£’000
Current
salary
760.0
480.0
443.7
1 September
2017
745.0
470.5
405.0
Executive director salaries were increased by 2.0 per cent with effect from 1 September 2018. This is lower than the 3.0 per cent increase applying to
the general workforce in 2018. The committee judged that the increase was supported by very good individual and business performance.
On his appointment as COO on 1 August 2017, Steve Fraser’s salary was set at £405,000 in consideration of the organisational structure and the
level of responsibilities he assumed at that time, and also took account of internal and external market benchmarks. As stated in last year’s report,
on 1 January 2018 there was a material change in the size and scope of the COO role as a result of a reorganisation, and his salary was increased
to £435,000 from the same date in recognition of this. His current salary reflects the 2.0 per cent increase applied to the executive directors on
1 September 2018.
Pensions
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 for the current executive directors during the year commencing 1 April 2019.
Benefits
For executive directors, benefits include: a car allowance of £14,000; health, life cover and income protection insurance; travel costs; and
communication costs.
No material changes are expected to benefits during the year commencing 1 April 2019.
External appointments
Steve Mogford is the senior independent director of G4S PLC for which he received and retained an annual fee of £78,500. Russ Houlden is an
independent member of the supervisory board, and audit committee chairman, of Orange Polska SA for which he receives and retains annual fees of
around £80,000.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Annual report on remuneration
Annual bonus
Annual bonus in respect of financial year ended 31 March 2019 (audited information)
The performance measures, targets and outcomes in respect of the executive directors’ annual bonus for the year ended 31 March 2019 are set out
below. The table on page 123 summarises how these performance measures are linked to our business strategy.
Measure
Underlying operating profit(1)
Threshold
(25%
vesting)
Stretch
(100%
vesting)
Target
Vesting
as a
% of
maximum
Steve Mogford
weighting
(% of award)
Outcome
Russ Houlden
weighting
(% of award)
Outcome
Steve Fraser
weighting
(% of award)
Outcome
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£806.4m
£831.4m
£856.4m
65%
Actual: £838.9m
30.0%
19.5%
30.0%
19.5%
30.0%
19.5%
72.5
Actual: 69.8
£17.8m
Actual: £19.2m
Customer service in year
Service incentive
mechanism – qualitative
Service incentive
mechanism – quantitative
5th position v
other WASCs
4th position v
other WASCs
3rd position v
other WASCs
Actual 4th posi(cid:415)on
v other WASCs
Actual 4th posi(cid:415)on
v other WASCs
73.5
73.0
Maintaining and enhancing services for customers
Wholesale outcome delivery
incentive (ODI) composite
(£25.1m)
(£4.7m)
Time, cost and quality of
capital programme (TCQi)(2) 85.0%
91.5%
98.0%
Actual: 95.4%
Personal objectives (see page 133 for further detail)
Steve Mogford
Russ Houlden
Steve Fraser
Actual: 95%
Actual: 90%
Actual: 95%
Total:
Actual award (% of maximum)
Maximum award (% of salary)
Actual award (% of salary)(3)
Actual award (£’000 – shown in single figure table)(3)
50%
12.0%
12.0%
12.0%
100%
100%
80%
95%
90%
95%
6.0%
6.0%
4.0%
4.0%
24.0%
24.0%
20.0%
16.0%
10.0%
9.5%
4.0%
4.0%
24.0%
24.0%
20.0%
16.0%
10.0%
9.0%
79.0%
130%
102.7%
774
78.5%
130%
102.1%
486
6.0%
4.0%
4.0%
24.0%
24.0%
20.0%
16.0%
10.0%
9.5%
79.0%
130%
102.7%
452
(1)
(2)
The underlying operating profit figure for bonus purposes is based on the underlying operating profit on page 67 and excludes infrastructure renewals expenditure and
property trading. The vesting percentage shown in the table above is the figure after this adjustment.
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.
132
United Utilities Group PLC Annual Report and Financial Statements for the year ended 31 March 2019
United Utilities Remuneration.indd 132
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Further detail of achievement against personal objectives
Personal objectives represent 10 per cent of the total bonus opportunity. Assessment of outcomes against personal objectives is summarised in the
table below:
Steve Mogford
Personal objectives related to:
›
Preparations for the new regulatory period
(2020–2025);
›
›
›
Operational performance for the benefit of
customers;
Analyst and investor engagement; and
Organisation culture.
Russ Houlden
Personal objectives related to:
›
Financial preparations for the new regulatory
period 2020–25;
›
›
Financing activities; and
Cyber security.
Steve Fraser
Personal objectives related to:
›
Operational preparations for the new regulatory
period 2020–25; and
›
Operational performance for the benefit of
customers.
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Performance summary
The committee assessed that Steve Mogford’s performance warranted an outcome of
95 per cent in respect of the personal objective element of his bonus, including:
›
›
›
›
›
Led the formulation of the company’s PR19 business plan for the period 2020–25,
rewarded by the award of fast-track status to the plan by Ofwat, yielding a significant
reward in AMP7.
Drove a further step-change in company performance with significant financial rewards
related to ODI and SIM performance.
Provided strong leadership of the company’s response to the exceptional weather
conditions during the summer of 2018.
Engaged actively with investors and analysts in the communication of our strategy,
performance and plan.
Continued to develop a strong and cohesive executive team and organisation culture.
Performance summary
The committee assessed that Russ Houlden’s performance warranted an outcome of
90 per cent in respect of the personal objective element of his bonus, including:
›
›
›
Strong contribution to the formulation of the company’s PR19 business plan for the period
2020–25.
Led the enhancement of our financing competitive advantage, with low cost financing
raised within the context of a low risk hedging strategy delivering significant value to
customers and shareholders, benefitting service resilience and the environment.
Strengthened our cyber security strategy to defend against increasing cyber threats,
covering information technology and operational technology.
Performance summary
The committee assessed that Steve Fraser’s performance warranted an outcome of
95 per cent in respect of the personal objective element of his bonus, including:
›
›
›
›
Strong contribution to the formulation of the company’s PR19 business plan for the period
2020–25.
Achievement of our best ever annual ODI result.
Established a new network maintenance function and implemented a revised contracting
framework, delivering a marked improvement in network performance and best ever
customer satisfaction scores.
Strong leadership of the company’s operational teams in addressing the impact of the
exceptional weather conditions.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Annual report on remuneration
Deferred Bonus Plan awards made in the year ended 31 March 2019 (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 on 18 June 2018 in respect of bonus payments made to executive directors in 2018/19.
Executive Director
Steve Mogford
Russ Houlden
Steve Fraser
Type of
award
Conditional shares
Conditional shares
Conditional shares
Basis of
award
50% of bonus
50% of bonus
50% of bonus(2)
Number of
shares
47,057
29,517
22,043
Face value of award(1)
(£’000)
£359
£225
£168
End of
deferral period
18.06.2021
18.06.2021
18.06.2021
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(1)
The face value has been calculated using the closing share price on 15 June 2018 (the dealing day prior to the date of grant), which was 762.8 pence per share.
(2) As stated in last year’s report, a bonus of around £277,000 was earned by Steve Fraser in respect of the period 1 August 2017 to 31 March 2018 (following his appointment to
the board), along with a bonus of around £74,000 in respect of the period 1 April 2017 to 31 July 2017 (prior to his appointment to the board). He received one overall Deferred
Bonus Plan award in respect of both bonus payments, where the overall award value was based on 50 per cent of the bonus earned since his appointment to the board plus 40
per cent of the bonus earned prior to his appointment.
Annual bonus in respect of the financial year commencing 1 April 2019
The maximum bonus opportunity for the year commencing 1 April 2019 will remain unchanged at 130 per cent of base salary.
The annual bonus will operate in a similar way as that for the year 2018/19, except in relation to the ‘Customer service in year’ measures. As Ofwat
as its primary assessment of customer service, the two SIM measures will be
transitions from using the service incentive mechanism (SIM) to C-MeX
approach.
replaced by measures based on performance related to the new C-MeX
The table below summarises the measures, weighting and targets for the 2019/20 bonus. Targets that are considered commercially sensitive will be
disclosed in the 2019/20 annual report on remuneration.
Targets
– customer service survey (out of 10 WASCs)
– quantitative
Measure
Underlying operating profit(1)
Customer service in year
C-MeX
C-MeX
Maintaining and enhancing services for customers
Wholesale outcome delivery incentive (ODI) composite
Time, cost and quality of capital programme (TCQi)(2)
Personal objectives
Total
Threshold
(25% vesting)
Target
(50% vesting)
Commercially sensitive
Stretch
(100% vesting)
6th
16.62
4th
16.06
3rd
15.50
Commercially sensitive
85%
91.5%
98%
Commercially sensitive
Weighting
(% of award)
30.0%
12.0%
4.0%
24.0%
20.0%
10.0%
100%
(1) Underlying operating profit for bonus purposes excludes 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.
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Long-term incentives
Performance for Long Term Plan awards
2016 Long Term Plan (LTP) awards with a performance period ended 31 March 2019 (audited information)
The 2016 LTP awards were granted in June 2016 and performance was measured over the three-year period from 1 April 2016 to 31 March 2019.
Executive directors’ awards will normally vest in April 2021, 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 2019). The values of the 2016 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.
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The table below shows how the long-term incentive amount in respect of the 2016 LTP was calculated:
Threshold
(25%
vesting)
Intermediate
Stretch
(100%
vesting)
Vesting
as a % of
maximum
Steve
Mogford
weighting
(% of
award)
Outcome
Russ
Houlden
weighting
(% of
award)
Outcome
Steve
Fraser
weighting
(% of
award)
Outcome
Median
TSR
Actual: Less than median TSR
Straight-line between
threshold and stretch
Median
TSR ✕ 1.15
Company TSR of 2.7% was below threshold TSR
of 17.9%
0%
33.3%
0%
33.3%
0%
33.3%
0%
(50% vesting)
1.13
1.15
Actual: 1.22
100%
33.3%
33.3%
33.3%
33.3%
33.3%
33.3%
1.05
✓ Met
Median
rank
(80% vesting)
Upper
quartile rank
Upper
decile rank
Estimate: 5th out of 18
80.0%
33.3%
26.7%
33.3%
26.7%
33.3%
26.7%
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
Average underlying dividend
cover over the three-year
performance period
Underpin:
Dividend growth of at least RPI
in each of the years 2016/17,
2017/18 and 2018/19(2) (2)
Customer service excellence
Ranking for the year ended
31 March 2019 versus 17
other water companies using
Ofwat’s service incentive
mechanism (SIM) combined
score(3)
✓ Assumed met.
The committee will make a final assessment of the
company’s performance once the combined SIM
score is known.
Overall underpin
Overall vesting is subject to the
committee being satisfied that
the company’s performance on
these measures is consistent
with underlying business
performance
Estimated vesting (%
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 (pence)(4)
Estimated value at end of performance period (£’000 – shown in single figure table)
of award)
60.0%
98,763
11,733
110,496
66,297
824.5
547
60.0%
62,333
7,404
69,737
41,842
824.5
345
60.0%
23,397
2,778
26,175
15,705
824.5
129
(1)
(2)
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.
Subject to approval of the final dividend by shareholders at the 2019 AGM.
This is an estimate as the final outcome will not be known until the combined scores are published later in 2019.
(3)
(4) Average share price over the three-month period from 1 January 2019 to 31 March 2019.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Annual report on remuneration
Long Term Plan awards granted in the year
2018 LTP awards with a performance period ending 31 March 2021 (audited information)
The table below provides details of share awards made to executive directors on 25 June 2018 in respect of the 2018 LTP:
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Executive Director
Steve Mogford
Russ Houlden
Steve Fraser
Type of award
Conditional shares
Conditional shares
Conditional shares
Basis of award
130% of salary
130% of salary
130% of salary
Face value
of award
(£’000)(1)
£968
£612
£565
Number of
shares under
award
129,030
81,488
75,339
% vesting at
threshold
25%
25%
25%
End of
performance
period(2)
31.03.2021
31.03.2021
31.03.2021
The face value has been calculated using the closing share price on 22 June 2018 (the dealing day prior to the date of grant) which was 750.6 pence per share.
(1)
(2) An additional two-year holding period applies after the end of the three-year performance period.
Details about the 2018 LTP performance measures and targets are shown in the following table. Performance is measured over the three-year period
1 April 2018 to 31 March 2021. The table on page 123 summarises how these performance measures are linked to our business strategy.
Measure
Relative total shareholder return (TSR)
TSR versus median TSR of FTSE 100 companies (excluding
financial services, oil and gas, and mining companies) (1)
measured over the three-year performance period
Sustainable dividends
Average underlying dividend cover over the part of the
performance period up to the end of the regulatory period
(31 March 2020)
Underpin:
Targets
Threshold
(25% vesting)
Median TSR
Stretch
(100% vesting)
Median TSR
✕ 1.15
The targets are considered commercially sensitive and so are not
disclosed in this report. However, actual targets, performance
achieved and awards made will be published retrospectively so
that shareholders can fully understand the basis for any vesting
Dividend growth of at least RPI in each of the years 2018/19 and
2019/20
Weighting
33.3%
33.3%
Customer service excellence (2)
Ranking for the year ending 31 March 2021 versus ten other
water and wastewater 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
(3rd out of 10)
(5th out of 10)
Median rank
33.3%
(1)
(2)
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.
The committee retains the discretion to adjust the customer service measure and targets once Ofwat’s approach to assessing customer service for the regulatory period
2020–25 is agreed.
Straight-line vesting applies between the threshold 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
2019 LTP awards with a performance period ending 31 March 2022
Awards are expected to be made in late June 2019 and the award level for executive directors will remain unchanged at 130 per cent of base salary.
Setting appropriate targets against the current performance measures is challenging given that two of the three years of the performance period will
be in the new regulatory period. The committee is considering whether it might begin to reflect the performance measures included in the proposed
directors’ remuneration policy in the construct of the 2019 LTP awards, and major shareholders will be consulted on the proposed approach before
the awards are made.
136
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Executive directors’ interests in shares
Executive directors’ shareholding (audited information)
Executive directors are expected to reach a shareholding guideline of 200 per cent of salary, normally within five years of appointment. There is no
additional requirement in the current guidelines for post-employment shareholding requirements as outlined on page 120.
Details of beneficial interests in the company’s ordinary shares as at 31 March 2019 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. Steve Mogford and Russ Houlden have
both exceeded the target shareholding guideline level of 200 per cent of salary. Steve Fraser is expected to reach his shareholding guideline of 200
per cent of salary within five years of his appointment to the board.
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s
s
of
s
Unvested shares not subject to performance conditions
after tax and national insurance
Shares owned outright
Number of shares required to achieve shareholding
guideline at 31 March 2019
e nde d
e nde d
e nde d
Steve Mogford
CEO
Russ Houlden
CFO
Steve Fraser
COO
Further details of the executive directors’ shareholdings and their share plan interests are given in the table below and in the appendix on page 143.
Share-
holding
guideline
(% of
salary)
Number
of shares
required
to meet
shareholding
guideline(1)
Number of shares
owned outright
(including
connected persons)
2019
2018
200%
200%
200%
184,354
116,434
107,629
158,299
110,119
55,040
60,608
69,435
46,905
Unvested
shares
not subject
to performance
conditions(2)
Total shares
counting
towards
shareholding
guidelines(3)
2019
255,366
160,669
43,069
2018
225,615
142,088
29,027
2019
293,665
140,217
83,457
2018
229,713
144,760
62,310
Share-
holding
as % of
base
salary at
31 March
2019(1)
2019
319%
241%
155%
Share-
holding
guideline
met at
31 March
2019
Unvested
shares subject
to performance
conditions(4)
2019
2019
Yes
Yes
No
352,738
222,701
129,081
2018
318,589
201,117
75,479
Director
Steve Mogford(5) (6)
Russ Houlden(5) (6)
Steve Fraser(5)
Share price used is the average share price over the three months from 1 January 2019 to 31 March 2019 (824.5 pence per share).
(1)
(2) Unvested shares subject to no further performance conditions such as matching shares under the ShareBuy scheme. Includes shares subject only to withholding provisions
(3)
(4)
(5)
such as 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 2019 to 21 May 2019, additional shares were acquired by Steve Mogford (37 ordinary shares), Russ Houlden (37 ordinary shares) and Steve Fraser (38
ordinary shares) in respect of their regular monthly contributions to the all-employee ShareBuy scheme. These will be matched by the company on a one-for-five basis. Under
the scheme, matching shares vest one year after grant provided the employee remains employed by the company.
(6) On 1 April 2019, shares granted on 30 June 2014 under the Long Term Plan vested for Steve Mogford and Russ Houlden following their additional two-year holding period.
Steve Mogford had 66,415 shares vesting, of which 31,294 shares were sold to cover tax and national insurance. Steve retained the remaining balance of 35,121 shares. Russ
Houlden had 41,920 shares vesting, of which 19,752 shares were sold to cover tax and national insurance. Russ retained the remaining balance of 22,168 shares.
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
employs 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 shares 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 (five per cent in any rolling 10-year period).
No treasury shares were held or utilised in the year ended 31 March 2019.
Stock Code: UU.
unitedutilities.com/corporate
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0
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4
5
6
2
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3
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0
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1
5
0
1
0
0
5
0
0
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 ten 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 ten-year period as the TSR chart.
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)
£
(
e
u
a
V
l
Year ended 31 March
United U(cid:415)li(cid:415)es Group PLC
FTSE 100 Index
Year ended 31 March
CEO single figure of
remuneration (£000)
Annual bonus
payment (% of
maximum)
LTP vesting (% of
maximum)(4)
Steve Mogford
Philip Green
Steve Mogford
2010
n/a
1,992
n/a
2011
377
3,073
90.6
2012
1,421
n/a
72.0
2013
1,549
n/a
84.4
2014
2,378
n/a
78.2
2015
2,884
n/a
77.4
Philip Green
Steve Mogford
89.2
n/a
90.8
n/a(5)
n/a
n/a(5)
n/a
n/a(5)
n/a
93.5
n/a
97.5
Philip Green
0(8)
12.5(9)
28.1(10)
100(11)
n/a
n/a
n/a
n/a
2016
2,760(1)
2017
2,233(2)
2018
2,167(3)
2019
2,269
n/a
54.5
n/a
33.6
100(6)
n/a
n/a
83.7
n/a
54.5
n/a
74.9
n/a
55.4
n/a
79.0
n/a
60.0(7)
n/a
n/a
n/a
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
This includes the 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 pay-out from the 2014 LTP, which vested on 1 April 2019 after the end of a two-year holding period, has been updated to reflect the additional dividends accruing on this
award and the closing share price on the date of vesting of 813 pence per share.
The pay-out from the 2015 LTP has been restated to reflect the additional dividend equivalents accruing on these awards, final vesting outcome and updated share price. See
page 131 for further details.
For performance periods ended on 31 March, unless otherwise stated.
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.
The retention period applicable to Steve Mogford’s Matched Share Investment Scheme ended on 5 January 2016.
The 2016 Long Term Plan amount vesting percentage is estimated. See page 135 for further details.
2007 Performance Share Plan (PSP).
2007 Matching Share Award Plan (MSAP).
(9)
(10) 2008 PSP and MSAP.
(11) 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
Steve Fraser(1)
(1)
Steve Fraser joined the company on 23 May 2005.
Date of service contract
5.1.11
1.10.10
1.8.17
138
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1
0
0
1
5
0
2
0
0
2
5
0
3
0
0
3
5
0
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
8
2
0
1
9
2
0
1
7
1
0
0
1
2
3
1
3
8
1
4
8
1
8
3
2
1
5
2
6
5
2
7
2
3
0
6
1
5
0
1
6
2
1
6
4
1
8
9
2
0
1
2
1
4
2
0
3
2
5
0
2
5
1
2
3
0
2
7
0
2
7
6
Relative importance of spend on pay
The table below shows the relative importance of spend on pay compared to distributions to shareholder.
Employee
costs £m (1)
Dividends paid to
shareholders £m
+4.0%
+2.8%
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(1)
Employee costs includes wages and salaries, social security costs, and post-employment benefits.
Alignment of wider workforce pay
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 2017/18 and 2018/19 compares with the
percentage change in the average of each of those components for a group of employees.
Change in CEO remuneration
Base salary(1)
+2.0%
Change in employee remuneration(3)
Base salary(4)
+4.3%
Bonus(2)
+7.8%
Bonus
+11.3%
Benefits(2)
-3.6%
Benefits(5)
+16.9%
(1) On 1 September 2018, Steve Mogford received a base salary increase of 2.0 per cent.
(2)
(3)
(4)
(5)
See page 132 for further details.
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.
Includes promotional increases. The headline salary increase for employees was 3.0 per cent.
The increase in benefits for employees mainly relates to the alignment of life assurance benefits with effect from 1 April 2018, which improved the value of the benefit package
for a large number of employees. Additionally, a large number of employees became eligible for group income protection benefits with effect from 1 April 2018.
Cascade of remuneration through the organisation
Base salary
Annual bonus – cash
Annual bonus – deferred shares
Long Term Plan(1)
Pension
Life cover and ill health benefits
Company-funded healthcare
ShareBuy
Other benefits
Executive
directors
Executive
committee
Senior
leaders Management
Wider
workforce
Graduates Apprentices
(1)
Long Term Plan grants for senior leaders are made annually on a selective basis.
Stock Code: UU.
unitedutilities.com/corporate
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£
0
£
5
0
£
1
0
0
£
1
5
0
£
2
0
0
£
2
5
0
£
3
0
0
2
0
1
8
/
1
9
2
0
1
7
/
1
8
£
2
9
9
£
2
8
8
£
2
6
7
£
2
7
4
Corporate governance report
Annual report on remuneration
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Non-executive directors
Single total figure of remuneration for non-executive directors (audited information)
Taxable benefits
£’000
Salary/fees
£’000
Year ended 31 March
Dr John McAdam
Stephen Carter
Mark Clare
Alison Goligher
Brian May
Paulette Rowe(1)
Sara Weller
2019
307
78
80
66
82
66
80
2018
300
76
78
65
81
49
78
2019
1
0
0
0
0
0
0
2018
2
0
2
0
2
0
0
Total
£’000
2019
308
78
80
66
82
66
80
2018
302
76
80
65
83
49
78
(1)
Paulette Rowe joined the board on 1 July 2017.
Fees
Non-executive director annual fee rates were reviewed and increased with effect from 1 September 2018 as shown below. Base fees were increased
by 2.0 per cent which is lower than the 3.0 per cent increase applying to the general workforce in 2018. Additional fees for the senior independent
non-executive director and the chairs of committees were not increased.
Role
Base fee: Chairman(1)
Base fee: 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 2018
309.0
66.9
13.5
16.0
13.5
12.0
1 Sept 2017
303.0
65.6
13.5
16.0
13.5
12.0
Non-executive directors’ shareholding (audited information)
Details of beneficial interests in the company’s ordinary shares as at 31 March 2019 held by each of the non-executive directors and their connected
persons are set out in the table below.
Non-executive directors
Dr John McAdam
Stephen Carter
Mark Clare
Alison Goligher
Brian May
Paulette Rowe
Sara Weller
(1)
From 1 April 2019 to 21 May 2019 there have been no movements in the shareholdings of the non-executive directors.
