United Utilities
Group PLC
Annual Report and Financial Statements
for the year ended 31 March 2020
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Driven by
what matters
United Utilities is the UK’s largest listed water and wastewater
company. Our purpose is to provide great water and more for
the North West.
Our
purpose
We are a purpose-led organisation. This is why we exist and
why we focus on what matters to our stakeholders.
Read more about how we deliver
our purpose on page 16
What
matters
Our
approach
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 provide great water and more for the North West.
Our
competitive
advantages
Read more about our strategic themes
on page 17
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,
presented in a way that we believe is fair, balanced
and understandable.
We recognise this report will be read by a wide
variety of other stakeholders including customers,
employees, analysts, regulators, suppliers,
community bodies, politicians, non-governmental
organisations, and devolved authorities. Where
we believe a topic is material to a large number of
them, we either include it in this report or refer the
reader to other reports and information (such as
our customer communications, the responsibility
pages on our website, or regulatory reports).
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.
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Contents
Driven by what matters
What matters to our stakeholders
Our approach
Our competitive advantages
Business overview
Chairman and Chief Executive
Officer's review
2019/20 highlights
Strategic report
Delivering our purpose
Our business model
– Our key resources
– Our external drivers and relationships
– How we plan for the future
– Our plans for 2020–25
– How we create value for stakeholders
– How we respond to challenges
How we measure our performance
Contributing to the UN SDGs
Our approach to climate change (TCFD)
Our performance in 2019/20
Our risk management
S172(1) Statement
Non-financial information statement
Glossary
Time for a tea break
Governance
Corporate governance report
– Board of directors
– Letter from the Chairman
– Nomination committee report
– Audit committee report
– Corporate responsibility committee report
– Remuneration committee report
– Tax policies and objectives
Directors’ report
Statement of directors’ responsibilities
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
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92
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252
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.
Integrated Report and TCFD disclosures
This Annual Report contains information in line with the recommendations
of the Task Force on Climate-related Financial Disclosures (TCFD), and
is an Integrated Report 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.
Sir David Higgins
Chairman
Steve Mogford
Chief Executive Officer
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Stock Code: UU.
Annual Report and Financial Statements for the year ended 31 March 2020
1
2
Resilience
Our approach to
securing long-term
operational, corporate
and financial resilience
is key for stakeholders.
They want to know
they can rely on us,
now and in the future,
and that we are
prepared for, and can
manage, any problems
that come our way.
Stakeholders affected:
Customers
Environment
Shareholders
Trust, transparency and legitimacy
Stakeholders expect us to operate in a responsible
manner. They want to know what contribution
we are making to the region. Being open, honest
and transparent about what we do and how we
perform is key to building and maintaining trust and
legitimacy with all.
Stakeholders affected:
Communities
Customers
Customers
Shareholders
Employees
Communities
Employees
Communities
What matters to
our stakeholders
We continually assess what matters to our stakeholders and
this shapes how we deliver our strategy to fulfil our purpose.
Read more about our material issues on page 27
3
Customer service and
operational performance
Stakeholders expect us to
provide great customer service.
They expect us to provide safe,
clean drinking water without
interruption, and to return
wastewater safely back to the
environment.
Stakeholders affected:
Customers
Environment
Shareholders
Communities
OUR STAKEHOLDERS:
OUR STAKEHOLDERS:
Communities
Customers
Communities
Customers
Customers
Employees
Environment
Employees
Environment
Environment
Our
purpose
What
matters
Our
approach
Our
competitive
advantages
2
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1United Utilities Group PLC unitedutilities.com/corporate
Leakage and water
efficiency
In the face of a changing
climate and increasing
population pressures
on water supplies,
stakeholders are interested
in our efforts to reduce
leakage and how we can
help everybody use less
water.
Stakeholders affected:
Customers
Media
Shareholders
Employees
Communities
6
Affordability and vulnerability
North West England has 41 per cent of
the most deprived areas in the country
so helping customers who are struggling
to pay their water bills is especially
important. Many stakeholders are
interested in how we support customers
in vulnerable circumstances.
Stakeholders affected:
Communities
Customers
Customers
Communities
5
Political and regulatory environment
Many of our quality and environmental standards
will be affected by the UK’s exit from the European
Union. New environmental and quality regulations
will have a key impact on us and is of interest to our
stakeholders.
Stakeholders affected:
Environment
Shareholders
Media
Shareholders
Employees
Communities
Shareholders
Investors
Suppliers
Media
Shareholders
Media
Media
Employees
Politicians
Regulators
Communities
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4Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 WHAT MATTERS
Our
approach
Our decisions are shaped by material issues for
stakeholders, risk assessments, a commitment
to environmental, social and governance (ESG)
matters and our pioneering Systems Thinking
approach. This integrated approach helps us
create sustainable long-term value.
Our
purpose
What
matters
Our
approach
Our
competitive
advantages
44
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United Utilities Group PLC unitedutilities.com/corporate How what matters shapes our decisions
Our prioritisation of issues
We can’t do everything right away, so we must
identify the top priorities to help us deliver a resilient
service. We conduct research and assessments to
help us understand how material each issue is to our
stakeholders and to our ability to create value.
Our risk management
We face a range of risks that could threaten the quality
of our service, cause delays, increase cost, and/or
damage our reputation. We have an embedded risk
management framework to anticipate and mitigate
these risks, which helps us prioritise our actions.
Read more about our material issues on page 27
Read more about our risk management on pages 92 to 101
Our commitment to ESG matters
Our priorities and decisions are shaped by our
commitment to ESG, which is embedded in
everything we do. We have strong credentials in all
three areas, and this has been a part of who we are
as a business for many years.
Systems Thinking
Our pioneering Systems Thinking approach improves
efficiency and operational resilience, giving us a
competitive advantage and helping us deliver great
service to customers. This approach feeds into our
decisions and how we prioritise our activities.
Read more about our ESG metrics on pages 62 and 63
Read more about our competitive advantages on pages
6 and 7
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 WHAT MATTERS Our competitive
advantages
Our competitive advantages help us provide great water
for the long term. Prudent financial risk management
delivers long-term predictability and resilience to financial
shocks, while Systems Thinking improves efficiency and
operational resilience.
Prudent financial risk management
What do we do?
Debt – 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 RCV and
revenue. Most is RPI-linked, but now that Ofwat is
transitioning to CPIH we are gradually increasing our
CPI exposure, subject to cost and availability, as this
is the best available proxy for CPIH in the absence
of a CPIH debt capital market. On our remaining
nominal debt, we fix the underlying interest cost out
to ten years on a reducing balance basis.
Pensions – we adopt an asset-liability matching
approach for our defined benefit pension schemes
by investing in assets that perform in line with the
liabilities, such as corporate bonds and gilts and the
use of interest rate swaps, to hedge the impact of
changes in swap and gilt yields. The schemes have
hedged inflation exposure through RPI gilts and
swaps, and in April 2019 we prepaid all remaining
deficit repair contributions. As a result, our pension
position is stable and the schemes are self-sufficient.
How this differentiates us
Our prudent approach offers a lower risk exposure
than many other companies, and it may be costly for
others to transition from a different approach due to
the typically long-term nature of debt in our industry.
How it helps us create value
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.
Our approach to debt financing helps us 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 pensions approach reduces volatility in our
defined benefit schemes, and self-sufficiency means
our employees, past and present, are in a very secure
position and shareholders are well protected.
Our
purpose
What
matters
Our
approach
Our
competitive
advantages
6
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United Utilities Group PLC unitedutilities.com/corporate S
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WHAT MATTERS
Innovating for
better leak detection
We are co-creating to develop
mobile sensors that allow
remote monitoring in leak
detection.
We have a strong track record in avoiding, finding and
fixing leaks, always looking for new ideas and ways of
working to further improve our performance.
Our innovation model seeks to find the best innovators
to help evolve concepts into game-changing solutions
we can use. To stimulate new thinking, we often look
outside the traditional water sector. In 2019, we found
a small supplier who was passionate to help find and
pinpoint leaks in the water network using sophisticated
electronics, machine learning, artificial intelligence and
modern data analytics.
FIDO (Free Intelligent Domain Observers) was one of
eight suppliers chosen through our 2019 Innovation
Lab. Following a six-month period using our test rig
and over 100 trials in live environments to help FIDO
enhance the design of its previously untested prototype,
we now have access to a new innovation that has been
developed for field teams and adopted by us.
FIDO uses three sensors that can be deployed in-pipe
or close by, even attached to a traditional listening
stick. Each sensor captures its location and the sound
from the pipe, and this is processed in real time to
spot the ‘digital signature’ of a leak. The software
removes background noises and artificial intelligence
makes recommendations on the location and severity,
which helps us prioritise when scheduling teams to
fix leaks. This remote monitoring capability is another
implementation of our Systems Thinking approach. The
FIDO algorithm can be used to process files from our
extensive deployed acoustic logger fleet, saving time
versus human processing.
FIDO can be deployed faster than traditional methods
of leak detection and can process more digital files with
greater consistency than a human. In testing, FIDO has
a greater than 85 per cent success rate, outperforming
humans and traditional methods.
There are benefits from using one core technology
that can be adapted for multiple applications.
Recognising the potential of FIDO, we have secured a
long-term agreement to optimise the current products
and continue to co-create, test and adopt any new
developments. FIDO is recruiting technical specialists
from within the water sector to supplement its in-
house experts in artificial intelligence and electronics
capability.
Generating value for:
Communities
Environment
Shareholders
Customers
Media
What do we do?
Systems Thinking looks at how each individual element interacts with
the other parts of the system in which it operates. Instead of isolating
small elements, Systems Thinking expands its view to consider larger
numbers of interactions over time as a particular system issue is being
studied. For a water and wastewater company, this means, rather than
operating each asset or treatment works in isolation, we use all the data
from the telemetry we have installed across our network to analyse the
entire system and all its linkages, enabling us to find the best all-round
solutions.