Number of shares
owned outright
(including connected
persons) at 31 March
2019(1)
1,837
3,075
7,628
3,000
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
1.7.17
1.3.12
140
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The remuneration committee
Summary terms of reference
The committee’s terms of reference were last reviewed in November 2018 and are available on our website:
corporate.unitedutilities.com/corporate-governance
The committee’s main responsibilities include:
›
›
›
›
›
›
determining and recommending to the board the policy for executive director remuneration, having reviewed and taken into account workforce
remuneration and related policies and the alignment of incentives and reward with culture;
setting 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;
setting 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 aspects
of executive remuneration.
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Composition of the remuneration committee
Member
Sara Weller (chair since 27.7.12)
Mark Clare
Alison Goligher
Brian May
Member since
1.3.12
1.9.14
1.8.16
16.5.17
Member to
To date
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.
Support to the remuneration committee
By invitation of the committee, meetings are also attended by the Chairman of the company, the CEO, the company secretary (who acts as secretary
to the committee), the customer services and people director and the head of reward and pensions, 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 advisers.
During the year, the committee was assisted in its work by the following external adviser:
Adviser
New Bridge Street
Appointed by
Committee
How appointed
Reappointed following
committee review in 2013
Services provided to the
committee in year ended
31 March 2019
General advice on
remuneration matters and
support for the directors’
remuneration policy review
Fees paid by company for these
services in respect of year and
basis of charge
£205,000 on a time/cost basis
Other services provided to the company:
Benchmarking of roles not under the committee’s remit, provision of market information relevant to the price review submission 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 advisers is objective and independent.
In addition, during the year the law firm Eversheds Sutherland provided advice on the company’s share schemes to the company.
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Annual report on remuneration
Key activities of the remuneration committee over the past year
The committee met seven times in the year ended 31 March 2019.
Regular activities
›
Approved the 2017/18 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 2017/18 annual bonus scheme, reviewed progress against the targets for the 2018/19 annual bonus
scheme, and set the targets for the 2019/20 annual bonus scheme;
Assessed the achievement of targets for the Long Term Plan (LTP) awards made in 2015 and set the targets for LTP awards made in 2018;
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;
Amended the committee’s terms of reference, taking account of best practice and changes introduced by the 2018 UK Corporate Governance
Code, including the committee assuming responsibility for the setting of remuneration for all members of the executive team;
Considered governance developments and market trends in executive remuneration, including in the wider utilities sector; and
Noted progress on the company’s gender pay gap reporting.
Other activities
›
Reviewed the executive pay arrangements and consulted with shareholders on the proposed remuneration policy;
›
›
Reviewed the shareholding guidelines; and
Agreed to align pension arrangements for future executive directors with those of the wider workforce.
2018 AGM: Statement of voting
At the last Annual General Meeting on 27 July 2018, votes on the 2017/18 directors’ remuneration report (other than the part containing the
directors’ remuneration policy) were cast as follows:
V ote s
f or
438,000,676
of
v ote s
a st)
V ote s
inst
v ote s
of
a st)
6,060,476
444,061,152
Total votes cast
779,222
Votes withheld
(absten(cid:415)ons)
The directors’ remuneration report was approved by the board of directors on 21 May 2019 and signed on its behalf by:
Sara Weller
Chair of the remuneration committee
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a
g
a
(
9
8
.
6
4
%
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1
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3
6
%
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Corporate governance report
Appendix 1: Executive directors’ share plan interests
1 April 2018 to 31 March 2019
Awards held
at 1 April
2018
Award date
Granted in
year
Vested
in year
Lapsed/
forfeited in
year
Notional
dividends
accrued in
year(1)
Awards held
at 31 March
2019
28.6.16
27.6.17
25.6.18
104,863
105,426
–
210,289
544,204
16.6.15
16.6.16
16.6.17
18.6.18
29.7.13
30.6.14
30.6.15
1.4.18 to 31.3.19
Steve Mogford
Shares not subject to performance conditions at 31 March 2019
41,627
DBP
29,485
DBP
42,735
DBP
DBP(2)
–
48,700
LTP
63,029
LTP
108,300
LTP
ShareBuy matching shares(3)
39
333,915
Subtotal
Shares subject to performance conditions at 31 March 2019
LTP
LTP
LTP(4)
Subtotal
TOTAL
Russ Houlden
Shares not subject to performance conditions at 31 March 2019
26,277
DBP
18,440
DBP
26,816
DBP
DBP(2)
–
30,733
LTP
39,784
LTP
68,373
LTP
ShareBuy matching shares(3)
38
Subtotal
210,461
Shares subject to performance conditions at 31 March 2019
LTP
LTP
LTP(4)
Subtotal
TOTAL
Steve Fraser
Shares not subject to performance conditions at 31 March 2019
10,197
DBP
8,085
DBP
10,702
DBP
DBP(2)
–
25,651
LTP
ShareBuy matching shares(3)
43
Subtotal
54,678
Shares subject to performance conditions at 31 March 2019
LTP
LTP
LTP(4)
Subtotal
TOTAL
16.6.15
16.6.16
16.6.17
18.6.18
29.7.13
30.6.14
30.6.15
1.4.18 to 31.3.19
16.6.15
16.6.16
16.6.17
18.6.18
30.6.15
1.4.18 to 31.3.19
66,183
66,561
–
132,744
343,205
24,842
24,986
–
49,828
104,506
28.6.16
27.6.17
25.6.18
28.6.16
27.6.17
25.6.18
–
–
–
47,057
–
–
–
47
47,104
–
–
129,030
129,030
176,134
–
–
–
29,517
–
–
–
48
29,565
–
–
81,488
81,488
111,053
–
–
–
22,043
–
48
22,091
–
–
75,339
75,339
97,430
41,627
–
–
–
48,700
–
–
39
90,366
–
–
–
0
90,366
26,277
–
–
–
30,733
–
–
38
57,048
–
–
–
0
57,048
10,197
–
–
–
14,731
43
24,971
–
–
–
0
24,971
–
–
–
–
–
–
50,073
–
50,073
–
–
–
0
50,073
–
–
–
–
–
–
31,613
–
31,613
–
–
–
0
31,613
–
–
–
–
11,860
–
11,860
–
–
–
0
11,860
–
1,583
2,296
2,527
–
3,386
4,994
–
14,786
5,633
5,663
2,123
13,419
28,205
–
990
1,440
1,585
–
2,136
3,153
–
9,304
3,554
3,575
1,340
8,469
17,773
–
433
574
1,184
940
–
3,131
1,333
1,342
1,239
3,914
7,045
–
31,068
45,031
49,584
–
66,415
63,221
47
255,366
110,496
111,089
131,153
352,738
608,104
–
19,430
28,256
31,102
–
41,920
39,913
48
160,669
69,737
70,136
82,828
222,701
383,370
–
8,518
11,276
23,227
–
48
43,069
26,175
26,328
76,578
129,081
172,150
(1) Note that these are also subject to performance conditions where applicable.
(2)
(3) Under ShareBuy, matching shares vest provided the employee remains employed by the company one year after grant. During the year Steve Mogford purchased 238
See page 134 for further details.
partnership shares and was awarded 47 matching shares (at an average share price of 757 pence per share). Russ Houlden purchased 238 partnership shares and was awarded
48 matching shares (at an average share price of 757 pence per share). Steve Fraser purchased 237 partnership shares and was awarded 48 matching shares (at an average
share price of 757 pence per share).
See page 136 for further details.
(4)
Stock Code: UU.
unitedutilities.com/corporate
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Corporate governance report
Tax policies and objectives
Our tax policies and objectives, which are approved by the board on an
annual basis, ensure that we:
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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 marketed, aggressive or abusive tax avoidance;
Do not use tax havens for tax avoidance purposes;
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 fully complied with and
applied at all levels
We expect to fully adhere to the HMRC framework for co-operative
compliance.
Our Chief Financial Officer (CFO) has responsibility for tax governance
with oversight from the board. The CFO is supported by a specialist
team of tax professionals with many years of tax experience within the
water sector and led by the Head of Tax. The Head of Tax has day-to-day
responsibility for managing the group’s tax affairs and engages regularly
with key stakeholders from around the group in ensuring that tax risk is
proactively managed. Where appropriate, he will also engage with both
external advisers and HMRC to provide additional required certainty
with the aim of ensuring that any residual risk is typically low. All
significant tax issues are reported to the board regularly.
Consistent with the group’s general risk management framework, all
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.
have been explicitly put in place by successive governments precisely
to encourage such investment. This reflects responsible corporate
behaviour in relation to taxation.
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; reducing their bills.
For 2018/19, the impact of tax deductions on capital investment alone
reduced average household bills by around £25.
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).
The investment in Tallinn Water is directly held via United Utilities
(Tallinn) BV, a Dutch holding company. There is no tax advantage to
this historic intermediate holding company and the only income of the
Dutch company is the annual dividends received from Tallinn Water of
around £2 million, which are fully taxable within Estonia and wholly paid
onto the UK. The group’s only other overseas subsidiary is a dormant
company resident in Thailand, where the group had historic trading
operations. This company is in the process of being dissolved and has no
income.
Every year, the group pays significant contributions to the public
finances on its own behalf as well as collecting and paying over further
amounts for its 5,000-strong workforce. Details of the total payments for
2019 of around £241 million are set out below.
We expect the above details, which apply for the year ended 31 March
2019, to fully comply with the new legislative requirements for ‘Publication
of Group Tax Strategies’ for UK groups.
From summer 2019, the group will also now be publishing a separate
dedicated annual tax report on our website, which will include further
details in relation to the following key areas:
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
›
›
›
How much tax we pay;
How we ensure that we pay the right tax at the right time; and
How we ensure our tax affairs are transparent for all our
stakeholders.
Taxes/contributions to public finances for 2019
Total taxes and contributions to public finances
£241m
£95m
Business rates
£28m
£23m
£50m
£17m
£28m
Corporation tax
Employment taxes:
company
Employment taxes:
employees
Environmental taxes
and other duties
Regulatory services fees (e.g.
water extraction charges)
144
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Directors’ report
Energy and carbon
Carbon emissions
Operational energy use
Renewable energy generation
167,856
tonnes CO(cid:1046) equivalent (tCO(cid:1046)e)
71 per cent below our 2005/06 baseline
976GWh
underlying energy use that is used to
calculate GHG emissions
173GWh
equivalent to 21 per cent of our
electricity consumption
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Greenhouse gas emissions reporting
We measure and report our greenhouse gas (GHG) emissions of the six
Kyoto Protocol gases that result from all United Utilities’ operational
activities in the UK. There are no material omissions.
We report as required under the Companies Act 2006 (Strategic
Report and Directors’ Reports) Regulations. We follow the 2019 UK
Government Environmental Reporting Guidelines: Including streamlined
energy and carbon reporting guidance and the GHG Protocol Corporate
Accounting and Reporting Standard (2015).
In line with the recommendations of the Taskforce on Climate-related
Financial Disclosure (TCFD), we are reporting scope 1, 2 and 3 emissions,
our methodology and targets.
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).
How we measure our greenhouse gas emissions
A carbon footprint is calculated by converting all emissions of Kyoto
Protocol gases into a carbon dioxide equivalent (CO2e). Emissions are
categorised as direct, indirect or avoided emissions.
Direct emissions (scope 1 emissions) are those from activities we own
or control including those from our treatment processes, company
vehicles, burning of fossil fuels for heating and incineration of sewage
sludge.
Greenhouse gas emissions by scope
Indirect emissions, known as scope 2 and 3 emissions, result from
operational activities we do not own or control. These include emissions
produced as a consequence of electricity we purchase to power our
treatment plants (scope 2) and other indirect emissions such as travel
on company business (scope 3).
Avoided emissions are reductions from the purchase, or export, of
renewable energy.
Gross emissions are the sum of all three scopes. Net emissions are the
gross emissions minus reductions from avoided emissions.
The GHG Protocol recommends using two methods to quantify
emissions – the ‘location-based’ method which uses average grid
electricity emissions factors and the ‘market-based’ method which is
specific to the actual electricity purchased. From this year we will report
results using both methods and will adopt the gross ‘market-based’
figure to report our headline carbon emissions.
Intensity measurement
As in previous years we state our carbon emissions as tonnes CO2e per
£million revenue. This year we have also reported the metric tonnes
CO2e per megalitre (using the location-based method) broken down
by clean water and wastewater, as these are common metrics for our
industry.
PFC
Perfluorocarbons
N2O
Nitrous
oxide
CH4
Methane
CO2
Carbon dioxide
SF6
Sulphur
hexafluoride
HFC
Hydrofluorocarbons
Avoided emissions
Renewable electricity purchased
Renewable electricity exported
Biomethane exported
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.
unitedutilities.com/corporate
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Directors’ report
Energy and carbon
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Emissions target
By 2020 we aim to reduce our greenhouse gas emissions by 50 per cent
from the 2005/06 baseline and to achieve a 60 per cent reduction by
2035. We are pleased to report that for 2018/19 our carbon emissions
were 167,856 tCO2e, 71 per cent below the 2005/06 baseline.
We have achieved our emission target early as a result of purchasing
certified renewable electricity, with over 95 per cent of the electricity
we use having zero emissions. We will now focus on our remaining
emissions, the majority of which are from processing wastewater and
the treatment and disposal of sludge.
In line with our refreshed environmental policy, published in October
2018, we recognise our obligation to mitigate climate change and will
continue to explore ways to lower our GHG emissions. We will set a new
science based emissions target and evolve our reporting in line with
expectations to achieve net zero emissions.
Our carbon footprint since 2005/06
600,000
e
2
O
C
t
e t
Reported carbon emissions
Gross opera�onal emissions (Loca�on-based)
Gross opera�onal emissions (Market-based)
50% Reduc�on from 2005/06 baseline
6
0
/
5
0
0
2
7
0
/
6
0
0
2
8
0
/
7
0
0
2
9
0
/
8
0
0
2
0
1
/
9
0
0
2
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
4
1
/
3
1
0
2
5
1
/
4
1
0
2
6
1
/
5
1
0
2
7
1
/
6
1
0
2
8
1
/
7
1
0
2
9
1
/
8
1
0
2
0
2
/
9
1
0
2
United Utilities’ greenhouse gas emissions
Scope 1 Direct emissions
Direct emissions from burning of fossil fuels
Process emissions from our treatment plants – including refrigerants
Transport: company owned or leased vehicles
Total Scope 1 Direct emissions
Scope 2 Energy indirect emissions
Grid electricity purchased – generation
Total Scope 2 Energy indirect emissions
Scope 3 Other indirect emissions
Business travel (public transport and private vehicles)
Emissions from sludge and process waste disposal
Grid electricity purchased – transmission and distribution
Total Scope 3 Other indirect emissions
GROSS CARBON EMISSIONS(3)
Avoided emissions from renewable electricity exported
Avoided emissions from biomethane exported
Avoided emissions from renewable electricity purchased
Total avoided emissions
NET CARBON EMISSIONS(3)
Current year
2018/19
tCO2e
Previous years
2017/18
tCO2e(2)
2016/17
tCO2e
Baseline Year
2005/06
tCO2e
16,809
88,136
14,409
119,354
Market-based(1) 18,503
Location-based 187,171
18,503
2,236
26,186
Market-based(1) 1,577
Location-based 15,955
29,999
167,856
(3,434)
(8,446)
Location based (168,667)
(11,880)
155,976
14,324
91,456
11,803
117,583
28,287
230,167
230,167
2,504
23,048
2,644
21,520
47,072
394,822
(2,303)
(8,577)
(173,876)
(184,756)
210,066
20,848
96,019
11,783
128,649
277,726
277,726
2,889
17,915
25,120
45,924
452,301
(4,417)
(3,240)
–
(7,657)
444,644
17,638
125,032
7,514
150,183
357,660
357,660
2,374
42,712
33,088
78,174
586,017
(1,597)
–
–
(1,597)
584,420
(1) Market-based figures for electricity purchased on a standard tariff have been calculated using specific emissions factors from published generator fuel mix disclosures.
(2)
(3) Operational emissions for baseline and previous years use the location-based method and current year uses the market-based method.
2017/18 figures are restated recognising the purchase of renewable electricity during that year and calculated using the market-based method.
United Utilities’ greenhouse gas emissions intensity
Carbon emissions per £m revenue
Operational emissions per megalitre of treated water
Operational emissions per megalitre of sewage treated
tCO2e
Kg CO2e/Ml
Kg CO2e/Ml
Current year
2018/19
92.3
38.22
102.43
Previous year
2017/18
225.6
60.43
116.75
Baseline year
2005/06
280.9
146
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7
0
0
,
0
0
0
2
0
2
0
T
a
r
g
5
0
0
,
0
0
0
4
0
0
,
0
0
0
3
0
0
,
0
0
0
2
0
0
,
0
0
0
1
0
0
,
0
0
0
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Energy efficiency action taken
Our energy management strategy aims to achieve an appropriate
balance between managing our energy consumption, use of renewables
and self-generation and being smart about how we operate our assets
to get best value while maintaining security of supply.
A key activity in the last year has been assessing and improving energy
management planning at both local and regional levels. For instance, at
a local level, the United Utilities energy standard has been developed
and roll-out is well under way. This is a simple assessment that enables
sites to understand current energy management practices and identify
where improvements can be made. Supporting this are energy
engineers who identify energy efficiency opportunities and share their
knowledge of best practice with our teams across the region.
At a regional level, we have increased the weighting that energy
consumption has in investment and operational decision-making.
This began with raising awareness of actual energy consumption and
generation by using the now well-established energy management
information portal. With timely, accurate and consistent data,
supplemented by trials using energy monitoring and control tools, it
has been possible to better understand the local and broader energy
impacts of our business decisions and improve how we balance business
needs and energy use.
Renewable energy generation by technology
E ne
S ol
y dr o
c ov
r om
ior
e sou
e s
a ne
a s to
r id)
e th
iom
ind
Energy use
The underlying energy data used to calculate our carbon emissions
includes electricity, gas and other fuels purchased for use on-site and for
transport.
This year we used 976GWh of energy. The prolonged dry and warm
conditions from January 2018 increased customer demand for water
and required more pumping to move water around our integrated
network. As a result, we estimate that we used up to 30GWh more
electricity.
We generated the equivalent of 173GWh of renewable electricity,
an increase of 6GWh on last year. We achieved this with a mix of
generation from wind, hydro, solar photovoltaics and energy recovery
from bioresources (using sewage sludge to power combined heat and
power generators).
We continued to invest in our generation capability with nine new solar
installations coming on line during the year. Most of the energy we
generate is used to power our operations, but where there is excess
or it makes commercial sense to do so we export to the grid. We are
exploring emerging technologies such as batteries and electric vehicles
and investigating how systems thinking and artificial intelligence might
optimise our energy use and generation.
Energy use and generation
Energy use
Electricity
Gas
Other fuels (e.g. for transport)(1)
Total energy use(2)
Electricity purchased
Renewable 0 CO2 g/kWh
Supplier Standard Tariff 310 CO2 g/kWh
Total electricity purchased
Renewable energy generated
CHP
Solar
Wind
Hydro
Biomethane(3)
Total renewable energy generated
Renewable energy exported
Electricity
Biomethane(3)
Total renewable energy exported
GWh
807.8
33.0
135.0
975.8
601.5
59.7
661.2
115.7
34.6
4.8
4.6
13.2
172.9
13.0
13.2
26.2
(1)
Energy use for other fuels includes fuel used in processing and transport plus
business mileage in private vehicles converted to GWh using UK Government GHG
Conversion Factors for Company Reporting.
(2) Underlying energy use that is used to calculate GHG emissions.
(3) Biomethane generated and exported to grid is expressed as an electricity
equivalent.
Stock Code: UU.
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0
0
1
8
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4
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Directors’ report
Statutory and other information
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Our directors present their management report, including the strategic report, on pages 10 to 77 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 2019.
Business model
A description of the company’s business model can be found within the strategic report on pages 24 to 38.
Dividends
Directors
Reappointment
Interests
Corporate governance
statement
Share capital
Voting
Transfers
Our directors are recommending a final dividend of 27.52 pence per ordinary share for the year ended
31 March 2019, which, together with the interim dividend of 13.76 pence, gives a total dividend for the year
of 41.28 pence per ordinary share (the interim and final dividends paid in respect of the 2017/18 financial year were
13.24 pence and 39.73 pence per ordinary share respectively). Subject to approval by our shareholders at our AGM,
the final dividend will be paid on 1 August 2019 to shareholders on the register at the close of business on
21 June 2019.
The names of our directors who served during the financial year ended 31 March 2019 can be found on
pages 80 to 83. Sir David Higgins was appointed on 13 May 2019.
Our articles of association provide that our directors must retire at every annual general meeting following their
last election or reappointment by our shareholders which is consistent with the recommendation contained within
the 2016 UK Corporate Governance Code (‘the Code’) that all directors should be subject to annual election by
shareholders. This has been the case at all the AGMs since 2011. Information regarding the appointment of our
directors is included in our corporate governance report on pages 94 to 97.
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 116 to 143 which is hereby incorporated by reference into this
directors’ report.
The corporate governance report on pages 80 to 115 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 2016 version of the Code, as applicable to the company for the year ended
31 March 2019, 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 2019, 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 23 to the financial statements on page 186. 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 2019.
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 2019 AGM. Our directors’ powers are conferred on them by UK legislation and by
the company’s articles. At the AGM of the company on 27 July 2018, 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.
Electronic and paper proxy appointment and voting instructions must be received by our registrars (Equiniti) not
less than 48 hours before a general meeting and when calculating this period, the directors can decide not to take
account of any part of a day that is not a working day.
There are no restrictions on the transfer of our ordinary shares in the company, nor any limitations on the holding
of our shares in the company, save: (i) where the company has exercised its right to suspend their voting rights or
to prohibit their transfer following the omission of their holder or any person interested in them to provide the
company with information requested by it in accordance with Part 22 of the Companies Act 2006; or (ii) where their
holder is precluded from exercising voting rights by the Financial Conduct Authority’s Listing Rules or the City Code
on Takeovers and Mergers.
There are no agreements known to us between holders of securities that may result in restrictions on the transfer
of securities or on voting rights. All our issued shares are fully paid.
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Major shareholdings
At 22 May 2019, 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:
Lazard Asset Management LLC
BlackRock Inc.
Norges Bank
Per cent of issued
share capital
8.03
5.13
3.03
Direct or indirect
nature of holding
Indirect
Indirect
Direct
Purchase of own shares
Change of control
At our last AGM held on 27 July 2018, 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 2019 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 2020.
As at 31 March 2019, 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 all-employee share incentive plan (ShareBuy) would be
able to direct the trustee of ShareBuy, 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 6 to the
financial statements on page 175. In line with current UK tax legislation, the amount is fully deductible against the
group’s corporation tax liability, resulting in tax relief of £7.1 million.
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Directors’ indemnities and
insurance
Political donations
Trade associations
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 £9,338
(2018: £21,662) as part of this process. At the 2018 AGM, an authority was taken to cover such expenditure.
A similar resolution will be put to our shareholders at the 2019 AGM to authorise the company and its subsidiaries
to make such expenditure.
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 focus on specific
professions such as the 100 Group representing the views of the finance directors of FTSE 100 and large UK private
companies and the GC 100, the voice of general counsel and company secretaries in FTSE 100 companies. The
company is also a member of regional bodies, such as the North West Business Leadership Team which encourages
engagement across the public and private sectors to promote the sustainable economic development and long-
term well-being of the North West. Our total contribution to these associations in 2018/19 was £399,658 (2017/18:
£389,743).
Stock Code: UU.
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Directors’ report
Statutory and other information
Employees
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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 32. 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 (see page 42), measuring their views annually, then
taking action to improve how they feel about the company and understand its direction. Employees are provided
with information, through briefings and access to other online materials, to enable them to understand the financial
and economic factors affecting the company’s performance. Furthermore, Alison Goligher has been designated
as the non-executive director for leading the board’s engagement with the workforce. Amongst other initiatives,
an Employee Voice Panel has been established, chaired by Alison; meetings will be held quarterly with the venue
rotating around our region. The Panel will consist of circa 30 employees elected from across all employee segment
groups and geographical areas. Panel members will be re-elected approximately every two years. The objectives
of the Panel are to: provide the opportunity for a two-way channel of communication between the board and
the workforce; provide insight to the board on how people think and feel about working for the company; and
contribute to the monitoring and assessment of the culture of the business. During the year, we have had regard to
employee interests, consulting with employees and their representatives and trade union representatives in relation
to new pension arrangements introduced on 1 April 2019 and consulting with employee representatives in relation
to organisational changes for support and managerial roles. The effect of our regard towards employees in relation
to the decisions taken during the financial year is included in our s172(1) Statement on page 152.
Employees are encouraged to own shares in the company through the operation of an all employee share incentive
plan (ShareBuy).
Information on our average number of employees during the year, can be found in note 3 on page 173.
Environmental, social
and community matters
Details of our approach, as a responsible business, is set out in our business principles, which can be found on our
website at unitedutilities.com/corporate/about-us/governance/business-principles/. Our approach to engagement
with our environmental stakeholders and those in the communities we serve can be found on pages 40 to 43.
The effect of our regard towards the environment, social and community matters in relation to the decisions taken
during the financial year is included in our s172(1) Statement on page 152.
Customers and suppliers
and key stakeholders
Our approach to engagement with customers, suppliers, regulators and other key stakeholders can be found on
pages 39 to 45. The effect of our regard towards customers, suppliers, regulators and other key stakeholders in
relation to the decisions taken during the financial year is included in our s172(1) Statement on page 152.
Our sustainable supply chain charter sets out how we work with our suppliers, which can be found on our website
at: unitedutilities.com/corporate/about-us/governance/suppliers/how-we-buy/sustainable-supply-chain/, we
are also a signatory to the Prompt Payment Code. We publish key statistics and other information on our payment
practices in line with the Duty to Report on Payment Practices and Performance on the Department for Business,
Energy & Industrial Strategy’s website. Information is published on a six-monthly basis. For the six months to 31
March 2019, our average time taken to pay invoices was 24 days; in the previous six months it was 25 days.
Approach to technology
development
We are committed to using innovative, cost-effective and practical solutions for providing high-quality services and
we recognise the importance of ensuring that we focus our investment on the development of technology and that
we have the right skills to apply technology to achieve sustainable competitive advantage and also that we continue
to be alert to emerging technological opportunities.
Financial instruments
Our risk management objectives and policies in relation to the use of financial instruments can be found in note A4
on page 190.
Events occurring after the
reporting period
Slavery and human
trafficking statement
Details of events after the reporting period are included in note 26 on page 186.
Our statement can be found on our website at: unitedutilities.com/human-rights
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Annual general meeting
Our 2019 annual general meeting (AGM) will be held on 26 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.
At our 2019 AGM, resolutions will be proposed, among 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; and
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.
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 22 May 2019 and signed on its behalf by:
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Company Secretary
Non-financial information statement
The table below constitutes the company’s non-financial Information statement (‘the statement’), produced to comply with sections 414CA(1) and
414CB(1) of the Companies Act 2006. The statement is incorporated into the strategic report by cross reference. Our business principles set out how
we behave as a business and are applicable to the areas of disclosure required by s414CB(1). Our business principles can be found on our website:
unitedutilities.com/corporate/about-us/governance/business-principles/. The stakeholder metrics table (see page 55) also includes data in relation
to the areas of disclosure required by s414CB(1).
Reporting requirement
Environmental matters
Employees
Respect for human rights
Social matters
Anti-corruption and anti-
bribery
Information necessary to understand our business and
its impact, policy, due diligence and outcomes
Reflecting the needs of the environment:
Natural resources – see page 28
›
›
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Natural environment – see page 28
Reducing our carbon emissions – see pages 28-29
Reflecting the needs of our employees:
›
Competitive base salaries and benefits - see page 93
›
Health and safety – see page 6
› Mental well being – see page 33
›
›
›
Gender pay report 2018 – see page 98
Engagement – see pages 42 and 150
Board diversity – see page 96
Reflecting the needs of our stakeholders:
›
Suppliers – see page 43.
›
Diversity within our workforce – see pages 32 and
98
Reflecting the needs of our stakeholders:
Customers – see pages 40 and 57
›
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›
›
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Community – see page 40
Environment – see pages 42 and 61
Suppliers – see pages 42 and 148
Regulators – see page 44
Employees – see pages 36, 41 to 42
Suppliers – see page 42
Policies, guidance and standards which govern
our approach (some of which are only published
internally)
› Waste and resource use policy
›
Environmental policy – see page 29
› Water resources management plan – see page 48
›
›
›
›
›
Emissions target – see page 146
Health and safety policy
Equality, diversity and inclusion policy
Flexible working arrangements
Agency worker policy
› Mental well being policy
›
›
›
›
›
›
›
›
›
›
›
›
Human rights policy – see page 32
Board diversity policy – see page 97
Employee data protection policy
Slavery and human trafficking statement
Human rights policy – see page 32
YourVoice – see page 40
Charitable matched funding guidance
Volunteering policy
Sustainable supply chain charter – see page 150
Commercial procurement policy
Anti-bribery policy
Fraud investigation and reporting processes
› Whistleblowing policy
›
›
Internal financial control processes
Commercial procurement policy
Stock Code: UU.
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Directors’ report
Statutory and other information
Introduction
Throughout this annual report, we provide examples of how we: take
into account the likely consequences of long-term decisions; build
relationships with stakeholders; understand the importance of engaging
with our employees; understand the impact of our operations on the
communities in our region and the environment we depend upon; and
attribute importance to behaving as a responsible business.
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Statement by the directors in performance
of their statutory duties in accordance with
s172(1) Companies Act 2006
The board of directors of United Utilities Group PLC consider, both
individually and together, that they have acted in the way they consider,
in good faith, would be most likely to promote the success of the
company for the benefit of its members as a whole (having regard to
the stakeholders and matters set out in s172(1)(a-f) of the Act) in the
decisions taken during the year ended 31 March 2019 (see pages 88
to 89). In particular, by reference to the approval of our business plan
(‘our plan’) for the period 2020–25, supported by the board assurance
statement accompanying our plan:
›
›
›
›
›
Our plan was designed to have a long-term beneficial impact on
the company and to contribute to its success in delivering a better
quality, more reliable water and wastewater service for customers
in the North West of England to 2025 and beyond. We will continue
to operate our business within tight budgetary controls and in line
with our regulatory targets. Our plan was awarded ‘fast-track’ status
and commended in relation to: customer engagement, affordability
and vulnerability, resilience and innovation (see pages 19 to 21).
Our employees are fundamental to the delivery of our plan. We
aim to be a responsible employer in our approach to the pay and
benefits our employees receive. The health, safety and well-being of
our employees is one of our primary considerations in the way we
do business (see page 6).
Our duty, in accordance with the Water Industry Act 1991, is to
provide a safe and secure supply of water and return wastewater
safely to the environment. Our plan was informed by extensive
engagement with customers, enabling us to gain an understanding
of their views and priorities, communicating and listening through
new channels and underpinned by working with the independent
customer challenge group YourVoice (see page 40). We have made a
commitment to share the gains of out-performance with customers.
We also aim to act responsibly and fairly in how we engage with:
our suppliers (see page 42); our credit investors (see page 100);
and co-operate with our regulators (see page 44); all of whom are,
integral to the successful delivery of our plan.
Our plan took into account the impact of the company’s operations
on the community and environment and our wider societal
responsibilities, and in particular how we impact the regions
we serve in the North West of England (see page 40). Several
of the proposed performance measures in our plan will deliver
environmental improvements.
As the Board of Directors, our intention is to behave responsibly
and ensure that management operate the business in a responsible
manner, operating within the high standards of business conduct
and good governance expected for a business such as ours (see
pages 84 to 143) and in doing so, will contribute to the delivery
of our plan. The intention is to nurture our reputation, through
both the construction and delivery of our plan, that reflects our
responsible behaviour.
›
As the Board of Directors, our intention is to behave responsibly
toward our shareholders and treat them fairly and equally, so they
too may benefit from the successful delivery of our plan.
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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 law and regulations.
Responsibility statement of the directors in
respect of the annual financial report
We confirm that to the best of our knowledge:
Company law requires the directors to prepare group and parent
company financial statements for each financial year. Under that
law they are required to prepare the group financial statements in
accordance with International Financial Reporting Standards as adopted
by the European Union (EU) (IFRSs as adopted by the 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, relevant and
reliable;
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; and
the strategic report 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.
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We consider the annual report and accounts, 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.
Approved by the board on 22 May 2019 and signed on its behalf by:
›
›
›
state whether they have been prepared in accordance with IFRSs as
adopted by the EU;
Dr John McAdam
Chairman
assess the group and parent company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern; and
use the going concern basis of accounting unless they either
intend to liquidate the group or the parent company or to cease
operations, or have no realistic alternative but to do so.
Russ Houlden
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
are responsible for such internal control as they determine is necessary
to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and 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 comply
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.
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Financial
statements
In this section you will find our full
audited financial results for the year
ended 31 March 2019
Independent auditor’s report to the members
156
of United Utilities Group PLC only
Consolidated income statement
162
Consolidated statement of comprehensive income 162
Consolidated and company statements
of financial position
Consolidated statement of changes in equity
Company statement of changes in equity
Consolidated and company statements
166
of cash flows
Guide to detailed financial statements disclosures 167
168
Accounting policies
172
Notes to the financial statements
187
Notes to the financial statements – appendices
209
Five-year summary – unaudited
210
Shareholder information
163
164
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Sunrise over Castlerigg, near
Keswick - photograph taken
by our wastewater data and
analytics colleague John King
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Independent auditor’s report to the members of
United Utilities Group PLC only
Basis for opinion
We conducted our audit in accordance with International Standards
on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities are
described below. We believe that the audit evidence we have obtained
is a sufficient and appropriate basis for our opinion. Our audit opinion is
consistent with our report to the audit committee.
We were first appointed as auditor by the shareholders on 22 July 2011.
The period of total uninterrupted engagement is for the eight financial years
ended 31 March 2019. We have fulfilled our ethical responsibilities under,
and we remain independent of the group in accordance with, UK ethical
requirements, including the FRC Ethical Standard as applied to listed public
interest entities. No non-audit services prohibited by that standard were
provided.
1. Our opinion is unmodified
We have audited the financial statements of United Utilities Group
PLC (the company) for the year ended 31 March 2019, which comprise
the Consolidated income statement, the Consolidated statement of
comprehensive income, the Consolidated and company statements of
financial position, the Consolidated statement of changes in equity, the
Company statement of changes in equity, the Consolidated and company
statements of cash flows, and the related notes, including the accounting
policies on pages 168 to 171 and 203 to 207.
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 2019 and
of the group’s profit for the year then ended;
the group financial statements have been properly prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU);
the parent company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU and as
applied in accordance with the provisions of the Companies Act
2006; and
the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the group
financial statements, Article 4 of the IAS Regulation.
2. Key audit matters: including our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement,
were of most significance in the audit of the financial statements and
include the most significant assessed risks of material misstatement
(whether or not due to fraud) identified by us, including those which
had the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the engagement
team. We summarise below the key audit matters, in arriving at our
audit opinion above, together with our key audit procedures to address
those matters and, as required for public interest entities, our results
from those procedures. These matters were addressed, and our results
are based on procedures undertaken, in the context of, and solely for
the purpose of, our audit of the financial statements as a whole, and in
forming our opinion thereon, and consequently are incidental to that
opinion, and we do not provide a separate opinion on these matters.
Overview
Materiality: group
financial statements
as a whole
Coverage
Risks of material misstatement
Recurring risks
£20.0m (2018: £19.0m)
4.7% (2018: 4.9%) of normalised group profit
before tax
98% (2018: 98%) of group profit before tax
Revenue recognition and allowance
for household customer debt
Capitalisation of costs relating
to the capital programme
Retirement benefit obligation
valuation
Water Plus joint venture investment
and loans carrying value
Recoverability of parent company's
investment in United Utilities PLC
vs 2018
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Revenue recognition and
allowance for household
customer debt
Revenue not recognised:
£18.0 million (2018: £20.3 million)
Provision for household customer
debt: £52.9 million (2018: £63.4
million)
Refer to page 108 (Audit
committee report), note A7 and
pages 170 and 171 (accounting
policies)
Capitalisation of costs relating to
the capital programme
£726.2 million (2018: £741.3
million)
Refer to pages 108 (Audit
committee report), note A7, page
171 (accounting policies) and page
178 (financial disclosures)
The risk
At each balance sheet date:
Our response
Our procedures included:
›
›
judgement is required to identify
properties where there is little prospect
that cash will be received for revenue
that has been billed due to either the
occupier not being able to be identified
or a past history of non-payment of
bills relating to that property and,
therefore, whether the revenue should
be recognised; and
assumptions involving a high degree
of estimation uncertainty are required
to assess the recoverability of trade
receivables.
The effect of these matters is that, as part
of our risk assessment, we determined that
the recoverability of trade receivables has
a high degree of estimation uncertainty,
with a potential range of reasonable
outcomes greater than our materiality for
the financial statements as a whole. The
financial statements (see pages 170 and 171
accounting policies) disclose the sensitivities
estimated by the group.
›
›
Accounting analysis – Assessing the recognition of revenue
where the collection of consideration is not probable on
the date of sale for compliance with relevant accounting
standards;
Control observation – Testing the group’s controls over
revenue recognition and provision for household customer
debt, including reconciliations between sales and cash
receipts systems and the general ledger;
› Methodology choice – Assessing the appropriateness of
the customer debt provisioning policy based on historical
cash collections, credits, re-bills and write-off information;
and
›
Assessing transparency – Assessing the adequacy of
the group’s disclosures of its revenue recognition and
household customer debt provisioning policies, including
the judgement involved in recording revenue and
estimation uncertainty of the doubtful debts provision.
Our results:
› We found the amount of revenue recognised to be
acceptable; and
› We considered the level of provisioning against household
customer debt to be acceptable.
Subjective classification
Our procedures included:
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. Costs capitalised include an
allocation of overhead costs, relating to
the proportion of time spent by support
function staff, which is based on assumptions
involving a high degree of judgement.
The effect of these matters is that, as part
of our risk assessment, we determined
that the costs capitalised has a high degree
of judgement, with a potential range of
reasonable outcomes greater than our
materiality for the financial statements
as a whole. The financial statements (see
page 171 accounting policies) disclose the
sensitivities estimated by the group.
›
›
›
›
›
›
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 review of project
business case submissions, and attending a sample of
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 project cost transactions against the
capitalisation policy;
Tests of details – Identify and assess the impact of existing
projects where the capitalisation rate has changed during
the year;
Historical comparisons – Critically assess the proportion
of capitalised overhead costs using historical comparisons
and expected changes based on corroborated enquiry and
our sector knowledge; and
Assessing transparency – Assessing the adequacy of the
group’s disclosures of its capitalisation policy, including the
judgement involved in assessing expenditure as capital and
the judgement relating to the allocation of overhead costs.
Our results:
› We found the group’s classification of expenditure as
capital or operating to be acceptable.
Stock Code: UU.
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Independent auditor’s report to the members of
United Utilities Group PLC only
Retirement benefit obligation
valuation
£3,425.2 million (2018: £3,498.7
million)
Refer to page 108 (Audit
committee report), note A7, page
171 (accounting policies), and note
A5 (financial disclosures)
Water Plus joint venture
investment and loans carrying
value
£36.7 million investment in joint
venture and £142.1 million loans to
joint venture (2018: £37.3 million
and £135.8 million respectively)
Refer to page 109 (Audit commitee
report), note A7, page 171
(accounting policies) and pages
179 to 180 (financial disclosures)
The risk
Subjective valuation:
Our response
Our procedures included:
The valuation of the retirement benefit
obligations depends on a number of
estimates, including the discount rates
used to calculate the current value of the
future payments the group expects to pay
pensioners, the rate of inflation that must be
incorporated in the estimate of the future
pension payments, and the life expectancy of
pension scheme members.
There is a considerable amount of estimation
uncertainty involved in setting the above
assumptions and a small change in the
assumptions and estimates may have a
significant impact on the retirement benefit
obligations.
The effect of these matters is that, as part of
our risk assessment, we determined that the
gross defined benefit pension obligations has
a high degree of estimation uncertainty, with
a potential range of reasonable outcomes
greater than our materiality for the financial
statements as a whole, and possibly many
times that amount. The financial statements
(see note A5) disclose the sensitivity
estimated by the group.
› Our actuarial expertise – We used our own actuarial
specialists to challenge key assumptions and estimates
used in the calculation of the retirement benefit
obligations. We also compared the IAS 19 valuation
with the triennial funding valuations of the UK schemes,
notwithstanding that they were prepared on a different
basis and as at different dates;
› Methodology assessment – We used our own actuarial
specialists to assess the appropriateness and consistency
of the methodology applied by management in setting the
key assumptions;
›
›
›
Benchmarking assumptions – We performed a comparison
of key assumptions against our own benchmark ranges
derived from externally available data and against those
used by other companies reporting on the same period
Assessing external actuary' s credentials – We assessed
the competence and independence of the external actuary
engaged by the group; and
Assessing transparency – We considered the adequacy of
the group's disclosure in respect of retirement benefits,
in particular, the gross defined benefit obligation and the
assumptions used, which are set out in note A5 to the
financial statements.
Our results:
› We found the resulting estimate of the retirement benefit
obligations to be acceptable.
Forecast-based valuation:
Our procedures included:
The group’s investment in the equity of
and loans to Water Plus is significant. The
estimated recoverable amount is subjective
due to the inherent uncertainty involved in
forecasting future cash flows.
›
Assessing methodology – We assessed whether the
principles and integrity of the cash flow model are in
accordance with relevant accounting standards;
› Our valuation expertise – We challenged the assumptions
used by the group in the calculation of the discount rates,
including comparisons with external data sources and
by involving our own valuation specialist to assist us in
assessing the discount rate assumptions applied.
›
›
Sensitivity analysis – We performed our own sensitivity
analysis, including a reasonably possible reduction in
forecast cash flows and an alternative discount rate
assumption, to assess level of sensitivity to these changes;
and
Assessing transparency – We assessed whether the
group's disclosures about the sensitivity of the outcome
of the impairment assessment to a reasonably possible
change in the discount rate and cash flows reflected the
risks inherent in the valuation.
Our results:
› We found the resulting estimate of the recoverable
amount of the investment in the equity and loans to Water
Plus to be acceptable.
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Recoverability of parent
company' s investment in United
Utilities PLC
Investment in United Utilities PLC
£6,326.8 million (2018: £6,326.8
million).
Refer to note A7, page 203
(accounting policies) and page 180
(financial disclosures)
The risk
Low risk, high value:
Our response
Our procedures included:
The carrying amount of the parent
company's investments in United Utilities
PLC represents 99 per cent (2018: 99
per cent) of the company's total assets.
The recoverability is not at a high risk
of significant misstatement or subject
to significant judgement. However, due
to the materiality in the context of the
parent company financial statements,
this is considered to be the area that had
the greatest effect on our overall parent
company audit.
›
Tests of detail: Compared the carrying amount of the
investment with the draft balance sheet of United
Utilities PLC to identify whether the net assets, being an
approximation of the minimum recoverable amount, was
in excess of the carrying amount and if not, comparing
it with the expected value of the business based on a
suitable premium to the regulatory capital value.
Our results:
› We found the group's assessment of the recoverability of
the investment in United Utilities PLC to be acceptable.
3. Our application of materiality and an
overview of the scope of our audit
Materiality for the group financial statements as a whole was set at
£20.0 million (2018: £19.0 million), determined with reference to a
benchmark of group profit before tax, normalised to exclude net fair
value gains or losses on debt and derivative instruments as disclosed in
note 5, of £9.5 million, of which it represents 4.7 per cent (2018: 4.9 per
cent).
Materiality for the parent company financial statements as a whole was
set at £19.5 million (2018: £18.5 million), determined with reference to
a benchmark of company total assets, of which it represents 0.30 per
cent (2018: 0.29 per cent).
We agreed to report to the audit committee any corrected or
uncorrected identified misstatements exceeding £0.5 million, in
addition to other identified misstatements that warranted reporting on
qualitative grounds.
Of the group’s 34 (2018: 34) reporting components, we subjected seven
(2018: six) to full scope audits for group purposes.
The components within the scope of our work accounted for the
percentages illustrated opposite.
For the residual components, we performed analysis at an aggregated
group level to re-examine our assessment that there were no significant
risks of material misstatement within these.
The group team approved the component materialities, which ranged
from £2.5 million to £19.5 million (2018: £2.5 million to £18.5 million),
having regard to the mix of size and risk profile of the group across
the components. The work on one of the seven reporting components
(2018: one of six) was performed by component auditors and the rest,
including the audit of the parent company, was performed by the
group team. The group team instructed the component auditor as to
the significant areas to be covered, including the relevant risks detailed
above and the information to be reported back. The group team
performed procedures on the items excluded from normalised group
profit before tax.
The group team visited none (2018: none) of the component locations
to assess the audit risk and strategy. Telephone conference meetings
were held with the component auditor. At these meetings, the findings
reported to the group team were discussed in more detail and any
further work required by the group team was then performed by the
component auditor.
Normalised group profit before tax
£426.7m (2018: £384.8m)
Materiality
£20.0m (2018: £19.0m)
£20.0m
Whole financial
statements materiality
(2018: £19.0m)
£19.5m
Range of materiality at
7 components £2.5m to £19.5m
(2018: £2.5m to £18.5m)
£0.5m
Misstatements reported to the
audit committee (2018: £0.5m)
Group normalised
profit before tax
Normalised group profit
before tax
Group materiality
Group revenue
1
100%
(2018: 100%)
99
100
100%
(2018: 100%)
100
100
Group total assets
Group profit before tax
1
1
99%
(2018: 99%)
99
99
2
2
98%
(2018: 98%)
98
98
Full scope for group audit
purposes 2019
Full scope for group audit
purposes 2018
Residual components
Specified risk-focused audit
procedures 2019
Specified risk-focused audit
procedures 2018
Stock Code: UU.
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Independent auditor’s report to the members of
United Utilities Group PLC only
4. We have nothing to report on going
concern
The directors have prepared the financial statements on the going
concern basis as they do not intend to liquidate the company or the
group or to cease their operations and, as they have concluded, that the
company's and the group's financial position means that this is realistic.
They have also concluded that there are no material uncertainties that
could have cast significant doubt over their ability to continue as a going
concern for at least a year from the date of approval of the financial
statements ('the going concern period').
Our responsibility is to conclude on the appropriateness of the directors'
conclusions and, had there been a material uncertainty related to going
concern, to make reference to that in this audit report. However, as we
cannot predict all future events or conditions and as subsequent events
may result in outcomes that are inconsistent with judgements that were
reasonable at the time they were made, the absence of reference to a
material uncertainty in this auditor's report is not a guarantee that the
group and the company will continue in operation.
In our evaluation of the directors' conclusions, we considered the
inherent risks to the group's and the company's business model and
analysed how those risks might affect the group's and the company's
financial resources or ability to continue operations over the going
concern period. The risks that we considered most likely to adversely
affect the group's and the company's available financial resources over
this period were:
›
›
›
a significant increase required in total expenditure;
funding to be obtained in line with forecast; and
the impact of macro-economic factors on household customers'
ability to pay.
As these were risks that could potentially cast significant doubt on the
group's and the company's ability to continue as a going concern, we
considered sensitivities over the level of available financial resources
indicated by the group's financial forecasts taking account of reasonably
possible (but not unrealistic) adverse effects that could arise from these
risks individually and collectively and evaluated the achievability of the
actions the directors consider they would take to improve the position
should the risks materialise. We also considered less predictable but
realistic second-order impacts, such as the impact of Brexit and the
erosion of customer or supplier confidence, which could result in a rapid
reduction of available financial resources.
Based on this work, we are required to report to you if:
› we have anything material to add or draw attention to in relation to
the directors' statement on page 168 of the financial statements on
the use of the going concern basis of accounting with no material
uncertainties that may cast significant doubt over the group and
company's use of that basis for a period of at least 12 months from
the date of approval of the financial statements; or
›
the related statement under the Listing Rules set out on page 101 is
materially consistent with our audit knowledge.
We have nothing to report in these respects and we did not identify
going concern as a key audit matter.
5. We have nothing to report on the other
information in the Annual Report
The directors are responsible for the other information presented in
the Annual Report, together with the financial statements. Our opinion
on the financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except as explicitly
stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so,
consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the
financial statements or our audit knowledge. Based solely on that work,
we have not identified material misstatements in the other information.
Strategic report and Directors’ report
Based solely on our work on the other information:
› we have not identified material misstatements in the strategic
report and the directors’ report;
›
›
in our opinion, the information given in those reports for the
financial year is consistent with the financial statements; and
in our opinion, those reports have been prepared in accordance
with the Companies Act 2006.
Directors’ remuneration report
In our opinion, the part of the Directors’ remuneration report to be
audited has been properly prepared in accordance with the Companies
Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements
audit, we have nothing material to add or draw attention to in
relation to:
›
›
›
the directors’ confirmation within the Long-term viability statement
on pages 101 to 102 that they have carried out a robust assessment
of the principal risks facing the group, including those that would
threaten its business model, future performance, solvency and
liquidity;
the Principal risks and uncertainties disclosures describing these
risks and explaining how they are being managed and mitigated; and
the directors’ explanation in the Long-term viability statement of
how they have assessed the prospects of the group, over what
period they have done so and why they considered that period
to be appropriate, and their statement as to whether they have a
reasonable expectation that the group will be able to continue in
operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Under the Listing Rules, we are required to review the Long-term
viability statement. We have nothing to report in this respect.
Our work is limited to assessing these matters in the context of only
the knowledge acquired during our financial statements audit. As we
cannot predict all future events or conditions and as subsequent events
may result in outcomes that are inconsistent with judgements that
were reasonable at the time they were made, the absence of anything
to report on these statements is not a guarantee as to the group's and
company's longer-term viability.
Corporate governance disclosures
We are required to report to you if:
› we have identified material inconsistencies between the knowledge
we acquired during our financial statements 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 section of the annual report describing the work of the audit
committee does not appropriately address matters communicated
by us to the audit committee.
We are required to report to you if the Corporate governance statement
does not properly disclose a departure from the 11 provisions of the UK
Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
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6. We have nothing to report on the other
matters on which we are required to report
by exception
Under the Companies Act 2006, we are required to report to you if, in
our opinion:
Firstly, the group is subject to laws and regulations that directly affect
the financial statements; including financial reporting legislation
(including related companies legislation); distributable profits legislation
and taxation legislation; and we assessed the extent of compliance with
these laws and regulations as part of our procedures on the related
financial statement items.
Secondly, the group is subject to many other laws and regulations where
the consequences of non-compliance could have a material effect on
amounts or disclosures in the financial statements, for instance through
the imposition of fines or litigation. We identified the following areas
as those most likely to have such an effect: Ofwat, Environmental
Agency, Drinking Water Inspectorate, health and safety, anti-bribery,
employment law, regulatory capital and liquidity and certain aspects
of company legislation recognising the financial and regulated nature
of the group's activities and legal form. Auditing standards limit the
required audit procedures to identify non-compliance with these laws
and regulations to enquiry of the directors and inspection of regulatory
and legal correspondence, if any. Through these procedures, we became
aware of actual or suspected non-compliance and considered the effect
as part of our procedures on the related financial statement items. The
actual or suspected non-compliance was not sufficiently significant to
our audit to result in our response being identified as a key audit matter.
Owing to the inherent limitations of an audit, there is an unavoidable
risk that we may not have detected some material misstatements
in the financial statements, even though we have properly planned
and performed our audit in accordance with auditing standards. For
example, the further removed non-compliance with laws and regulations
(irregularities) is from the events and transactions reflected in the
financial statements, the less likely the inherently limited procedures
required by auditing standards would identify it. In addition, as with any
audit, there remained a higher risk of non-detection of irregularities,
as these may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal controls. We are not
responsible for preventing non-compliance and cannot be expected to
detect non-compliance with all laws and regulations.
8. The purpose of our audit work and to
whom we owe our responsibilities
This report is made solely to the company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company’s members, as a body, for our
audit work, for this report, or for the opinions we have formed.
William Meredith (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
St Peter’s Square, Manchester, M2 3AE
22 May 2019
›
›
›
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.
We have nothing to report in these respects.
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 153, the
directors are responsible for: the preparation of the financial statements,
including being satisfied that they give a true and fair view; such internal
control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether
due to fraud or error; assessing the group and parent company’s ability
to continue as a going concern, disclosing, as applicable, matters related
to going concern; and using the going concern basis of accounting unless
they either intend to liquidate the group or the parent company or to
cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or other irregularities (see below), or error, and to
issue our opinion in an auditor’s report. Reasonable assurance is a high
level of assurance, but does not guarantee that an audit conducted in
accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud, other irregularities
or error and are considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC’s
website at www.frc.org.uk/auditorsresponsibilities
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably
be expected to have a material effect on the financial statements
from our general commercial and sector experience and through
discussion with the directors and other management (as required by
auditing standards), and from inspection of the group's regulatory
and legal correspondence and discussed with the directors and other
management the policies and procedures regarding compliance with
laws and regulations. We communicated identified laws and regulations
throughout our team and remained alert to any indications of non-
compliance throughout the audit. This included communication from
the group to component audit teams of relevant laws and regulations
identified at group level.
The potential effect of these laws and regulations on the financial
statements varies considerably.
Stock Code: UU.
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Consolidated income statement
for the year ended 31 March
Revenue
Employee benefits expense
Other operating costs
Other income
Depreciation and amortisation expense
Infrastructure renewals expenditure
Total operating expenses
Operating profit
Investment income
Finance expense
Investment income and finance expense
Share of profits of joint ventures
Profit before tax
Current tax charge
Deferred tax charge
Tax
Profit after tax
Earnings per share
Basic
Diluted
Dividend per ordinary share
Note
2
3
4
4
4
5
6
12
7
7
7
8
8
9
2019
£m
1,818.5
(169.6)
(449.3)
3.6
(393.2)
(175.1)
(1,183.6)
634.9
17.1
(222.5)
(205.4)
6.7
436.2
(38.8)
(34.0)
(72.8)
363.4
2018
£m
1,735.8
(153.5)
(423.4)
3.8
(376.8)
(149.5)
(1,099.4)
636.4
12.0
(218.6)
(206.6)
2.3
432.1
(18.7)
(58.8)
(77.5)
354.6
53.3p
53.2p
52.0p
51.9p
41.28p
39.73p
All of the results shown above relate to continuing operations.
Consolidated statement of comprehensive income
for the year ended 31 March
Profit after tax
Other comprehensive income
Items that may be reclassified to profit or loss in subsequent periods:
Cash flow hedge effectiveness*
Tax on items that may be reclassified to profit or loss
Foreign exchange adjustments
Other comprehensive income that may be reclassified to profit or loss
Items that will not be reclassified to profit or loss in subsequent periods:
Remeasurement gains on defined benefit pension schemes
Change in credit assumptions for debt reported at fair value through profit or loss
Cost of hedging – cross-currency basis spread adjustment*
Tax on items that will not be reclassified to profit or loss
Other comprehensive income that will not be reclassified to profit or loss
Total comprehensive income
2019
£m
363.4
0.4
(0.1)
(0.8)
(0.5)
73.0
6.6
(2.2)
(13.1)
64.3
427.2
2018
£m
354.6
–
–
0.2
0.2
50.2
–
–
(8.5)
41.7
396.5
* On adoption of IFRS 9, the group has recognised the cost of hedging reserve and the cash flow hedging reserve as new components of equity. A reconciliation of movements in
these reserves, including amounts reclassified from other comprehensive income to profit or loss during the year, is included in note 22.
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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
Total assets
LIABILITIES
Non-current liabilities
Trade and other payables
Borrowings
Deferred tax liabilities
Derivative financial instruments
Current liabilities
Trade and other payables
Borrowings
Provisions
Derivative financial instruments
Total liabilities
Total net assets
EQ UITY
Capital and reserves attributable to equity holders of the
company
Share capital
Share premium account
Capital redemption reserve
Other reserves
Retained earnings
Shareholders’ equity
Note
2019
£m
Group
2018
£m
2019
£m
Company
2018
£m
10
11
12
13
15
18
A4
14
15
16
A4
21
17
19
A4
21
17
20
A4
23
22
11,153.4
202.7
79.0
11.5
148.1
483.9
387.8
12,466.4
14.9
249.5
16.4
339.3
101.3
721.4
13,187.8
(697.3)
(7,115.6)
(1,146.0)
(66.1)
(9,025.0)
(321.2)
(700.2)
(16.8)
(13.8)
(1,052.0)
(10,077.0)
3,110.8
499.8
2.9
–
338.3
2,269.8
3,110.8
10,790.5
197.7
75.2
7.1
141.1
344.2
297.8
11,853.6
16.8
260.9
24.5
510.0
337.7
1,149.9
13,003.5
(642.7)
(7,072.8)
(1,098.8)
(96.8)
(8,911.1)
(275.7)
(839.5)
(22.1)
(4.2)
(1,141.5)
(10,052.6)
2,950.9
499.8
2.9
–
327.9
2,120.3
2,950.9
–
–
–
6,326.8
–
–
–
6,326.8
–
82.2
–
–
–
82.2
6,409.0
–
(1,718.4)
–
–
(1,718.4)
(14.7)
(0.5)
–
–
(15.2)
(1,733.7)
4,675.4
499.8
2.9
1,033.3
–
3,139.4
4,675.4
–
–
–
6,326.8
–
–
–
6,326.8
–
74.2
–
–
–
74.2
6,401.0
–
(1,690.3)
–
–
(1,690.3)
(11.3)
(0.5)
–
–
(11.8)
(1,702.1)
4,698.9
499.8
2.9
1,033.3
–
3,162.9
4,698.9
These financial statements for the group and United Utilities Group PLC (company number: 6559020) were approved by the board of directors on
22 May 2019 and signed on its behalf by:
Steve Mogford
Chief Executive Officer
Russ Houlden
Chief Financial Officer
Stock Code: UU.
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Consolidated statement of changes in equity
for the year ended 31 March
At 31 March 2018
Adjustment on initial application of IFRS 9
Adjustment on initial application of IFRS 15
At 1 April 2018
Profit after tax
Other comprehensive income/(expense)
Remeasurement gains on defined benefit pension schemes (see note 18)
Change in credit assumption for debt reported at fair value through profit or loss
Cash flow hedge effectiveness
Cost of hedging – cross-currency basis spread adjustment
Tax on items taken directly to equity (see note 7)
Foreign exchange adjustments
Total comprehensive (expense)/income
Dividends (see note 9)
Equity-settled share-based payments (see note 3)
Exercise of share options – purchase of shares
At 31 March 2019
At 1 April 2017
Profit after tax
Other comprehensive income/(expense)
Remeasurement gains on defined benefit pension schemes (see note 18)
Tax on items taken directly to equity (see note 7)
Foreign exchange adjustments
Total comprehensive income
Dividends (see note 9)
Equity-settled share-based payments (see note 3)
Exercise of share options – purchase of shares
At 31 March 2018
Share
capital
£m
499.8
–
–
499.8
–
–
–
–
–
–
–
–
–
–
–
499.8
Share
capital
£m
499.8
–
–
–
–
–
–
–
–
499.8
Share
premium
account
£m
2.9
–
–
2.9
–
Other
reserves*
£m
327.9
12.7
–
340.6
–
Retained
earnings
£m
2,120.3
(12.7)
5.9
2,113.5
363.4
–
–
–
–
–
–
–
–
–
–
2.9
–
–
0.4
(2.2)
0.3
(0.8)
(2.3)
–
–
–
338.3
73.0
6.6
–
–
(13.5)
–
429.5
(274.4)
4.0
(2.8)
2,269.8
Share
premium
account
£m
2.9
–
Other
reserves
£m
327.7
–
Retained
earnings
£m
1,991.2
354.6
–
–
–
–
–
–
–
2.9
–
–
0.2
0.2
–
–
–
327.9
50.2
(8.5)
–
396.3
(267.0)
3.2
(3.4)
2,120.3
Total
£m
2,950.9
–
5.9
2,956.8
363.4
73.0
6.6
0.4
(2.2)
(13.2)
(0.8)
427.2
(274.4)
4.0
(2.8)
3,110.8
Total
£m
2,821.6
354.6
50.2
(8.5)
0.2
396.5
(267.0)
3.2
(3.4)
2,950.9
* Other reserves comprise the group’s cumulative exchange reserve, merger reserve, cost of hedging reserve and cash flow hedging reserve. The cost of hedging and cash flow
hedging reserves were included as separate components of equity for the first time in the year ended 31 March 2019 as a result of the group’s adoption of IFRS 9 ‘Financial
instruments’ (see pages 168 to 169 accounting policies). A reconciliation of movements in these reserves is included in note 22.
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Company statement of changes in equity
for the year ended 31 March
At 1 April 2018
Profit after tax
Total comprehensive income
Dividends (see note 9)
Equity-settled share-based payments (see note 3)
Exercise of share options – purchase of shares
At 31 March 2019
At 1 April 2017
Profit after tax
Total comprehensive income
Dividends (see note 9)
Equity-settled share-based payments (see note 3)
Exercise of share options – purchase of shares
At 31 March 2018
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
3,162.9
249.7
249.7
(274.4)
4.0
(2.8)
3,139.4
Retained
earnings
£m
3,183.5
246.6
246.6
(267.0)
3.2
(3.4)
3,162.9
Total
£m
4,698.9
249.7
249.7
(274.4)
4.0
(2.8)
4,675.4
Total
£m
4,719.5
246.6
246.6
(267.0)
3.2
(3.4)
4,698.9
At 31 March 2019, 31 March 2018 and 1 April 2017, the company's entire retained earnings balance was distributable to shareholders.
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 £249.7 million (2018: £246.6 million).
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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
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 (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
2019
£m
995.5
(143.0)
7.3
(27.5)
–
832.3
(622.3)
(39.9)
2.1
35.2
(6.0)
2.2
1.0
(627.7)
568.4
(668.6)
(274.4)
(2.8)
(377.4)
(172.8)
497.4
324.6
Group
2018
£m
989.8
(144.6)
5.9
(35.5)
–
815.6
(698.6)
(36.1)
1.1
23.7
(26.5)
3.3
1.0
(723.2)
801.0
(345.9)
(267.0)
(3.4)
184.7
277.1
220.3
497.4
2019
£m
278.8
(28.0)
–
–
10.4
261.2
–
–
–
–
–
–
–
–
16.0
–
(274.4)
(2.8)
(261.2)
–
(0.5)
(0.5)
Company
2018
£m
271.2
(25.1)
–
–
–
246.1
–
–
–
–
–
–
–
–
24.4
–
(267.0)
(3.4)
(246.0)
0.1
(0.6)
(0.5)
Note
A1
21
A6
12
13
9
16
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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 the
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
Segmental reporting
Revenue
Directors and employees
172
172
173
4
24
A1
Operating profit
Operating lease commitments
Cash generated from operations
Financing – information relating to how we finance our business
5
6
8
9
16
Investment income
Finance expense
Earnings per share
Dividends
Cash and cash equivalents
175
175
177
177
182
17
23
A2
A3
A4
Borrowings
Share capital
Net debt
Borrowings
Financial risk management
Page
174
186
187
182
186
187
188
190
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
180
181
182
21
A6
Trade and other payables
Related party transactions
Tax – information relating to our current and deferred taxation
7
Tax
176
19 Deferred tax liabilities
Employees – information relating to the costs associated with employing our people
3
18
Directors and employees
Retirement benefit surplus
173
182
A5 Retirement benefits
184
202
183
197
Long-term assets – information relating to our long-term operational and investment assets
10
11
12
Property, plant and equipment
Intangible assets
Joint ventures
Other – other useful information
20
22
25
Provisions
Other reserves
Contingent liabilities
178
179
179
184
185
186
13
18
A5
Investments
Retirement benefit surplus
Retirement benefits
26
A7
A8
Events after the reporting period
Accounting policies
Subsidiaries and other group undertakings
180
182
197
186
203
208
Stock Code: UU.
unitedutilities.com/corporate
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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 its liquidity position with regards to available cash and undrawn
committed borrowing facilities, as well as consideration of the group’s
capital adequacy. 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 the directors would consider undertaking.
Adoption of new and revised standards
The following standards, interpretations and amendments, effective for
the year ended 31 March 2019, are relevant to the group but have had
no material impact on the group’s financial statements:
›
Amendments to IFRS 2 ‘Classification and Measurement of Share-
based Payment Transactions’ (issued on 20 June 2016).
The following standards, interpretations and amendments, effective
for the year ended 31 March 2019, have had a material impact on the
group’s financial statements – this impact is discussed further below:
›
›
IFRS 9 ‘Financial Instruments’ (issued on 24 July 2014); and
IFRS 15 ‘Revenue from Contracts with Customers’ (issued on 28 May
2014) including amendments to IFRS 15: Effective date of IFRS 15
(issued on 11 September 2015).
IFRS 9 'Financial Instruments'
IFRS 9 ‘Financial Instruments’ was adopted by the group on 1 April 2018.
The standard replaces IAS 39 ‘Financial Instruments: Recognition and
Measurement’, and has been applied retrospectively in accordance
with the standard’s transition requirements. Comparative periods have
not been restated, with any differences arising from retrospective
application being recognised as an adjustment to retained earnings at
the beginning of the period. This has resulted in retained earnings at the
adoption date decreasing by £12.7 million with a corresponding credit
of £13.8 million to the cost of hedging reserve, which is a separate
component of equity newly recognised under IFRS 9, offset by a
corresponding debit of £1.1 million to the cumulative exchange reserve.
Further details of these adjustments are set out below.
Under IFRS 9, there is no longer a requirement for cross-currency
basis spread adjustments to be incorporated in the test for the
effectiveness of a hedge as was the case under IAS 39. IFRS 9 states
that when an entity separates the foreign currency basis spread from
a financial instrument, and excludes it from the designation of that
financial instrument as the hedging instrument, the entity may apply
the accounting such that the change in fair value resulting from the
foreign currency basis spread can be recognised in other comprehensive
income rather than in profit or loss to the extent that it relates to the
hedged item. Under the standard this change in fair value relating to
the basis spread adjustment, which effectively represents a liquidity
charge inherent in foreign exchange contracts for exchanging currencies,
shall be accumulated in a separate component of equity. This has been
recorded as a cost of hedging reserve.
The group has adopted this accounting treatment under IFRS 9,
resulting in the creation of a cost of hedging reserve with a brought
forward balance of £13.8 million at 1 April 2018, being the accumulated
fair value gains to date at this point relating to the basis spread
adjustment on cross-currency swaps in place at the adoption date. The
portion of the change in fair value due to changes in the cross-currency
basis spread during the period, which has been recognised in other
comprehensive income, has been a £2.2 million loss. This would have
previously been incorporated within the fair value charge recognised in
the income statement under IAS 39.
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, which has been a £6.6 million
gain during the period, has been recognised in other comprehensive
income rather than within profit or loss, and has been taken directly to
retained earnings, meaning no opening retained earnings adjustment
has been required.
During the period, fair value foreign exchange gains of £0.5 million
have been recognised in the income statement, which would not have
been recognised under previous accounting policies. This has resulted
from the classification of an investment previously accounted for as an
available-for-sale financial asset under IAS 39 ‘Financial Instruments:
Recognition and Measurement’ as a financial asset measured at fair
value through profit or loss. Under IFRS 9, the available-for-sale category
no longer exists and, given that the financial asset does not meet the
criteria to be subsequently measured at amortised cost or fair value
through other comprehensive income, subsequent measurement
at fair value through profit or loss is deemed the most appropriate
categorisation. As a result of this change in classification, a credit of
£1.1 million in the cumulative exchange reserve, representing
cumulative foreign exchange gains on the investment up to the adoption
date, was reclassified to retained earnings as an opening balance sheet
adjustment.
On adoption of IFRS 9, there were no financial assets or liabilities
initially designated at fair value through profit or loss that have
subsequently been reclassified out of this category.
The group has reassessed the effectiveness of existing accounting
hedges on adoption of IFRS 9 and the documentation that supports
any designation. Financial instruments that had been designated in
an accounting fair value hedge relationship under IAS 39 continue
to be designated as such under IFRS 9; however, the group has
reassessed its position with regards to designating non-financial risks
in hedge relationships, and has determined that in order to give a
more representative view of operating costs it would be appropriate
to designate existing and future swaps as being in a cash flow hedge
relationship provided they meet the criteria for designation. This means
that only the impact of any hedging ineffectiveness is recognised
through fair value in the income statement, with movements reflecting
the effective part of the swaps being recognised in other comprehensive
income. At the maturity date the amounts paid/received will be
recognised against operating costs in the income statement, including
the effect of any fair value movements reflecting hedge effectiveness
previously recognised in other comprehensive income.
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Previously, no income relating to these swaps would have been
recognised against corresponding operating expenses, with the
£4.2 million gain for the year being recognised in full as a fair value
movement included as part of finance expense. The treatment under
IFRS 9 has led to the settlement of existing swaps in the period giving
rise to income of £3.8 million recognised against operating expenses,
with a fair value gain of £0.4 million recognised in other comprehensive
income together with a corresponding increase in the cash flow hedge
reserve as the hedge was fully effective.
A deferred tax charge of £0.8 million has been recognised in other
comprehensive income during the period in relation to the above.
On transition to the expected credit loss model for impairing financial
assets in accordance with the standard, the group has not been
significantly impacted as under IAS 39 the group had always used a
model which used historic cash collection rates to form an expectation
of the estimated recoverability of trade receivables at a point in time.
The simplified approach, whereby the company recognises full lifetime
credit losses on initial recognition, has been adopted.
IFRS 15 'Revenue from Contracts with Customers'
The group adopted IFRS 15 on 1 April 2018, applying the standard
retrospectively with the cumulative effect of initial application
recognised at the date of initial application as an adjustment to retained
earnings. Prior period comparatives have therefore not been restated.
The group has elected to use the practical expedient whereby any
contracts that were completed in accordance with accounting standards
as at 31 March 2018 need not be restated on an IFRS 15 basis. This
transition approach, which was made in accordance with the IFRS 15
transitional provisions, has resulted in a £2.6 million increase in retained
earnings and reduction in deferred income on the adoption date due
to a change in the period over which revenue relating to connection
activities is recognised. This has also given rise to a tax credit of £3.3
million relating to the adjustment, which has resulted in an increase in
retained earnings at the adoption date. The tax credit is greater than the
£2.6 million increase in retained earnings on adoption of IFRS 15 due to
the different tax treatments of various connection activities that make
up the adjustment.
The two main areas of the group’s activities considered in the adoption
of IFRS 15 are:
›
›
the provision of core water and wastewater services, accounting for
more than 96 per cent of the group’s revenue; and
capital income streams relating to diversions work, and activities,
typically performed opposite property developers, that facilitate the
creation of an authorised connection through which properties can
obtain water and wastewater services.
The adoption of IFRS 15 had no impact on the timing or amount of
revenue recognised in relation to core water and wastewater services,
which are deemed to be distinct performance obligations under the
contracts with customers, though following the same pattern of transfer
to the customer who simultaneously receives and consumes both of
these services over time. No significant judgements are required in
identifying customers of these services. In accordance with IFRS 15,
revenue relating to these activities will be recognised over time as these
performance obligations are satisfied.
There are two categories of capital income, both of which will be
impacted by the adoption of IFRS 15:
›
›
Diversions relating to the relocation of water and wastewater
assets; and
Activities that facilitate the creation of an authorised connection
through which properties can obtain water and wastewater
services.
The adoption of IFRS 15 did not result in any net income statement
impact relating to diversions as income was previously recognised in line
with the completion of diversion work. However, whereas this income
was included in the income statement as a credit within infrastructure
renewals expenditure (IRE) due to it representing a contribution
towards these costs, under IFRS 15 it is now recognised within revenue,
resulting in an increase in both the revenue and IRE expense balances.
The adoption of the standard in the year has caused both balances to
increase by £11.1 million. As there was no net impact to the income
statement, there was also no net impact to earnings per share or diluted
earnings per share as a result of this element of the new standard.
Significant judgement is required in relation to accounting for activities
that facilitate an authorised network connection through which
water and wastewater services can be delivered. Establishing such an
authorised connection can involve a number of activities performed
opposite developers, which are considered to be neither separable nor
distinct and instead form a bundle of activities necessary to establish an
authorised connection from which network access can be obtained and
water and wastewater services can be provided. Costs incurred by the
group in carrying out these activities are capitalised as property, plant
and equipment to the extent they result in the creation or enhancement
of assets. These activities are considered to form part of the group’s
ordinary activities associated with the operation, maintenance and
expansion of a water and wastewater network and, because they are
deemed to result in an exchange transaction, we have determined
that they fall within the scope of IFRS 15 as transactions arising from
contracts with customers.
In addition, as the group has a legal obligation to keep a connection in
place for as long as a property requires water and wastewater services,
these initial connection activities are deemed to result in a broader
ongoing performance obligation that is not distinct from the ongoing
supply of water and wastewater services. The right to benefit from this
connection, and obtain water and wastewater services through it, is
deemed to be transferable from the initial developer to subsequent
occupants of a connected property. Accordingly, under IFRS 15, the
element of the performance obligation associated with the connection
activities is deemed to be satisfied over the period of time that water
and wastewater services are expected to be provided through the
connection, compared with the prior treatment under which deferred
amounts were released to the income statement over the useful
economic life of the related assets or, for certain items, immediately to
the income statement. This estimated period is a matter of judgement.
We estimate that an average connection will be in place for a period of
60 years and therefore revenue associated with connection activities
will be recognised evenly over this period.
Contract liabilities are accounted for within deferred revenue. These
contract liabilities relate to the revenue which is held on the balance
sheet in respect of connection activities. As stated above, revenue is
released and recognised evenly over a period of 60 years; therefore
deferred income on the balance sheet will also be reduced evenly over
the 60 year period on a connection-by-connection basis. The group will
hold no material contract assets, meaning there will be no material
impairments to contract assets under IFRS 9 given the new requirement
to provide for expected credit losses for contract assets.
As noted above, we have applied IFRS 15 retrospectively, with the
cumulative effect of initially applying the standard recognised as an
adjustment to the opening retained earnings balance at the date of
initial application, resulting in an increase of £2.6 million in retained
earnings with the corresponding decrease being to deferred income. In
line with the standard, contracts which were completed in accordance
with current accounting standards at the date of initial application were
not restated on an IFRS 15 basis. The impact of the change on ongoing
revenue as a result of the revised period over which income is released
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Accounting policies
to the income statement is that revenue of £13.4 million was recognised
in the year relating to the amortisation of deferred income; had IFRS
15 not been adopted, this revenue recognised in the year would have
been £9.9 million. The adoption of IFRS 15 has therefore resulted in
an increase of revenue of £3.5 million. This has directly impacted the
amount of revenue and profit of the group with the corresponding
decrease of the adoption of IFRS 15 being in deferred income on the
balance sheet. Accordingly, the group's EPS and diluted EPS for the year
have also been affected. EPS was 53.3p and diluted EPS was 53.2p; had
IFRS 15 not been adopted the EPS and diluted EPS of the group would
have been 52.8p and 52.7p respectively.
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 16 ‘Leases’
This standard, which replaces IAS 17 ‘Leases’, IFRIC 4 ‘Determining
Whether an Arrangement Contains a Lease’, SIC-15 ‘Operating Leases
– Incentives’, and SIC-27 ‘Evaluating the Substance of Transactions in
the Legal Form of a Lease’, is effective for periods commencing on or
after 1 January 2019. The group therefore adopted the standard on
1 April 2019 with the 31 March 2020 financial statements being the
first which will be presented with IFRS 16 being applied. Under the
provisions of the new standard, most leases, including the majority of
those previously classified as operating leases where the group is the
lessee, will be brought onto the statement of financial position as both
a right-of-use asset and an offsetting lease liability. The typical items
which the group leases include land, buildings, and vehicles. 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 (being the
unwinding of the discounting applied to the future lease payments) and
reduced by lease payments. The group does not act as a lessor.
The key judgements associated with adoption of this standard relate
to the identification and classification of contracts containing a lease
within the scope of IFRS 16, and the discount rate to use in calculating
the present value of future lease payments on which the reported lease
liability and right-of-use asset is based when the rate is not implicit in
the lease contract.
The group has reassessed whether contracts it has entered into are, or
contain, leases as defined by the new standard, so the new standard is
being applied to a different population of contracts to those previously
identified as containing leases under IAS 17 and IFRIC 4. Some new
contracts have been identified as leases, while other contracts
previously identified as operating leases under IAS 17 and IFRIC 4 will
not be accounted for as leases under the new standard.
Due to the nature of the group’s operations, many of the current
operating leases have long remaining terms, which causes the discount
rate to be a key factor in determining the value of the lease liability.
Where the interest rate is not implicit in the lease, which is the case
for materially all of the group’s leases recognised under IFRS 16, the
discount rate which is used to calculate the lease liability will be based
on the relevant group company’s nominal incremental borrowing rate
adjusted for the payment profile and term of each lease.
The group intends to use the modified retrospective transitional
approach permitted by the standard in which the right-of-use asset
and lease liability brought onto the balance sheet on the adoption date
will be based on the present value of future lease payments at the
adoption date calculated using the appropriate discount rate at 1 April
2019. Under this approach there will be no effect on retained earnings
recognised on transition. After the initial adoption of the standard,
lease liabilities and right-of-use assets for new leases will be based on
the corresponding discount rate at the date the new contract is entered
into. Prior year comparatives will not be restated.
The group intends to apply recognition exemptions permitted by the
standard in relation to short-term leases and leases of low-value items.
Based on the appropriate incremental borrowing rates at 31 March
2019, the right-of-use asset and liability brought onto the balance sheet
is estimated to be £54.8 million. Absent new leases being entered into
or cancellation of existing leases, the income statement charge in the
year of adoption in respect of these leases is estimated to be
£3.8 million, split between £2.2 million of depreciation of the assets
and £1.6 million in relation to the finance charge recognised on the
liabilities. This compares with £3.7 million of operating lease expenses
that would have been recognised under IAS 17. The group does not
expect the adoption of IFRS 16 to impact its ability to comply with any
banking or financing covenants.
The actual impacts of adopting the standard on 1 April 2019 may differ
from the figures quoted above as new accounting policies may be
subject to change until the group presents its first financial statements
that include the date of initial application.
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
carrying 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. There
are two different criteria whereby management does not recognise
revenue for amounts which have been billed to the customer on the
basis that collectability is not reasonably assured. These are as follows:
›
›
The customer has not paid their bills for a period of at least two
years; and
The customer has paid their bills in the preceding two years;
however, has previously had statements de-recognised and has
more than their current year debt outstanding.
This two-criteria approach resulted in £18.0 million of amounts billed
not being recognised as revenue during the year (net of cash receipts
and credits). Had management made an alternative judgement that
where customers have paid in the preceding two years, and have more
than their current year debt outstanding, the recoverability of the
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economic lives have been required. The depreciation and amortisation
expense for the year was £393.2 million. A 10 per cent increase in
average asset lives would have resulted in a £38.9 million reduction in
this figure and a 10 per cent decrease in average asset lives would have
resulted in a £39.5 million increase in this figure.
Retirement benefits
Accounting estimate – The group operates two defined benefit pension
schemes which are independent of the group’s finances. Actuarial
valuations of the schemes are carried out as determined by the
trustees at intervals of not more than three years. Profit before tax
and net assets are affected by the actuarial assumptions used. The
key assumptions include: discount rates, pay growth, mortality, and
increases to pensions in payment and deferred pensions. It should be
noted that actual rates may differ from the assumptions used due to
changing market and economic conditions and longer or shorter lives
of participants and, as such, this represents a key source of estimation
uncertainty. Sensitivities in respect of the assumptions used during the
year are disclosed in
note A5.
Joint ventures – Water Plus
Accounting estimate – The group has an equity investment in Water Plus
Group Limited, a joint venture with Severn Trent PLC, the recoverability
of which is considered with reference to the present value of the
estimated future cash flows of the joint venture. Please see note 12 for
details of the significant estimates relating to the recoverable amount
of this investment, as well as an assessment of how sensitive the
recoverable amount is to reasonably possible downside scenarios.
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. Sensitivities relating to derivative financial instruments are
included in note A4.
entirety of their debt was deemed to be reasonably assured (i.e. the
second criteria were disapplied), the required adjustment to revenue
would have been £12.8 million lower. 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, among 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. At 31 March 2019, the allowance for doubtful receivables
relating to household customer debt of £52.9 million was supported by
a six-year cash collection projection. Based on a five-year or seven-year
cash collection projection the allowance for doubtful receivables would
have been £50.9 million or £53.5 million respectively.
Accounting estimate – United Utilities Water Limited raises bills in
accordance with its entitlement to receive revenue in line with the
limits established by the periodic regulatory price review processes.
For water and wastewater customers with water meters, the receivable
billed is dependent on the volume supplied, including the sales
value of an estimate of the units supplied between the date of the
last meter reading and the billing date. Meters are read on a cyclical
basis and the group recognises revenue for unbilled amounts based
on estimated usage from the last billing through to each reporting
date. The estimated usage is based on historical data, judgement and
assumptions; actual results could differ from these estimates, which
would result in operating revenues being adjusted in the period that
the revision to the estimates is determined. Revenue recognised for
unbilled amounts for these customers at 31 March 2019 was £47.2
million. Had actual consumption been five per cent higher or lower
than the estimate of units supplied this would have resulted in revenue
recognised for unbilled amounts being £4.2 million higher or lower
respectively. 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 elements within them. Enhancement spend was 26
per cent of total spend in relation to infrastructure assets during the
year. A change of +/- one per cent would have resulted in £2.4 million
less/more expenditure being charged to the income statement during
the period. 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. Support costs allocated to PPE represent 46 per cent
of total support costs. A change in allocation of +/- one per cent would
have resulted in £0.8 million less/more expenditure being charged to the
income statement during the period.
Accounting estimate – The estimated useful economic lives of PPE
and intangible assets 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 and
intangibles investment to the group, variations between actual and
estimated useful economic lives could impact operating results both
positively and negatively. As such, this is a key source of estimation
uncertainty, although historically few changes to estimated useful
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Notes to the financial statements
1 Segmental reporting
The board of directors of United Utilities Group PLC (the board) is provided with information on a single-segment basis for the purposes of assessing
performance and allocating resources. The group’s performance is measured against financial and operational key performance indicators which
align with our three strategic themes to deliver the best service to customers, at the lowest sustainable cost, in a responsible manner. The board
reviews revenue, operating profit and gearing, along with operational drivers at a consolidated level (see page 67). 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 Revenue
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.
Wholesale water charges
Wholesale wastewater charges
Residential retail charges
Other
2019
£m
767.4
905.8
86.7
58.6
1,818.5
2018
£m
719.2
875.6
91.2
49.8
1,735.8
In accordance with IFRS 15, revenue has been disaggregated based on what is recognised in relation to the core services of supplying clean water
and the removing and treating of wastewater. Each of these services is deemed to give rise to a distinct performance obligation under the contract
with customers, though following the same pattern of transfer to the customer who simultaneously receives and consumes both of these services
over time.
Residential retail charges relate solely to the margin applied to the wholesale amounts charged to residential customers. The wholesale charges and
retail margin are combined in arriving at the total revenues relating to water and wastewater services provided to household customers.
Other revenues comprise a number of smaller non-core income streams, including those relating to energy generation and export, and those
associated with activities, typically performed opposite property developers, which impact the group’s capital network assets including diversions
works to relocate water and wastewater assets, and activities that facilitate the creation of an authorised connection through which properties can
obtain water and wastewater services.
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3 Directors and employees
Directors’ remuneration
Fees to non-executive directors
Salaries
Benefits
Bonus
Share-based payment charge
2019
£m
0.8
1.7
0.4
0.9
2.4
6.2
Further information about the remuneration of individual directors and details of their pension arrangements are provided in the Directors’
remuneration report on pages 131 to 142.
Remuneration of key management personnel
Salaries and short-term employee benefits
Severance
Share-based payment charge
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
Employee-related taxes and levies
Severance
Post-employment benefits:
Defined benefit pension expense (see note 18)
Defined contribution pension expense (see note 18)
Charged to other areas including regulatory capital schemes
Employee benefits expense
2019
£m
5.2
–
3.1
8.3
2019
£m
234.2
24.1
4.8
18.0
23.0
41.0
(134.5)
169.6
2018
£m
0.7
1.5
0.4
0.7
1.8
5.1
2018
£m
5.3
0.6
2.4
8.3
2018
£m
220.7
22.8
3.7
32.2
12.1
44.3
(138.0)
153.5
Within employee benefits expense there were £7.2 million (2018: £6.0 million) of restructuring costs, £6.6 million of costs associated with the
equalisation of Guaranteed Minimum Pension (GMP) benefits (2018: nil) and £1.4 million (2018: nil) of costs incurred in relation to the group's
response to the severe dry weather event experienced during the year.
The total expense included within employee benefits expense in respect of equity-settled share-based payments was £4.0 million (2018: £3.2
million). The company operates several share option schemes, details of which are given on pages 135 to 137 in the Directors’ remuneration report.
Further disclosures have not been included as they are considered immaterial to the assessment of the share-based payments charge.
Average number of employees during the year (full-time equivalent including directors):
Average number of employees during the year
Company
The company has no employees.
2019
number
5,267
2018
number
5,223
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Notes to the financial statements
4 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
Materials
Power
Regulatory fees
Charge for bad and doubtful receivables (see note 15)
Cost of properties disposed
Loss on disposal of property, plant and equipment
Operating leases payable:
Property
Plant and equipment
Compensation from insurers
Settlement of commercial claims
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)
2019
£m
112.2
94.7
77.8
72.8
32.5
26.5
4.7
3.9
2.8
1.3
–
(9.9)
30.0
449.3
(3.6)
(3.6)
357.3
35.9
393.2
2018
£m
97.7
90.5
67.3
70.4
29.7
20.8
9.8
6.8
3.5
0.7
(3.6)
–
29.8
423.4
(3.8)
(3.8)
348.4
28.4
376.8
During the current year, as a result of the group's response to a severe dry weather event, there were £36.1 million of expenses incurred, comprising
£24.2 million of other operating costs, £10.5 million of infrastructure renewals expenditure, and £1.4 million of employee costs (see note 3).
During the prior year, as a result of two significant flooding incidents caused by storms Desmond and Eva in December 2015, there were £5.3 million
of expenses incurred, comprising £2.9 million of operating costs, £2.4 million of infrastructure renewals expenditure. Insurance compensation of
£3.6 million relating to the flooding incidents was recognised as part of a final settlement of the insurance claim. In addition, in the prior year, there
were £1.0 million of market reform restructuring costs relating to the non-household retail market opening to competition in April 2017.
Total other operating costs are stated net of £0.2 million (2018: £1.4 million) of costs recharged to Water Plus at nil margin under transitional service
agreements.
Research and development expenditure for the year ended 31 March 2019 was £1.2 million (2018: £1.2 million).
Other income relates primarily to property rental income.
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
2019
£’000
2018
£’000
97
340
437
47
65
549
84
295
379
46
80
505
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5
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)
6 Finance expense
Interest payable
Interest payable on borrowings held at amortised cost(1)
Fair value (gains)/losses on debt and derivative instruments
Fair value hedge relationships:
Borrowings(2)
Designated swaps(2)(3)
Financial instruments at fair value through profit or loss:
Borrowings designated at fair value through profit or loss(4)
Associated swaps(5)(6)
Fixed interest rate swaps(5)
Electricity swaps(7)
Net receipts on derivatives and debt under fair value option
Other swaps(5)(8)
Realisation of fair value loss on settlement of borrowings held at amortised cost(9)
Other
Net fair value gains on debt and derivative instruments(10)
2019
£m
3.3
4.3
9.5
17.1
2019
£m
232.0
232.0
47.4
(29.7)
17.7
32.8
(37.1)
(4.3)
19.1
–
(40.6)
–
–
(1.4)
(22.9)
(9.5)
222.5
2018
£m
1.5
3.4
7.1
12.0
2018
£m
265.9
265.9
(149.2)
159.6
10.4
(27.8)
63.7
35.9
(87.4)
(8.0)
(20.4)
2.2
23.1
(3.1)
(93.6)
(47.3)
218.6
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Includes a £98.3 million (2018: £137.8 million) non-cash inflation uplift expense repayable on maturity in relation to the group’s index-linked debt.
Includes foreign exchange losses of £37.6 million (2018: £56.5 million gains). These gains/losses are largely offset by fair value losses/gains on derivatives.
Under the provisions of IFRS 9 ‘Financial instruments’, changes in fair value resulting from changes to the foreign currency basis spread (£2.2 million gain) are recognised in
other comprehensive income rather than profit or loss as they relate to items designated in an accounting hedge relationship. In the prior year, there was an £8.1 million gain on
designated swaps recognised within profit or loss.
Under the provisions of IFRS 9 ‘Financial instruments’, changes in fair value due to changes in the group’s own credit risk (£6.6 million gain) are recognised in other
comprehensive income rather than within profit or loss. In the prior year, there was a £24.0 million loss, which was recognised within profit or loss.
These swap contracts are not designated within an IFRS 9 hedge relationship and are 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 a £3.8 million gain caused by the settlement of certain cross-currency interest rate swap liabilities.
From 1 April 2018, under the provisions of IFRS 9, electricity swaps have been designated within cash flow hedge relationships. Gains or losses resulting from the effective
portion of the hedge are recognised within other comprehensive income in the cash flow hedge reserve. Any other gains or losses are recognised immediately in the income
statement. The cash flow hedges are deemed to be fully effective and, therefore, have no impact on net fair value gains in the income statement. In the prior year, the electricity
swaps were not designated within a hedge relationship and an £8.0 million gain was recognised in net fair value gains in the income statement.
Includes fair value movements in relation to other economic hedge derivatives relating to debt held at amortised cost, which matured during the year ended 31 March 2018.
The fair value loss in the prior year results from the partial close-out of £50.0 million RPI index-linked notes due April 2043. The portion of the notes closed out had a nominal
value of £30.0 million (carrying value £41.3 million), and were purchased at a fair value of £64.4 million resulting in a £23.1 million fair value loss.
(10) Includes £30.6 million income (2018: £23.5 million) due to net interest on derivatives and debt under fair value option.
Interest payable is stated net of £37.4 million (2018: £39.7 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 3.1 per cent (2018: 3.6 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
7 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
Total deferred tax charge for the year
Total tax charge for the year
2019
£m
41.6
(2.8)
38.8
35.4
(1.4)
34.0
72.8
2018
£m
25.4
(6.7)
18.7
51.7
7.1
58.8
77.5
The adjustments in respect of prior years relate to agreement of prior years' UK tax matters.
The table below reconciles the notional tax charge at the UK corporation tax rate to the total tax charge and total effective tax rate for the year:
Profit before tax
Tax at the UK corporation tax rate
Adjustments in respect of prior years
Deferred tax rate adjustment/other
Total tax charge and effective tax rate for the year
2019
£m
436.2
82.9
(4.2)
(5.9)
72.8
2019
19.0
(1.0)
(1.3)
16.7
2018
£m
432.1
82.1
0.4
(5.0)
77.5
2018
%
19.0
0.1
(1.2)
17.9
The deferred tax rate adjustment/other mainly comprises the deferred tax movement calculated at the future tax rate from April 2020 of 17 per cent
rather than the current rate of 19 per cent.
The adjustments in respect of prior years relate to agreement of prior years' UK tax matters.
For the current year, there is also an adjustment for items included in retained earnings, following the adoption of IFRS 15 (see accounting policies
for further details).
The table below reconciles the notional tax charge at the UK corporation tax rate to the total current tax charge for the year:
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 19%
Relief for capital allowances in place of depreciation
Disallowance of depreciation charged in the accounts
Financial transactions timing differences
Pension timing differences
Relief for capitalised interest
Other timing differences
Adjustments to tax charge in respect of prior years
Joint venture profits
(Income not taxable)/expenses not deductible for tax purposes
Depreciation charged on non-qualifying assets
Current tax charge for the year
2019
£m
436.2
82.9
(91.0)
64.8
1.0
(11.7)
(7.1)
4.5
(2.8)
(1.3)
(1.8)
1.3
38.8
2018
£m
432.1
82.1
(88.8)
60.6
(13.3)
(11.0)
(7.5)
2.3
(6.7)
(0.4)
0.4
1.0
18.7
The group's current tax charge is lower than the UK headline rate of 19 per cent, primarily due to the availability of capital allowances; tax
deductions in relation to capital expenditure available instead of accounting depreciation and put in place by successive governments to encourage
such investment.
There are also various other adjustments where there is a simple timing difference between recognition of the income or expense in the accounts
and in the related tax computations submitted to HMRC. These include unrealised profits or losses in relation to financing and related treasury
derivatives, pension contributions and capitalised interest.
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7 Tax continued
The year-on-year movement in financial transactions timing differences is sensitive to fair value movements on treasury derivatives and can,
therefore, fluctuate significantly from year to year.
The joint venture profits are mainly our share of profits relating to AS Tallinna Vesi, which have already been fully taxed in Estonia.
For all of the timing differences, the corresponding deferred tax movements are at 17 per cent as the rate of corporation tax will reduce to 17 per
cent from April 2020.
Tax on items taken directly to equity
Deferred tax (see note 19)
On remeasurement gains on defined benefit pension schemes
On net fair value gains recognised in other comprehensive income
Total tax charge on items taken directly to equity
8 Earnings per share
Profit after tax attributable to equity holders of the company
Earnings per share
Basic
Diluted
2019
£m
12.4
0.8
13.2
2019
£m
363.4
2019
pence
53.3
53.2
2018
£m
8.5
–
8.5
2018
£m
354.6
2018
pence
52.0
51.9
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 (2018: 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 683.4 million, being the weighted average number of shares in issue
during the year including dilutive shares (2018: 683.1 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 3).
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
9 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 2018 at 26.49 pence per share (2017: 25.92 pence)
Interim dividend for the year ended 31 March 2019 at 13.76 pence per share (2018: 13.24 pence)
Proposed final dividend for the year ended 31 March 2019 at 27.52 pence per share (2018: 26.49 pence)
2019
million
681.9
1.5
683.4
2019
£m
180.6
93.8
274.4
187.7
2018
million
681.9
1.2
683.1
2018
£m
176.7
90.3
267.0
180.6
The proposed final dividends for the years ended 31 March 2019 and 31 March 2018 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 2019 and
31 March 2018.
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Notes to the financial statements
10 Property, plant and equipment
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Group
Cost
At 1 April 2017
Additions
Transfers
Disposals
At 31 March 2018
Additions
Transfers
Disposals
At 31 March 2019
Accumulated depreciation
At 31 March 2017
Charge for the year
Disposals
At 31 March 2018
Charge for the year
Transfers
Disposals
At 31 March 2019
Net book value at 31 March 2018
Net book value at 31 March 2019
Land and
buildings
£m
Infra-
structure
assets
£m
Operational
assets
£m
Fixtures,
fittings, tools
and
equipment
£m
Assets in
course of
construction
£m
354.2
2.4
12.0
(1.4)
367.2
5.5
(12.1)
(0.9)
359.7
111.6
9.4
(1.3)
119.7
8.3
(0.5)
(0.6)
126.9
247.5
232.8
5,243.1
70.7
72.6
(0.1)
5,386.3
60.8
43.3
–
5,490.4
345.9
39.5
–
385.4
35.4
0.5
–
421.3
5,000.9
5,069.1
7,033.2
122.2
141.8
(46.4)
7,250.8
126.3
87.3
(42.3)
7,422.1
2,870.7
260.9
(39.3)
3,092.3
279.3
–
(37.7)
3,333.9
4,158.5
4,088.2
496.8
10.1
23.4
(3.7)
526.6
11.6
6.5
(6.5)
538.2
335.9
38.6
(3.1)
371.4
34.3
–
(5.4)
400.3
155.2
137.9
Total
£m
14,069.6
741.3
–
(51.6)
14,759.3
726.2
–
(49.7)
15,435.8
3,664.1
348.4
(43.7)
3,968.8
357.3
–
(43.7)
4,282.4
942.3
535.9
(249.8)
–
1,228.4
522.0
(125.0)
–
1,625.4
–
–
–
–
–
–
–
–
1,228.4
1,625.4
10,790.5
11,153.4
During the year ended 31 March 2019, there was a transfer of £17.8 million cost and associated £0.5 million accumulated depreciation from land
and buildings to infrastructure assets following a data cleanse exercise in respect of the fixed asset register.
At 31 March 2019, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to
£300.7 million (2018: £430.1 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
2019 or 31 March 2018.
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Intangible assets
Group
Cost
At 1 April 2017
Additions
At 31 March 2018
Additions
At 31 March 2019
Accumulated amortisation
At 1 April 2017
Charge for the year
At 31 March 2018
Charge for the year
At 31 March 2019
Net book value at 31 March 2018
Net book value at 31 March 2019
Total
£m
357.2
38.4
395.6
40.9
436.5
169.5
28.4
197.9
35.9
233.8
197.7
202.7
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The group’s intangible assets relate mainly to computer software.
At 31 March 2019, the group had entered into contractual commitments for the acquisition of intangible assets amounting to £1.5 million (2018:
£2.8 million).
Company
The company had no intangible assets or contractual commitments for the acquisition of intangible assets at 31 March 2019 or 31 March 2018.
12 Joint ventures
Group
At 1 April 2017
Share of profits of joint ventures
Dividends received from joint ventures
Currency translation differences
At 31 March 2018
Share of profits of joint ventures
Dividends received from joint ventures
Currency translation differences
At 31 March 2019
£m
75.2
2.3
(3.3)
1.0
75.2
6.7
(2.2)
(0.7)
79.0
The group’s interests in joint ventures mainly comprise its interests in Water Plus Group Limited (Water Plus) and AS Tallinna Vesi (Tallinn Water).
Water Plus is jointly owned and controlled by the group and Severn Trent PLC under a joint venture agreement. Joint management of Tallinn Water is
based on a shareholders’ agreement.
As at 31 March 2019, the carrying value of the group’s equity interest in Water Plus was £36.7 million (2018: £37.3 million), which includes £16.9
million (2018: £16.9 million) representing the group’s 50 per cent share of goodwill included in Water Plus’s statement of financial position.
Following a deterioration in the working capital position of Water Plus since the non-household water retail market in England opened to
competition on 1 April 2017, the carrying value of the group’s interest in the Water Plus joint venture has been assessed relative to its estimated
recoverable amount in order to determine whether it is impaired. In performing this assessment, consideration has been given to information
provided by Water Plus, including the results of its own impairment testing carried out in respect of its goodwill and intangible assets in accordance
with IAS 36 ‘Impairment of Assets’. Having reviewed and challenged this information, the group estimates that the recoverable amount of the Water
Plus joint venture is in excess of its carrying value and therefore no impairment is required.
The recoverable amount has been calculated based on Water Plus’s value in use, which is determined by discounting the estimated future cash flows
of the Water Plus business to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money
and the risks specific to the business, for which estimates of future cash flows have not been adjusted.
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Notes to the financial statements
12 Joint ventures continued
The cash flows used in the value in use assessment go out to 31 March 2024, with a terminal growth rate of 2.0 per cent applied at this date based
on long-term projections of CPIH, to which Water Plus’s cash flows tend to be aligned. These cash flows were based on Water Plus’s five-year
business plan as agreed with its board, and were discounted using a pre-tax discount rate of 8.0 per cent based on a CAPM model underpinned by
observable inputs.
The key assumptions to which the recoverable amount is most sensitive are the forecast future cash flows, which are subject to the delivery of
Water Plus’s business plan, and the discount rate. These therefore represent key areas of estimation uncertainty. At 31 March 2019, the estimated
recoverable amount of the group’s interest in the Water Plus joint venture exceeded its carrying amount by £59.5 million. An increase in the discount
rate to 10.4 per cent or a reduction in forecast cash flows of 25 per cent, both of which are considered reasonably possible, would have, in isolation,
led to an impairment loss being recognised for the year ended 31 March 2019.
In addition to the equity interest in the Water Plus joint venture, the group has issued loans of £142.1 million to Water Plus, further details of which
can be found in note A6. At 31 March 2019, these loans were deemed to be fully recoverable.
As at 31 March 2019, the carrying value of the group’s 35.3 per cent interest in Tallinn Water was £42.4 million (2018: £38.0 million). Tallinn Water
has disclosed a contingent liability of EUR 28.6 million in its latest financial statements relating to possible third-party claims. If this contingent
liability materialises in the future, this would impact the group’s share of profits of the joint venture and the joint venture’s carrying value under the
equity method of accounting. In addition, Tallinn Water is currently involved in a regulatory dispute, the outcome of which is currently uncertain. At
this stage, the group does not consider this to be an indicator that its interest in Tallinn Water may be impaired.
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 2019 or 31 March 2018.
13 Investments
Group
At 1 April 2017
Reduction in investment stake
Currency translation differences
At 31 March 2018
Change in fair value
Reduction in investment stake
Currency translation differences
At 31 March 2019
£m
9.0
(1.0)
(0.9)
7.1
4.4
(1.0)
1.0
11.5
During the year, the group reduced its investment in Muharraq Holding Company 1 Limited through a £1.0 million (2018: £1.0 million) repayment
of a shareholder loan.
At 31 March 2019, 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 2019, the company’s investments related solely to its investments in United Utilities PLC, which was recorded at a cost of £6,326.8
million (2018: £6,326.8 million).
14 Inventories
Group
Properties held for resale
Other inventories
Company
The company had no inventories at 31 March 2019 or 31 March 2018.
2019
£m
4.7
10.2
14.9
2018
£m
9.0
7.8
16.8
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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
2019
£m
102.2
–
182.9
34.4
78.1
397.6
Group
2018
£m
116.7
–
179.7
40.8
64.8
402.0
2019
£m
–
82.2
–
–
–
82.2
Company
2018
£m
–
74.2
–
–
–
74.2
At 31 March 2019, the group had £148.1 million (2018: £141.1 million) of trade and other receivables classified as non-current, of which £143.5
million (2018: £137.2 million) was owed by related parties.
The carrying amounts of trade and other receivables approximates to their fair value at 31 March 2019 and 31 March 2018.
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 4)
Trade receivables written off
Amounts charged to deferred income
Amounts charged to infrastructure renewals expenditure
At the end of the year
2019
£m
63.4
26.5
(33.4)
–
–
56.5
2018
£m
85.4
20.8
(44.6)
1.6
0.2
63.4
Amounts charged to deferred income relate to amounts invoiced for which revenue has not yet been recognised in the income statement.
Amounts charged to infrastructure renewals expenditure relate to amounts invoiced in relation to contributions towards the cost of infrastructure
renewals incurred as a result of carrying out infrastructure diversions works.
At each reporting date, the group evaluates the recoverability of trade receivables and records allowances for doubtful receivables based on
experience.
At 31 March 2019 and 31 March 2018, 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 2019
At 31 March 2018
Aged
less than one
year
£m
63.8
77.5
Aged
between one
year and two
years
£m
25.6
24.4
Aged
greater than
two years
£m
1.8
4.2
Carrying
value
£m
91.2
106.1
At 31 March 2019, the group had £11.0 million (2018: £10.6 million) of trade receivables that were not past due.
Company
At 31 March 2019 and 31 March 2018, 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 2019 and 31 March 2018.
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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
2019
£m
4.7
334.6
339.3
(14.7)
324.6
Group
2018
£m
1.0
509.0
510.0
(12.6)
497.4
2019
£m
–
–
–
(0.5)
(0.5)
Company
2018
£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 normal 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)
2019
£m
4,814.6
2,301.0
7,115.6
441.9
243.6
14.7
700.2
7,815.8
2019
£m
1,718.4
1,718.4
0.5
0.5
1,718.9
2018
£m
4,723.4
2,349.4
7,072.8
583.2
243.7
12.6
839.5
7,912.3
2018
£m
1,690.3
1,690.3
0.5
0.5
1,690.8
Borrowings are unsecured and are measured at amortised cost. The carrying amounts of borrowings approximate their fair value.
18 Retirement benefit surplus
Defined benefit schemes
The net pension expense before tax recognised in the income statement in respect of the defined benefit pension 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 5)
Net pension expense charged before tax
2019
£m
6.2
9.0
2.8
18.0
(9.5)
8.5
2018
£m
27.3
2.3
2.6
32.2
(7.1)
25.1
Defined benefit pension costs excluding curtailments/settlements included within employee benefit expense were £9.0 million (2018: £29.9 million)
comprising current service costs and administrative expenses. Total post-employment benefits expense excluding curtailments/settlements charged
to operating profit of £32.0 million (2018: £42.0 million) comprise the defined benefit costs described above of £9.0 million (2018: £29.9 million) and
defined contribution pension costs of £23.0 million (2018: £12.1 million) (see note 3).
Included within curtailments/settlements is £6.6 million (2018: £nil) relating to the equalisation of GMP benefits (see note A5 for further details).
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18 Retirement benefit surplus continued
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 gains gross of tax
At the end of the year
2019
£m
344.2
(8.5)
75.2
73.0
483.9
2018
£m
247.5
(25.1)
71.6
50.2
344.2
Included in the contributions paid of £75.2 million (2018: £71.6 million) were deficit repair contributions of £66.1 million (2018: £43.0 million),
enhancements to benefits provided on redundancy of £1.6 million (2018: £1.5 million), administration expenses of £0.5 million (2018: £0.6 million)
and an inflation funding mechanism payment of £nil made during the year (2018: £0.4 million). Following the 2018 actuarial valuation, contributions
in relation to current service cost decreased to £7.0 million (2018: £26.2 million; 2016 actuarial valuation).
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 arising from changes in demographic assumptions
Actuarial gains/(losses) arising from experience
Remeasurement gains on defined benefit pension schemes
2019
£m
58.5
(160.6)
70.9
104.2
73.0
2018
£m
(60.0)
85.1
43.2
(18.1)
50.2
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 £23.0 million (2018: £12.1 million) of contributions to defined contribution schemes which are included in
employee benefits expense (see note 3).
Company
The company did not participate in any of the group’s pension schemes during the years ended 31 March 2019 and 31 March 2018.
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 2017
Charged to the income statement (see note 7)
Charged to equity (see note 7)
At 31 March 2018
Charged/(credited) to the income statement (see note 7)
Charged to equity (see note 7)
At 31 March 2019
Accelerated
tax
depreciation
£m
1,011.4
38.5
–
1,049.9
26.8
–
1,076.7
Retirement
benefit
obligations
£m
42.1
7.9
8.5
58.5
11.3
12.4
82.2
Other
£m
(22.0)
12.4
–
(9.6)
(4.1)
0.8
(12.9)
Total
£m
1,031.5
58.8
8.5
1,098.8
34.0
13.2
1,146.0
Certain deferred tax assets and liabilities have been offset in accordance with IAS 12 ‘Income Taxes’.
Company
The company had no deferred tax assets or liabilities at 31 March 2019 or 31 March 2018.
Stock Code: UU.
unitedutilities.com/corporate
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Notes to the financial statements
20 Provisions
Group
At 1 April 2017
Charged to the income statement
Utilised in the year
At 31 March 2018
Charged to the income statement
Utilised in the year
At 31 March 2019
Severance
£m
3.7
3.7
(4.8)
2.6
4.8
(4.6)
2.8
Other
£m
22.8
1.0
(4.3)
19.5
(0.3)
(5.2)
14.0
Total
£m
26.5
4.7
(9.1)
22.1
4.5
(9.8)
16.8
The group had no provisions classed as non-current at 31 March 2019 or 31 March 2018.
The severance provision as at 31 March 2019 and 31 March 2018 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 2019 or 31 March 2018.
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
2019
£m
671.2
26.1
697.3
2019
£m
34.4
–
0.6
5.4
13.3
232.7
34.8
321.2
Group
2018
£m
617.0
25.7
642.7
Group
2018
£m
27.9
–
1.4
5.3
8.8
191.7
40.6
275.7
The average credit period taken for trade purchases is 25 days (2018: 23 days).
The carrying amounts of trade and other payables approximates to their fair value at 31 March 2019 and 31 March 2018.
Deferred grants and contributions
Group
At the start of the year
Amounts capitalised during the year
Transfers of assets from customers
Credited to retained earnings – impact of adoption of IFRS 15 ‘Revenue from contracts with customers’
Credited to the income statement – revenue
Credited to the income statement – other operating costs (see note 4)
Credited to allowance for bad and doubtful receivables
At the end of the year
2019
£m
–
–
–
2019
£m
–
12.4
–
–
–
2.3
–
14.7
2019
£m
625.8
35.7
39.4
(2.6)
(12.9)
(0.5)
(0.4)
684.5
Company
2018
£m
–
–
–
Company
2018
£m
–
9.0
–
–
–
2.3
–
11.3
2018
£m
579.2
23.7
34.2
–
(3.3)
(6.4)
(1.6)
625.8
184
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22 Other reserves
At 31 March 2018
Adjustment on initial application of IFRS 9
At 1 April 2018
Other comprehensive income
Change in fair value recognised in other comprehensive income
Amounts reclassified from other comprehensive income to profit or loss
Tax on items taken directly to equity
Foreign exchange adjustments
At 31 March 2019
At 1 April 2017
Other comprehensive income
Foreign exchange adjustments
Total comprehensive income
At 31 March 2018
Cumulative
exchange
reserve
£m
(1.8)
(1.1)
(2.9)
–
–
–
(0.8)
(3.7)
Cumulative
exchange
reserve
£m
(2.0)
0.2
0.2
(1.8)
Merger
reserve
£m
329.7
–
329.7
–
–
–
–
329.7
Merger
reserve
£m
329.7
–
–
329.7
Cost of
hedging
reserve
£m
–
13.8
13.8
Cash flow
hedging
reserve
£m
–
–
–
(2.2)
–
0.4
–
12.0
3.5
(3.1)
(0.1)
–
0.3
Cost of
hedging
reserve
£m
–
Cash flow
hedging
reserve
£m
–
–
–
–
–
–
–
Total
£m
327.9
12.7
340.6
1.3
(3.1)
0.3
(0.8)
338.3
Total
£m
327.7
0.2
0.2
327.9
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.
On adoption of IFRS 9, the group has recognised the cost of hedging reserve as a new component of equity during the year. This reserve reflects
accumulated fair value movements on cross-currency swaps resulting from changes in the foreign currency basis spread, which represents a liquidity
charge inherent in foreign exchange contracts for exchanging currencies and is excluded from the designation of cross-currency swaps as hedging
instruments.
On adoption of IFRS 9, the group designated a number of swaps hedging non-financial risks in cash flow hedge relationships in order to give a more
representative view of operating costs. Fair value movements relating to the effective part of these swaps are recognised in other comprehensive
income and accumulated in the cash flow hedging reserve.
Stock Code: UU.
unitedutilities.com/corporate
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Notes to the financial statements
23 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
2019
million
681.9
274.0
955.9
2019
£m
34.1
465.7
499.8
2018
million
681.9
274.0
955.9
2018
£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 148.
The 170.0 pence deferred shares were created to facilitate 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 (see company statement of changes in equity on page 165), and represent the
amount of a special dividend paid on B shares at that time. The 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.
24 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
2019
£m
Plant and
equipment
2019
£m
Property
2018
£m
Plant and
equipment
2018
£m
2.6
9.0
279.8
291.4
0.5
0.4
–
0.9
2.6
9.4
279.9
291.9
0.6
0.4
–
1.0
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 2019 or 31 March 2018.
25 Contingent liabilities
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 (2018: none).
The company has not entered into performance guarantees as at 31 March 2019 or 31 March 2018.
26 Events after the reporting period
After the reporting period, the group paid accelerated deficit repair contributions of £103.0 million to its defined benefit pension schemes, further
details of which are included in note A5. In addition to this, the group increased its CPI-linked debt by executing a £100 million CPI-linked bank loan
with a 10-year maturity, and entered into inflation swaps against three existing RPI-linked bonds with aggregate notional value of £100.4 million,
swapping cash flows from RPI- to CPI-linkage. None of these events have been included in the financial statements for the year ended 31 March 2019
as they represent non-adjusting events after the reporting period.
186
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Notes to the financial statements – appendices
A1 Cash generated from operations
Profit before tax
Adjustment for investment income (see note 5) and finance expense
(see note 6)
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)
Loss on disposal of property, plant and equipment (see note 4)
Amortisation of deferred grants and contributions (see note 21)
Equity-settled share-based payments charge (see note 3)
Other non-cash movements
Changes in working capital:
Decrease in inventories (see note 14)
Decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Decrease in provisions (see note 20)
Pension contributions paid less pension expense charged
to operating profit
Cash generated from operations
2019
£m
436.2
205.4
(6.7)
634.9
357.3
35.9
3.9
(12.9)
4.0
–
1.9
11.7
21.3
(5.3)
(57.2)
995.5
Group
2018
£m
432.1
206.6
(2.3)
636.4
348.4
28.4
6.8
(6.4)
3.2
(3.3)
5.6
27.5
(13.0)
(4.4)
(39.4)
989.8
2019
£m
243.8
30.5
–
274.3
–
–
–
–
–
–
–
4.4
0.1
–
Company
2018
£m
241.7
25.4
–
267.1
–
–
–
–
–
–
–
3.5
0.6
–
–
278.8
–
271.2
The group has received property, plant and equipment of £39.4 million (2018: £34.2 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 9)
Interest
Inflation uplift on index-linked debt (see note 6)
Tax
Loans to joint ventures
Fair value movements:
Net fair value gains on debt and derivative instruments recognised in finance expense (see note 6)
Net fair value gains on debt and derivative instruments recognised in other comprehensive income (see note 22)
Less: net receipts on derivatives and debt under fair value option (see note 6)
Less: foreign exchange gains on investments measured at fair value through profit or loss
Other
Cash generated from operations (see note A1)
At the end of the year
2019
£m
6,867.8
624.9
274.4
135.7
98.3
27.5
6.0
(9.5)
(4.8)
40.6
1.0
0.9
(995.5)
7,067.3
2018
£m
6,5(cid:1011)8.(cid:1011)
701.0
267.0
138.7
137.8
35.5
26.5
(47.3)
–
20.4
–
(0.7)
(989.8)
6,86(cid:1011).8
Net debt comprises borrowings, net of cash and short-term deposits and derivatives. As such, movements in net debt during the year reflected in the
above reconciliation are impacted by net cash generated from financing activities as disclosed in the consolidated statement of cash flows.
The movements from financing activities is £2(cid:1011)4.4 million (2018: £26(cid:1011).0 million), which relates solely to dividend movements. Other financing
movements in the statement of cash flows, such as proceeds from borrowings and repayment of borrowings, do not affect the total net debt figure
as the cash generated or used in these activities offsets against the associated decrease or increase in liabilities.
Of the total increase in net debt in the year, £126.5 million (2018: £110.2 million) relates to non-cash movements.
Stock Code: UU.
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Job Number
4 June 2019 4:30 pm
Proof Number
04/06/2019 16:31:10
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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:
Currency
Year of final
repayment
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
2.0% 450m bond
2.867% 320m bond
2.92% 739m bond
1.129% 52m bond
2.37% 830m bond
5.625% 300m bond
5.02% JPY 10bn dual currency loan
2.058% 30m bond
2.625% 250m bond
1.641% 30m bond
2.9% 600m bond
1.707% 28m bond
1.653% 26m bond
1.70% 30m bond
5.0% 200m bond
Borrowings designated at fair value through profit or loss
6.875% 400m bond
Borrowings measured at amortised cost
Short-term bank borrowings – fixed
1.61%+RPI 50m EIB IL loan
1.73%+RPI 50m EIB IL loan
1.84%+RPI 50m EIB IL loan
1.90%+RPI 50m EIB IL loan
1.93%+RPI 50m EIB IL loan
1.88%+RPI 50m EIB IL loan
2.10%+RPI 50m EIB IL loan
2.46%+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
1.23%+RPI 50m EIB (amortising) IL loan
1.29%+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
0.76%+RPI 50m EIB (amortising) IL loan
1.15%+RPI 50m EIB (amortising) IL loan
1.11%+RPI 50m EIB (amortising) IL loan
0.178%+RPI 35m IL bond
0.245%+CPI 20m IL bond
GBP
USD
USD
EUR
GBP
GBP
HKD
HKD
EUR
HKD
GBP
JPY/USD
EUR
GBP
EUR
HKD
EUR
EUR
EUR
GBP
USD
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
2018
2018
2019
2020
2022
2025
2026
2026
2027
2027
2027
2029
2030
2031
2031
2031
2032
2032
2033
2035
2028
2019
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
2019
£m
2,749.3
–
–
–
449.7
424.5
453.1
31.5
72.7
45.2
78.7
390.7
92.0
26.9
260.0
26.2
58.9
24.3
22.3
25.8
266.8
373.9
373.9
5,781.9
152.0
68.5
68.5
68.6
68.6
68.6
68.4
68.6
69.0
102.6
121.3
120.3
29.9
117.5
23.4
48.1
50.5
49.7
49.7
50.3
50.3
51.0
51.1
43.3
21.2
Carrying
value
2019
£m
2,765.8
–
–
–
441.9
406.2
456.7
32.3
74.9
46.0
82.0
393.5
99.4
27.9
253.0
26.4
56.3
26.0
23.7
27.9
291.7
373.9
373.9
4,676.1
152.0
65.3
65.2
65.1
65.1
65.0
64.9
64.8
64.9
100.0
115.0
110.7
27.6
109.2
23.2
44.2
46.1
45.7
45.7
46.8
46.6
46.5
46.6
38.6
21.0
Fair
value
2018
£m
2,905.9
157.9
181.2
256.5
478.8
435.3
299.6
–
65.9
45.0
70.6
388.6
86.9
27.0
–
25.7
52.4
23.9
21.9
25.4
263.3
347.7
347.7
5,798.4
161.5
67.6
67.8
67.9
67.9
67.9
67.7
68.0
68.6
102.6
117.9
116.2
28.1
111.7
22.1
51.2
53.4
52.6
52.5
52.9
52.8
53.7
53.7
40.4
20.3
Carrying
value
2018
£m
2,895.3
150.8
178.8
253.6
466.4
411.5
301.5
–
66.9
44.5
72.4
393.2
95.0
26.7
–
25.0
48.3
24.7
22.4
26.4
287.2
347.7
347.7
4,669.3
161.5
63.7
63.6
63.5
63.4
63.4
63.3
63.2
63.2
100.0
112.2
107.9
26.9
106.5
22.9
47.4
49.2
48.8
48.8
49.8
49.6
49.4
49.6
37.6
20.6
188
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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
0.873%+LIBOR 100m EIB (amortising) loan
0.840%+LIBOR 75m EIB (amortising) loan
0.01%+RPI 26.5m IL bond
0.379%+CPI 20m IL bond
0.01%+RPI 29m IL bond
0.093%+CPI 60m IL bond
1.66%+RPI 35m IL bond
2.40%+RPI 70m IL bond
1.7829%+RPI 100m IL bond
1.3258%+RPI 50m IL bond
1.5802%+RPI 100m IL bond
1.5366%+RPI 50m IL bond
1.397%+RPI 50m IL bond
0.359%+CPI 32m 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
1.5865%+RPI 50m IL bond
1.591%+RPI 25m IL bond
1.556%+RPI 50m IL bond
1.435%+RPI 50m IL bond
1.3805%+RPI 35m IL bond
1.585%+RPI 100m IL bond
0.387%+CPI 33m IL bond
1.702%+RPI 50m IL bond
Book overdrafts (see note 16)
Currency
Year of final
repayment
Fair
value
2019
£m
Carrying
value
2019
£m
Fair
value
2018
£m
Carrying
value
2018
£m
s
t
n
e
m
e
t
a
t
s
i
l
a
c
n
a
n
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
GBP
GBP
GBP
GBP
2031
2032
2032
2032
2033
2033
2033
2034
2034
2034
2035
2035
2035
2036
2036
2036
2037
2037
2039
2040
2041
2042
2043
2046
2048
2049
2053
2056
2056
2056
2056
2056
2056
2056
2056
2057
2057
2057
2019
44.7
126.2
81.0
126.0
86.4
133.6
106.7
80.0
82.3
82.3
217.8
100.6
75.9
31.7
21.3
34.6
60.6
62.9
138.0
221.9
102.9
215.5
43.6
109.3
32.3
122.9
54.6
229.9
228.0
221.6
109.3
54.6
108.8
106.1
73.5
215.3
32.3
111.2
14.7
8,905.1
43.3
79.5
81.2
126.6
87.5
135.9
102.2
76.6
78.7
78.7
148.6
100.0
75.0
33.2
21.0
32.3
62.5
47.7
93.0
147.0
73.4
146.6
29.2
73.3
32.9
72.9
27.4
143.9
143.3
143.0
71.5
35.6
71.1
70.8
49.6
137.6
33.6
69.4
14.7
7,815.8
42.4
122.4
86.6
134.4
92.0
141.6
109.6
82.2
81.8
81.8
208.3
99.6
75.2
30.1
20.7
32.9
58.8
61.9
135.9
219.0
100.7
214.7
43.2
109.1
32.0
122.9
56.2
232.2
231.7
222.0
109.2
54.7
108.6
105.9
73.5
218.9
33.2
112.9
12.6
9,052.0
42.6
76.9
87.5
135.9
93.8
145.3
106.4
79.7
79.3
79.3
143.9
100.0
75.0
31.8
20.6
32.5
61.4
46.5
90.7
142.4
71.1
142.0
28.3
71.0
32.4
70.7
27.9
140.3
139.8
139.5
69.7
34.8
69.3
69.1
48.4
134.2
33.0
67.7
12.6
7,912.3
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.
During the year, the group issued a further £150 million fixed rate notes in addition to the £300 million fixed rate notes issued in the prior year. These
notes were issued under the same terms with year of final repayment being 2025 and coupon rate of 2.0 per cent.
In April 2019, the group increased its CPI-linked debt by executing a £100 million CPI-linked bank loan with a 10-year maturity. This has not been
recorded in the financial statements at 31 March 2019 as it represents a non-adjusting event after the reporting period.
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 2019, the group had £1,039.3 million (2018: £1,205.0 million) of available liquidity, which comprised £339.3 million (2018: £510.0
million) of cash and short-term deposits and £700.0 million (2018: £695.0 million) of undrawn committed borrowing facilities.
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.
2019
£m
100.0
50.0
650.0
800.0
(100.0)
700.0
2018
£m
100.0
150.0
500.0
750.0
(55.0)
695.0
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 2019 or 31 March 2018.
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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 2019
Bonds
Bank and other term borrowings
Adjustment to carrying value(2)
Borrowings
Derivatives:
Payable
Receivable
Adjustment to carrying value(2)
Derivatives – net assets
Group
At 31 March 2018
Bonds
Bank and other term borrowings
Adjustment to carrying value(2)
Borrowings
Derivatives:
Payable
Receivable
Adjustment to carrying value(2)
Derivatives – net assets
Total(1)
£m
10,174.4
3,008.0
(5,366.6)
7,815.8
1,389.0
(1,825.0)
26.8
(409.2)
Total(1)
£m
10,343.8
3,119.3
(5,550.8)
7,912.3
1,382.5
(1,885.7)
(31.3)
(534.5)
Adjust-
ment(2)
£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
583.4
293.3
129.1
680.4
504.9
125.1
109.2
356.1
110.1
125.4
8,737.7
1,427.7
(5,366.6)
(5,366.6)
26.8
26.8
Adjust-
ment(2)
£m
(5,550.8)
(5,550.8)
(31.3)
(31.3)
876.7
809.5
630.0
465.3
235.5
10,165.4
510.2
(607.0)
43.7
(71.5)
36.6
(70.2)
32.6
(93.8)
30.1
(64.7)
735.8
(917.8)
(96.8)
(27.8)
(33.6)
(61.2)
(34.6)
(182.0)
1 year or
less
£m
733.9
289.4
1–2 years
£m
585.7
125.2
2–3 years
£m
116.7
682.5
3–4 years
£m
492.5
124.5
4–5 years
£m
96.7
355.3
More than
5 years
£m
8,318.3
1,542.4
1,023.3
710.9
799.2
617.0
452.0
9,860.7
404.4
(750.0)
475.6
(546.9)
28.6
(28.7)
22.4
(28.7)
19.7
(51.6)
431.8
(479.8)
(345.6)
(71.3)
(0.1)
(6.3)
(31.9)
(48.0)
Notes:
(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 IFRS 9 'Financial Instruments' and therefore this adjustment reconciles the undiscounted
forecast future cash flows to the carrying value of debt in the statement of financial position.
Company
The company has total borrowings of £0.5 million (2018: £0.5 million), which are payable within one year, and £1,718.4 million (2018: £1,690.3
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 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 below, 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.
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 being comprised 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 non-household retail market opening to competition, credit risk in this area is now concentrated in 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 2019, Water Plus was the group’s single largest debtor, with amounts outstanding in relation to
wholesale services of £39.1 million (2018: £42.2 million). During the year, sales to Water Plus in relation to wholesale services were £454.8 million
(2018: £495.4 million). Details of transactions with Water Plus can be found in note A6.
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A4 Financial risk management continued
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 credit 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 of 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. Credit limits
are refreshed annually and reviewed in the event of any credit rating action. Additionally, 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 2019 and 31 March 2018, 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
2019
£m
339.3
397.6
11.5
489.1
1,237.5
Group
2018
£m
510.0
402.0
7.1
635.5
1,554.6
2019
£m
–
82.2
–
–
82.2
Company
2018
£m
–
74.2
–
–
74.2
* Included within trade and other receivables is £143.5 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 2019, the group held £52.0 million (2018: £106.7 million) as
collateral in relation to derivative financial instruments (included within short-term bank borrowings – fixed 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. Currently,
the group’s regulatory assets are linked to RPI inflation; however, following Ofwat’s decision to transition to the use of CPIH for inflation indexation
for the 2020–25 regulatory period, from 2020 the group’s RCV will be 50 per cent linked to RPI inflation and 50 per cent linked to CPIH inflation, with
any new additions being added to the CPIH portion of the RCV.
The group's inflation hedging policy aims to have around half of the group’s net debt in index-linked form (where it is economic to do so), by issuing
index-linked debt and/or swapping a portion of nominal debt. This is expected to remain mostly in RPI-linked form until CPI and/or CPIH debt and
swaps become available in sufficient size at an economic cost.
The group believes this is an appropriate inflation hedging policy taking into account a balanced assessment of the following factors: economic hedge
of United Utilities Water Limited’s (UUW) RCV and revenues; cash flow timing mismatch between allowed cost of debt and the group’s incurred cost
of debt; the inflation risk premium that is generally incorporated into nominal debt costs; income statement volatility; hedging costs; debt maturity
profile mismatch risk; and index-linked hedging positioning relative to the water sector.
As a result of the evaluation of the above factors, the group will continue to identify opportunities to maintain around 50 per cent of the group’s net
debt being hedged for inflation, which can be evidenced by issuing of CPI index-linked debt since 2017 and the swapping of RPI-linked debt to CPI
after the reporting period as described in note 26. Inflation risk is reported monthly to the treasury committee in the operational compliance report.
The carrying value of index-linked debt held by the group was £3,775.8 million at 31 March 2019 (2018: £3,792.8 million).
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A4 Financial risk management continued
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.
Increase/(decrease) in profit before tax and equity
1% increase in RPI/CPI
1% decrease in RPI/CPI
2019
£m
(38.2)
38.2
2018
£m
(37.7)
37.7
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 2019 or 31 March 2018.
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 currently 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 (see inflation risk section for changes being introduced by Ofwat to inflation indexation
from 2020).
In the next regulatory period, Ofwat intends to continue using materially the same methodology in setting a fixed real cost of debt in relation to
embedded debt (currently assumed to be 70 per cent of net debt), but will introduce a debt indexation mechanism in relation to new debt (currently
assumed to be 30 per cent of net debt).
Therefore, sterling index-linked debt is left unswapped at inception, in accordance with our inflation hedging policy goal to maintain around half of
the group’s net debt in index-linked form. Conventional nominal debt is hedged as set out below.
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, mirroring Ofwat’s expected split of 70 per cent embedded and 30 per cent new debt. As such, at the start of each regulatory
period, around 30 per cent of the projected nominal net debt for that regulatory period will remain floating until it is fixed via the above 10-year
reducing balance basis, which should more closely mirror Ofwat’s new debt indexation mechanism.
This interest rate hedging policy dovetails with our revised inflation hedging policy should we need to swap a portion of nominal debt to real rate
form to maintain our desired mix of nominal and index-linked debt.
The group seeks to manage its risk by maintaining its interest rate exposure within a board-approved range. Interest rate risk is reported 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% increase in interest rate
1% decrease in interest rate
2019
£m
130.2
(141.3)
Group
2018
£m
128.1
(138.3)
2019
£m
(17.2)
17.2
Company
2018
£m
(16.9)
16.9
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.
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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.
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At 31 March 2019
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 2018
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
1 year or
less
£m
Total
£m
2,765.8
–
2,765.8
441.9
2,323.9
2,765.8
373.9
–
373.9
179.4
720.9
3,775.8
4,676.1
–
7,815.8
(339.3)
7,476.5
–
373.9
373.9
152.6
720.9
3,775.8
4,649.3
(2,330.9)
5,458.1
(339.3)
5,118.8
1 year or
less
£m
Total
£m
1–2 years
£m
2–3 years
£m
3–4 years
£m
4–5 years
£m
–
–
–
–
–
–
0.6
–
–
0.6
148.5
149.1
–
149.1
406.2
(406.2)
–
–
–
–
0.7
–
–
0.7
50.0
50.7
–
50.7
–
–
–
–
–
–
0.7
–
–
0.7
164.5
165.2
–
165.2
–
–
–
–
–
–
0.7
–
–
0.7
575.0
575.7
–
575.7
1–2 years
£m
2–3 years
£m
3–4 years
£m
4–5 years
£m
2,895.3
–
2,895.3
583.2
2,312.1
2,895.3
466.4
(466.4)
–
347.7
–
347.7
189.4
750.1
3,729.8
4,669.3
–
7,912.3
(510.0)
7,402.3
–
347.7
347.7
162.0
750.1
3,729.8
4,641.9
(3,006.3)
4,878.6
(510.0)
4,368.6
–
–
–
0.6
–
–
0.6
925.4
926.0
–
926.0
–
–
–
–
–
–
0.6
–
–
0.6
252.1
252.7
–
252.7
411.5
(411.5)
–
–
–
–
0.7
–
–
0.7
50.0
50.7
–
50.7
–
–
–
–
–
–
0.8
–
–
0.8
164.5
165.3
–
165.3
More than
5 years
£m
1,917.7
(1,917.7)
–
373.9
(373.9)
–
24.1
–
–
24.1
1,392.9
1,417.0
–
1,417.0
More than
5 years
£m
1,434.2
(1,434.2)
–
347.7
(347.7)
–
24.7
–
–
24.7
1,614.3
1,639.0
–
1,639.0
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Company
Borrowings measured at amortised cost
Floating rate instruments
Total borrowings
2019
1 year or less
£m
Total
£m
2018
1 year or less
£m
Total
£m
1,718.4
1,718.4
1,718.4
1,718.4
1,690.8
1,690.8
1,690.8
1,690.8
Electricity price risk
The group is allowed a fixed amount of revenue by the regulator, in real terms, to cover electricity costs for each five-year regulatory pricing period.
To the extent that electricity prices remain floating over this period, this exposes the group to volatility in its operating cash flows. The group’s policy,
therefore, is to manage this risk by fixing a proportion of electricity commodity prices in a cost-effective manner. The group has fixed the price on a
substantial proportion of its anticipated net electricity usage out to the end of the AMP in 2020 and has begun fixing prices for the subsequent AMP
from 2020 to 2025, partially through entering into electricity swap contracts.
The adoption of IFRS 9 ‘Financial Instruments’ has enabled the group to designate electricity swaps into cash flow hedge relationships. This
means that only the impact of any hedging ineffectiveness is recognised through fair value in the income statement, with movements reflecting
the effective portion of the swaps being recognised in other comprehensive income. As a result of this, changes in electricity prices are no longer
significant sources of volatility in the income statement and therefore sensitivity analysis in this area will no longer be meaningful.
The company has no exposure to electricity price risk.
Currency risk
Currency exposure principally arises in respect of funding raised in foreign currencies.
To manage exposure to currency rates, foreign currency debt is hedged into sterling through the use of cross-currency swaps and these are often
designated within a fair value accounting hedge.
The group seeks to manage its risk by maintaining currency exposure within board-approved limits. Currency risk in relation to foreign currency
denominated financial instruments is reported monthly to the treasury committee through the operational compliance report.
The group and company have no material net exposure to movements in currency rates.
Capital risk management
The group’s objective when managing capital is to maintain efficient access to debt capital markets throughout the economic cycle. The board
therefore believes that it is appropriate to maintain RCV gearing, measured as group consolidated net debt (including derivatives) to regulatory
capital value (RCV) of UUW, within a target range of 55 per cent to 65 per cent. As at 31 March 2019, RCV gearing was 61 per cent (2018: 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,
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 its targeted minimum 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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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
2019
Financial assets at fair value through profit or loss
Derivative financial assets – fair value hedge
Derivative financial assets – held for trading(1)
Derivative financial assets – cash flow hedge(2)
Investments(3)
Financial liabilities at fair value through profit or loss
Derivative financial liabilities – fair value hedge
Derivative financial liabilities –held for trading(1)
Derivative financial liabilities – cash flow hedge(2)
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
2018
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 – fair value hedge
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
Level 1
£m
Level 2
£m
Level 3
£m
–
–
–
–
–
–
–
–
(2,316.9)
(680.9)
(2,997.8)
Level 1
£m
–
–
–
–
–
–
329.4
158.5
1.2
11.5
(2.3)
(75.9)
(1.7)
(373.9)
(432.4)
(5,101.0)
(5,486.6)
Level 2
£m
7.1
455.7
179.8
(24.2)
(76.8)
(347.7)
(2,192.4)
(2,425.6)
(4,618.0)
(713.5)
(3,372.8)
(3,892.4)
–
–
–
–
–
–
–
–
–
–
–
Level 3
£m
–
–
–
–
–
–
–
–
–
Total
£m
329.4
158.5
1.2
11.5
(2.3)
(75.9)
(1.7)
(373.9)
(2,749.3)
(5,781.9)
(8,484.4)
Total
£m
7.1
455.7
179.8
(24.2)
(76.8)
(347.7)
(2,905.9)
(5,798.4)
(8,510.4)
Notes:
(1)
(2)
(3)
›
›
›
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 £151.3 million (2018: £151.8 million).
On adoption of IFRS 9 'Financial Instruments', electricity swaps, previously classified as held for trading under IAS 39 'Financial Instruments: Recognition and Measurement',
have been designated in cash flow hedge relationships.
Prior to the adoption of IFRS 9 'Financial Instruments' on 1 April 2018, investments were classified as available-for-sale financial assets in accordance with IAS 39 'Financial
Instruments: Recognition and Measurement'.
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 £2,997.8 million (2018: £4,618.0
million) of ‘level 1’ fair value measurements. In the absence of an appropriate quoted price, the group has applied discounted cash flow valuation
models utilising market available data in line with prior years. The £1,620.2 million decrease (2018: £1,914.0 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 2019.
During the year, changes in the fair value of financial liabilities designated at fair value through profit or loss resulted in a £26.2 million loss
(2018: £27.8 million gain). Included within this was a £6.6 million gain (2018: £24.0 million loss) attributable to changes in own credit risk. Following
adoption of IFRS 9 'Financial Instruments', this £6.6 million gain has been recognised in other comprehensive income rather than profit or loss. The
cumulative amount due to changes in credit spread was £44.8 million profit (2018: £38.2 million profit). The carrying amount is £147.8 million (2018:
£145.6 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.
In the year ended 31 March 2019, the majority of active members in the defined benefit sections of the UUPS transitioned to a hybrid section
comprising both defined benefit and defined contribution elements. Pension benefits relating to pensionable service before 1 April 2018 were
unaffected by the changes. This transition is a consequence of an increase in future service costs and is intended to reduce the overall costs and risk
to the group while balancing the interests of employees by maintaining an element of defined benefit pension provision.
The group also operates a series of historic 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
2019
£m
754.3
651.4
2,019.5
3,425.2
2018
£m
913.8
748.6
1,836.3
3,498.7
The duration of the combined schemes is around 18 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 2018, earlier than
originally planned due to the aforementioned changes to the pension scheme, 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 2019 and 31 March 2018 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 had plans in place with the schemes’ trustees to address the funding deficits by 31 December 2021 for the UUPS and
30 September 2024 for the ESPS, through a series of deficit recovery contributions. This timescale has been accelerated, with accelerated deficit
repair contributions of £97.6 million and £5.4 million made to the UUPS and ESPS respectively in April 2019. These payments represent the final
acceleration of deficit repair contributions set out in the schedules of contributions agreed with the schemes’ trustees as part of the 31 March 2018
valuation process, and reduce the deficit repair contributions payable, due from the company, to nil.
As the 2018 valuation basis was consistent with a long-term target for self-sufficiency, the expectation is that there should be minimal ongoing
reliance on the company by the pension schemes.
The group and trustees have agreed long-term strategies for reducing investment risk in each scheme. 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 corporate bonds and gilts, supplemented by
swap and gilt long-term hedges of interest and inflation rates, which perform in line with the liabilities so as to hedge against changes in interest and
inflation rates.
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Notes to the financial statements – appendices
A5 Retirement benefits continued
In addition, in the year ended 31 March 2019, the investment and risk management strategy continued to evolve with both UUPS and ESPS now fully
hedging inflation exposure through external market swaps and gilts. As a consequence, the Inflation Funding Mechanism (IFM), which previously
provided an element of inflation hedging directly with the company, has now ceased to apply and, therefore, no IFM payments were made during
the year. Further details of the derivatives used in reducing investment risk are disclosed in the ‘Further reporting analysis’ section of this appendix.
The group expects to make further contributions of £8.4 million in the year ending 31 March 2020, £7.1 million and £0.9 million in respect of current
service contributions to UUPS and ESPS respectively, and £0.4 million in respect of expenses to the ESPS.
The schemes’ funding plans are reviewed regularly, and the next funding valuation for UUPS and ESPS is due no later than 31 March 2021.
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 CPI 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 and CPI. Due
to the IFM ceasing to exist, as mentioned above, both UUPS and ESPS are now fully hedging inflation exposure along with underlying interest rates
through external market swaps and gilts, the value of which is included in the schemes’ assets.
Consequently, the reported statement of financial position under IAS 19 remains volatile due to changes in credit spread which have not been
hedged, primarily due to the difficulties in doing so over long durations, and 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 bases, which formed the basis for regular deficit repair contributions, are unlikely to suffer from significant
volatility due to credit spread, because a prudent, fixed credit spread assumption is applied.
Pension benefits under the defined benefit element of the new UUPS hybrid section, that became effective for pensionable service from 1 April
2018, are linked to CPI rather than RPI.
In the year ended 31 March 2019, the discount rate decreased by 0.2 per cent (2018: 0.05 per cent increase), which includes a 0.1 per cent decrease
in credit spreads and a 0.1 per cent decrease in gilt yields over the year. The IAS 19 remeasurement gain of £73.0 million (2018: £50.2 million)
reported in note 18 has largely resulted from the favourable impact of updated membership data due to the 2018 funding valuation, changes in
mortality assumptions, and growth asset gains, partially offset by the reduction in credit spreads and gilt yields during the year.
Guaranteed Minimum Pensions (GMP) equalisation
On 26 October 2018, the High Court issued its ruling in a landmark case involving Lloyds Banking Group on GMP. The implication of the ruling is that
GMP will be equalised for males and females. The impact of GMP equalisation under the chosen C2 method of calculation is £5.5 million (0.2 per
cent of liability) for the UUPS and £1.1 million (0.3 per cent of liability) for the ESPS, resulting in an overall increase in the pension liability of £6.6
million as a result of additional benefits being recognised, with a corresponding amount recorded in past service costs in the income statement. Any
future true-up costs will be accounted for in other comprehensive income as a change in management estimate.
Reporting and assumptions
The results of the latest funding valuations at 31 March 2018 have been adjusted for IAS 19 in order to assess the position at 31 March 2019, 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 valuations
as at 31 March 2018 for both UUPS and ESPS.
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 – RPI
Price inflation – CPI
2019
% p.a.
2.40
3.45
3.45
2.05
2018
% p.a.
2.60
3.35
3.35
1.95
The discount rate is consistent with a high-quality corporate bond rate, with 2.40 per cent being equivalent to gilts plus 90 basis points (31 March
2019: 2.60 per cent being equivalent to gilts plus 100 basis points).
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A5 Retirement benefits continued
Demographic assumptions
At both 31 March 2019 and 31 March 2018, mortality in retirement is assumed to be in line with the Continuous Mortality Investigation’s (CMI) S2PA
year of birth tables, with a scaling factor of 106 per cent and 109 per cent for male pensioners and non-pensioners respectively and 104 per cent and
105 per cent for female pensioners and non-pensioners respectively (2018: 108 per cent for males and 102 per cent for females), reflecting actual
mortality experience. At 31 March 2019, mortality in retirement is based on CMI 2018 (2018: CMI 2016) long-term improvement factors, with a long-
term annual rate of improvement of 1.50 per cent (2018: 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
2019
years
26.4
27.5
28.6
30.0
2018
years
27.0
28.7
29.4
31.1
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, while all other assumptions are held constant.
This approach does not take into account the interrelationship 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 £73.2 million (2018: £72.7 million) decrease/
increase in the schemes’ liabilities at 31 March 2019, although as long as credit spreads remain stable this will be largely offset by an increase/
decrease 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 £68.4 million (2018: £68.1 million)
increase/decrease in the schemes’ liabilities at 31 March 2019, as a significant proportion of the schemes’ benefit obligations are linked
to inflation. However, nearly all of the schemes’ liabilities were hedged for RPI in the external market at 31 March 2019, meaning that this
sensitivity is likely to be insignificant as a result. As assumptions for pensionable salary growth and pension increases are in line with those for
price inflation, sensitivities are also in line.
› Mortality long-term improvement rate – An increase in the mortality long-term improvement rate to 1.75 per cent would have resulted in a
£37.5 million decrease in the schemes' liabilities at 31 March 2019.
›
Life expectancy – An increase/decrease in life expectancy of one year would have resulted in a £137.1 million (2018: £128.6 million) increase/
decrease in the schemes’ liabilities at 31 March 2019. 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
–
7.7
33.5
46.2
12.6
100.0
Schemes’
assets
%
9.5
5.7
47.2
40.6
(3.0)
100.0
2019
£m
0.8
302.5
1,310.2
1,805.8
489.8
3,909.1
(3,425.2)
483.9
2018
£m
363.9
219.1
1,813.3
1,561.7
(115.1)
3,842.9
(3,498.7)
344.2
The fair values in the table above are all based on quoted prices in an active market, with the exception of £203.8 million (2018: £150.1 million) of
assets included in 'Other', which fall within the 'Level 3' fair value categorisation in accordance with IFRS 13 'Fair Value Measurement'.
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Notes to the financial statements – appendices
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.
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 of derivatives included within pension scheme asset classification are analysed as follows:
Group
At 31 March 2019
Equities
Other non-equity growth assets
Gilts
Bonds
Other
Total fair value of schemes' assets
At 31 March 2018
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
4.8
302.5
1,310.2
1,821.0
370.0
3,808.5
357.3
219.1
1,813.3
1,561.1
170.1
4,120.9
(4.0)
–
–
(15.2)
119.8
100.6
6.6
–
–
0.6
(285.2)
(278.0)
0.8
302.5
1,310.2
1,805.8
489.8
3,909.1
363.9
219.1
1,813.3
1,561.7
(115.1)
3,842.9
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 £nil (2018: £4.7 million) and currency forwards with a value
of £(4.0) million (2018: £1.9 million).
›
Derivatives are used within both the UUPS and ESPS bond portfolio to hedge non-sterling exposure back to sterling:
›
›
The UUPS total value of £(17.1) million comprises interest rate swaps with a value of £(15.0) million (2018: £(3.9) million) and currency
forwards with a value of £(2.1) million (2018: £1.1 million); and
The ESPS total value of £1.9 million (2018: £3.4 million) relates to interest rate swaps.
›
Derivatives are used within both the UUPS and ESPS ‘other’ portfolios to manage liability risks. Both schemes use a range of derivatives to
target a high level of interest rate and inflation hedging, comprising £112.7 million (2018: £(285.9) million) in the UUPS and £7.1 million (2018:
£0.7 million) in the ESPS. These are further broken down as follows:
›
›
The UUPS net value of £112.7 million (2018: £(285.9) million) comprises asset swaps with a value of £(32.7) million (2018: £(27.3) million),
interest rate swaps with a value of £143.6 million (2018: £252.1 million), gilt repurchase agreements with a value of £nil (2018: £(517.2)
million) and RPI inflation swaps with a value of £1.8 million (2018: £6.5 million); and
The ESPS net value of £7.1 million (2018: £0.7 million) represents gilt repurchase agreements with a value of £7.4 million (2018: £2.3 million)
and RPI inflation swaps with a value of £(0.3) million (2018: £(1.6) million).
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A5 Retirement benefits continued
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 £582.0 million (2018: £567.4 million).
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
2019
£m
3,842.9
98.4
58.5
2.9
(166.0)
(2.8)
75.2
3,909.1
2018
£m
3,863.0
97.7
(60.0)
4.9
(131.7)
(2.6)
71.6
3,842.9
The group’s actual return on the schemes’ assets was a gain of £156.9 million (2018: £37.7 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 arising from changes in demographic assumptions
Actuarial (losses)/gains arising from experience
Curtailments/settlements
Member contributions
Benefits paid
Current service cost
At the end of the year
2019
£m
(3,498.7)
(88.9)
(160.6)
70.9
104.2
(9.0)
(2.9)
166.0
(6.2)
(3,425.2)
2018
£m
(3,615.5)
(90.6)
85.1
43.2
(18.1)
(2.3)
(4.9)
131.7
(27.3)
(3,498.7)
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Notes to the financial statements – appendices
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 transactions with the group’s joint ventures and other related parties during the period, and amounts outstanding at the period
end date, were as follows:
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Sales of services
Charitable contributions advanced to related parties
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
2019
£m
455.8
0.5
0.1
0.2
4.3
182.9
0.6
2018
£m
496.3
–
0.7
1.4
3.4
179.7
1.4
Sales of services to related parties during the year mainly represent non-household wholesale charges to Water Plus Group Limited (Water Plus), a
joint venture in which the group holds a 50 per cent stake alongside Severn Trent PLC, that were billed during the period. These transactions were
on the group’s normal trading terms in respect of non-household wholesale charges, which are governed by the wholesale charging rules issued by
Ofwat.
Charitable contributions advanced to related parties during the year relate to amounts paid to Rivington Heritage Trust, a charitable company limited
by guarantee for which United Utilities Water Limited is one of three guarantors.
At 31 March 2019, amounts owed by joint ventures, as recorded within trade and other receivables in the statement of financial position, were
£182.9 million (2018: £179.7 million), comprising £39.4 million (2018: £42.5 million) of trade balances, which are unsecured and will be settled in
accordance with normal credit terms, and £143.5 million (2018: £137.2 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 2020, bearing a floating interest rate of LIBOR plus a credit margin;
£9.6 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 £9.6 million receivable held at fair value, and £2.9 million recorded as an equity contribution to Water Plus recognised within
interests in joint ventures; and
£32.5 million outstanding on a £32.5 million revolving credit facility provided by United Utilities PLC, with a maturity date of 30 September 2020,
bearing a floating interest rate of LIBOR plus a credit margin.
A further £1.4 million of non-current receivables (2018: £1.4 million) was owed by other related parties at 31 March 2019.
£nil expense or allowance has been recognised for bad and doubtful receivables in respect of amounts owed by related parties (2018: £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 £58.1 million, of which £35.1 million related to guarantees to United Utilities Water Limited.
At 31 March 2019, amounts owed to joint ventures were £0.6 million (2018: £1.4 million). The amounts outstanding are unsecured and will be
settled in accordance with normal credit terms (2018: same).
Details of transactions with key management are disclosed in note 3.
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 £274.5 million (2018: £267.0 million) and total net interest payable during the year
was £30.5 million (2018: £25.4 million). Amounts outstanding at 31 March 2019 and 31 March 2018 between the parent company and subsidiary
undertakings are disclosed in notes 15, 17 and 21.
At 31 March 2019 and 31 March 2018, 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 2019 and 31 March 2018.
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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
168 to 171.
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. Amounts attributable
to non-controlling interests are presented separately in equity and total
comprehensive income where material.
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 consideration 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 is 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. This includes the
revenue in respect of connection activities which has been impacted
by IFRS 15. The revenue in respect of these activities is then released
to the income statement over a period of 60 years, which is deemed to
be the time over which the performance obligation for providing the
connection is satisfied.
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.
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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
Tax on the profit or loss for the year comprises current and deferred
tax. Tax is recognised in the income statement except to the extent
that it relates to items recognised directly in equity, in which case it is
recognised in equity. 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. A current tax provision is only recognised
when the group has a present obligation as a result of a past event and
it is probable that the group will be required to settle that obligation to
a taxing authority.
Current tax
Current tax is based on the taxable profit for the period and is provided
at amounts expected to be paid or recovered using the tax rates and
laws that have been enacted or substantively enacted at each reporting
date.
Taxable profit differs from the net profit as reported in the income
statement because it excludes items of income or expense that are
taxable or deductible in other years and it further excludes items that
are never taxable or deductible.
Current tax is charged or credited in the income statement, except when
it relates to items charged or credited to equity, in which case the tax is
also dealt with in equity.
Deferred tax
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities in
the financial statements and the corresponding tax bases used in the
computation of taxable profit. Deferred tax liabilities are provided,
using the liability method, on all taxable temporary differences at each
reporting date. Such assets and liabilities are not recognised if the
temporary difference arises from goodwill or from the initial recognition
(other than in a business combination) of other assets and liabilities
in a transaction that affects neither the taxable profit nor the
accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and interests in joint ventures,
except where the group is able to control the reversal of the temporary
difference and it is probable that the temporary difference will not
reverse in the foreseeable future.
Deferred tax is measured at the average tax rates that are expected
to apply in the periods in which the temporary timing differences are
expected to reverse based on tax rates and laws that have been enacted
or substantively enacted at each reporting date.
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.
Stock Code: UU.
unitedutilities.com/corporate
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Notes to the financial statements – appendices
A7 Accounting policies continued
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 where borrowing costs are
attributable.
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.
Costs associated with a major inspection or overhaul of an asset or
group of assets are capitalised within property, plant and equipment
and depreciated over the period of time expected to elapse between
major inspections or overhauls.
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 60 years, which is the estimated period over which an average
connection through which the group provides water and wastewater
services is expected to be in place (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
accounting treatment 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 10 years.
Impairment of assets
Where appropriate, assets are reviewed for impairment at each
reporting date to determine whether there is any indication that those
assets may have suffered an impairment loss. Where the asset does not
generate cash flows that are independent from other assets, the group
estimates the recoverable amount of the cash generating unit to which
the asset belongs.
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.
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A7 Accounting policies continued
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 financial assets measured at fair value
through profit or loss (FVPL) in accordance with IFRS 9 ‘Financial
Instruments’ are measured at subsequent reporting dates at fair value.
Gains and losses arising from changes in fair value are recognised in
the net profit or loss for the period. The business model employed in
respect of financial assets is that of a hold-to-collect model.
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, while
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 IFRS 9 ‘Financial Instruments’ 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 there is an economic
relationship between the borrowing instrument and the hedging
derivative and that the designated hedge ratio is consistent with the
group's risk management strategy.
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.
Under the provisions of IFRS 9 ‘Financial Instruments’, changes in the
group’s own credit risk are recognised in other comprehensive income.
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
The group’s default treatment is that 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).
Derivative financial instruments designated within a
cash flow hedge relationship
Gains or losses resulting from the effective portion of the hedging
instrument are recognised in other comprehensive income and in the
cash flow hedge reserve with any remaining gains or losses recognised
immediately in the income statement. The cash flow hedge reserve
is adjusted to the lower of the cumulative gain or loss on the hedging
instrument and cumulative change in fair value of the hedged item.
At the maturity date, amounts paid/received are recognised against
operating expenses in the income statement.
Stock Code: UU.
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Notes to the financial statements – appendices
A7 Accounting policies continued
Upon discontinuation of a cash flow hedge, the amount accumulated in
other comprehensive income remains in the cash flow hedge reserve if
the hedged future cash flows are still expected to occur. Otherwise the
amount is immediately reclassified to the income statement.
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 IFRS 9
‘Financial Instruments’. 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
‘Employee Benefits’, 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 pension cost under IAS 19 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.
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 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 fair value through other comprehensive income 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.
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A7 Accounting policies continued
Goodwill and fair value adjustments arising on the acquisition of a
foreign entity are treated as assets and liabilities of the foreign entity
and translated at the closing rate. The group has elected to treat
goodwill and fair value adjustments arising on acquisitions before the
date of implementation of IFRS 3 ‘Business Combinations’ (1 April 1999)
as sterling-denominated assets and liabilities.
Grants and contributions
Grants and contributions receivable in respect of property, plant and
equipment are treated as deferred income, which is credited to the
income statement over the estimated useful economic lives of the
related assets.
Leases
Leases are classified according to the substance of the transaction.
Operating leases are leases that do not transfer substantially all the risks
and rewards of ownership to the lessee.
Operating lease rentals are charged to the income statement on a
straight-line basis over the period of the lease.
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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.
Proportion of
share capital
owned/voting
rights % * Nature of business
Class of share
capital held
Subsidiary undertakings
Great Britain
Halkyn District Mines Drainage Company Limited
Lingley Mere Management Company Limited
North West Water International Limited
North West Water Limited
United Utilities (Overseas Holdings) Limited
United Utilities Bioresources Limited
United Utilities Energy Limited
United Utilities Healthcare Trustee Limited
United Utilities International Limited
United Utilities North West 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 Water Finance PLC
United Utilities Water Limited
UU (ESPS) Pension Trustee Limited
UU Group Limited
UU Secretariat Limited
YCL Transport Limited
The Netherlands
United Utilities (Tallinn) BV
Thailand
Manta Management Services Limited(1)
Joint ventures
Great Britain
Lingley Mere Business Park Development Company Limited
Selectusonline Limited
Water Plus Group Limited(2)
Water Plus Limited(2)
Water Plus Select Limited(2)
Estonia
AS Tallinna Vesi(3)
Associated undertakings
Bahrain
Muharraq STP Company BSC(c)(4)
Muharraq Wastewater Services Company WLL(4)
Jebel Ali Free Z one, Dubai, UAE
Muharraq Holding Company 1 Limited(5)
Muharraq Holding Company 2 Limited(5)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Dormant
Property management
Holding company
Dormant
Holding company
99.9
90.7
100.0
100.0
100.0
100.0 Wastewater services
Non-trading
100.0
Corporate trustee
100.0
Consulting services and project management
100.0
Holding company
100.0
Corporate trustee
100.0
Holding and management company
100.0
Property management
100.0
100.0
Renewable energy generation
100.0 Waste treatment
Holding company
100.0
Financing company
100.0
100.0 Water and wastewater services
100.0
100.0
100.0
100.0
Corporate trustee
Dormant
Dormant
Non-trading
Ordinary
100.0
Holding company
Ordinary
49.0 Management company
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Development company
Procurement portal
50.0
16.7
50.0 Water and wastewater non-household retail
50.0 Water and wastewater non-household retail
50.0 Water and wastewater non-household retail
Ordinary
35.3 Water and wastewater services
Ordinary
Ordinary
Ordinary
Ordinary
20.0
35.0
Project company
Operations and maintenance company
20.0
20.0
Holding company
Holding company
* With the exception of United Utilities PLC, shares are held by subsidiary undertakings rather than directly by United Utilities Group PLC.
(1) Registered address: Unit 2201, No. 1. Soi Chan 2, Yak 3 Chan Road, Thung Wat Don Sub District, Sathorn District, Bangkok, Thailand 10120.
(2) Registered address: Two Smithfield, Leonard Coates Way, Stoke-on-Trent, ST1 4FD, United Kingdom.
(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
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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 2019. 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)
2019
£m
1,818.5
2018
£m
1,735.8
2017
£m
1,704.0
2016
£m
1,730.0
2015
£m
1,720.2
634.9
684.8
436.2
460.3
363.4
378.7
53.3p
55.5p
636.4
645.1
432.1
370.2
354.6
304.9
52.0p
44.7p
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
Dividend per ordinary share (pence)
41.28p
39.73p
38.87p
38.45p
37.70p
Non-current assets
Current assets
Total assets
Non-current liabilities
Current liabilities
Total liabilities
Total net assets and shareholders’ equity
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
Net debt
RCV gearing(1) (%)
Note:
12,466.4
721.4
13,187.8
(9,025.0)
(1,052.0)
(10,077.0)
3,110.8
832.3
(627.7)
(377.4)
(172.8)
7,067.3
61%
11,853.6
1,149.9
13,003.5
(8,911.1)
(1,141.5)
(10,052.6)
2,950.9
815.6
(723.2)
184.7
277.1
11,768.2
657.9
12,426.1
(8,914.7)
(689.8)
(9,604.5)
2,821.6
820.8
(804.6)
22.0
38.2
11,280.8
626.0
11,906.8
(8,357.1)
(844.2)
(9,201.3)
2,705.5
685.6
(676.8)
(46.4)
(37.6)
10,664.8
638.8
11,303.6
(7,867.7)
(1,001.5)
(8,869.2)
2,434.4
706.5
(704.9)
139.2
140.8
6,867.8
61%
6,578.7
61%
6,260.5
61%
5,924.0
59%
(1) Regulatory capital value (RCV) gearing is calculated as group net debt (see note A2), divided by the RCV expressed in out-turn prices, of United Utilities Water Limited.
Stock Code: UU.
unitedutilities.com/corporate
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Shareholder information
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Key dates
− 20 June 2019
Ex-dividend date for 2018/19 final dividend
− 21 June 2019
Record date for 2018/19 final dividend
− 26 July 2019
Annual general meeting
− 1 August 2019
Payment of 2018/19 final dividend to shareholders
− 20 November 2019
Announcement of half-year results for the six months ending
30 September 2019
− 19 December 2019
Ex-dividend date for 2019/20 interim dividend
− 20 December 2019
Record date for 2019/20 interim dividend
− 3 February 2020
Payment of 2019/20 interim dividend to shareholders
− May 2020
Announce the final results for the 2019/20 financial year
− June 2020
Publish the Annual Report and Financial Statements for the 2019/20
financial year
Electronic communications
We’re encouraging our shareholders to receive their shareholder
information by email and via our website. Not only is this a quicker way
for you to receive information, it helps us to be more sustainable by
reducing paper and printing materials and lowering postage costs.
Registering for electronic shareholder communications is very
straightforward, and is done online via shareview.co.uk which is a
website provided by our registrar, Equiniti.
Log on to shareview.co.uk and you can:
›
›
›
›
set up electronic shareholder communication;
view your shareholdings;
update your address details if you change your address; and
get your dividends paid directly into your bank account.
Please do not use any electronic address provided in this notice or in any
related document to communicate with the company for any purposes
other than those expressly stated.
Why not make life easy and have your
dividends paid straight to your bank?
›
The dividend goes directly into your bank account and is available
immediately;
Online annual report
Our annual report is available online. View or download the full Annual
Report and Financial Statements from:
unitedutilities.com/corporate
›
›
›
›
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; and
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 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.
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Keeping you in the picture
You can find information about United Utilities quickly and easily
on our website: unitedutilities.com/corporate. Here the Annual
Report and Financial Statements, responsible business performance,
company announcements, the half-year and final results and
presentations are published.
Registrar
The group’s registrar, Equiniti, can be contacted on:
0371 384 2041 or textphone for those with hearing difficulties:
0371 384 2255. Lines are open 8.30 am to 5.30 pm, Monday to Friday
excluding public holidays in England and Wales.
The address is:
Equiniti, Aspect House, Spencer Road,
Lancing, West Sussex, BN99 6DA.
Overseas shareholders may contact them on:
+44 (0)121 415 7048
Equiniti offers a share dealing service by telephone:
0345 603 7037 and online: shareview.co.uk/dealing
Key shareholder facts
Balance analysis as at 31 March 2019
6
2
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2
9
5
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0
6
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6
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6
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% of shares
Number of holdings
,
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1
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Equiniti also offers a stocks and shares ISA for United Utilities shares:
call 0345 300 0430 or go to: shareview.co.uk/dealing
Shareholders by location
Looking after your investment
Our approach to responsible business has again helped us to retain world
class status in the Dow Jones Sustainability index for the eleventh consecutive
year and in 2018 we achieved the Industry mover award for our sector.
10.20%
16.50%
42.00%
Our membership of the FTSE4Good Index continued for the seventeenth
year and we also received a B rating in the Carbon Disclosure Project.
We have maintained our position in the Euronext Vigeo index: UK 20
and been reconfirmed as a constituent of the Ethibel Sustainability
Index Excellence Europe for our environmental, social and governance
performance.
We have retained our Gold award status with the Royal Society for the
Prevention of Accidents and been awarded the Chartered Institute of
Procurement and Supply Corporate Ethics Mark for our sustainable and
ethical approach.
Sustainability Award
Industry mover 2019
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.
31.30%
United Kingdom
North America
Europe
Rest of the World
Dividend history – pence per share
Interim
Final
Total ordinary
2015
12.56
25.14
37.70
2016
12.81
25.64
38.45
2017
12.95
25.92
38.87
2018
12.24
26.49
39.73
2019
13.76
27.52
41.28
Warning to shareholders
Please be very wary of any unsolicited contact about your investments
or offers of free company reports. It may be from an overseas
‘broker’ who could sell you worthless or high-risk shares. If you deal
with an unauthorised firm, you would not be eligible to receive
payment under the Financial Services Compensation Scheme. Further
information and a list of unauthorised firms that have targeted UK
investors is available from the Financial Conduct Authority at:
fca.org.uk/consumers/protect-yourself/unauthorised-firms
Important information
Cautionary statement:
The Annual Report and Financial Statements (the annual report) contains certain forward-looking statements with respect to the operations, performance and financial
condition of the group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially
from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this annual report and the company
undertakes no obligation to update these forward-looking statements. Nothing in this annual report should be construed as a profit forecast. Certain regulatory performance
data contained in this annual report is subject to regulatory audit.
Terms used in this report:
Unless expressly stated otherwise, the ‘group’, ‘United Utilities’, ‘UU’ or ‘the company’ means United Utilities Group PLC and its subsidiary undertakings; the ‘regulated
business’, ‘regulated activities’ or ‘UUW’ means the licensed water and wastewater activities undertaken by United Utilities Water Limited (formerly United Utilities Water
PLC) in the North West of England.
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United Utilities Group PLC
Haweswater House
Lingley Mere Business Park
Lingley Green Avenue
Great Sankey
Warrington
WA5 3LP
Telephone +44 (0)1925 237000
Stock Code: UU.
Registered in England and Wales
Registered number 6559020
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