Our field engineers are linked by an Integrated Control Centre (ICC)
at our head office, from which we plan, monitor and control our
operations. From our ICC we process vast amounts of real-time data
from across our network, factoring in other source data such as weather
forecasts, and using artificial intelligence and machine-learning to
process this data and spot issues so we can resolve them before they
impact customers. We allocate resources to production teams with full
accountability for asset and system performance, helping embed this
way of thinking within our operational teams.
How this differentiates us
Many of our assets were built over 30 years 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 the
network to enable a Systems Thinking approach. 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.
How it helps us create value
Using real-time data and operating our network in this way enables
us to optimise cost and service performance. Systems Thinking
improves our asset reliability and resilience, reduces unplanned
service interruptions, and helps us move away from the traditional
reactive approach to address problems proactively before they affect
customers. This pioneering approach helped us deliver operational
improvements and cost savings during AMP6, and we have further
developments planned for AMP7 and beyond, as Systems Thinking
forms part of our long-term strategy to continue creating value for
customers and stakeholders.
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Stock Code: UU.
Annual Report and Financial Statements for the year ended 31 March 2020
7
Systems Thinking
Chairman and Chief Executive Officer’s review
This year saw completion of the 2015–20 price
review period in which we continued to make
good progress on delivering our promises.
The COVID-19 pandemic has required us to
adapt the way we operate, and we are proud
of the way our people have embraced that
change and continued to deliver great service
to customers at this time.
Sir David Higgins
Chairman
Steve Mogford
Chief Executive
Officer
8
We are a purpose-led company, driven by what
matters to customers and other stakeholders.
This focus has helped us deliver a significant and
sustainable transformation in our operational
performance and customer service in recent years.
We have exceeded our targets for the 2015–20
period (AMP6) and we exit this regulatory period as
one of the best performers in the industry.
Since 2015, we have reduced significant water
quality incidents by 69 per cent and reduced water
supply interruptions by 39 per cent. We have been
the joint top performing company over the last
five years under the Environment Agency’s (EA)
annual assessment, and we are an industry leader in
reducing pollution.
Our regulatory targets this year were the toughest
to date, and we have risen to the challenge, earning
a net outperformance payment against our outcome
delivery incentives (ODIs) for the year and a
cumulative net outperformance payment for
the five-year period in total.
Strong performance in 2019/20 was delivered in
the face of many challenges. It has been a year of
significant rainfall, culminating in severe flooding
caused by storms Dennis and Ciara in February
2020. The COVID-19 (coronavirus) pandemic has
created further challenges, with enormous practical
implications on the way we work and economic
impacts for our communities.
We are well prepared for the 2020–25 period
(AMP7) and our fast-track business plan achievement
allowed us to make a flying start on improving our
performance towards our targets for the period. We
are proud of the responsible way we have delivered
this improvement, operating in an environmentally
and socially conscious manner and upholding the
highest standards of governance.
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United Utilities Group PLC unitedutilities.com/corporate Maintaining service for customers
while keeping our people safe
We have an incredible group of people working
at United Utilities who have shown themselves
to be great at embracing change, be that new
technologies and innovation or the need to adapt
quickly to an unexpected incident.
The flooding caused by Storm Ciara in February
caused damage to a key water main that served
thousands of properties in the Eden Valley area. The
damage occurred where the water main crossed a
river, and the conditions in the area were treacherous
with continuing heavy rain and strong winds. Thanks
to our contingency plans and the dedicated hard
work of our people around the clock, we were able
to repair the damage in just three days and restore
supply fully in five days.
COVID-19 then challenged us to deliver an
unprecedented level of change to working practices.
Our primary concern at this time is the safety of our
people and those they work alongside. We moved
over half of our people to remote working and, of
those remaining in offices and sites, many moved
locations to maintain compliance with government
guidelines on social distancing. Non-essential tasks
have been postponed but we are continuing with our
construction activity where we can do so safely for
our people and those with whom they are in contact.
Many of our employees are designated as key
workers, continuing to provide essential water and
wastewater services at a time when sanitation is
even more important. We are proud of the dedicated
way in which they, like all the amazing key workers,
have continued to leave their families each day in
this difficult time to serve their communities.
We worked to ensure all our people have access to
the correct equipment to comply with sanitation
and personal protective equipment (PPE)
requirements, and we rapidly increased our internal
communications to ensure our people are kept
informed about the latest national guidelines and
what we are doing to respond to the pandemic.
We set up a dedicated area of our intranet to
assist with employees’ mental health during the
lockdown, recognising that this can be a particularly
challenging time from a psychological perspective as
well as a practical one.
Thanks to the flexibility and hard work of our
employees we have maintained great water services
throughout this time, and it is pleasing to see
that this is appreciated by customers as well. Our
satisfaction scores have never been higher and the
latest scores are the highest in the sector.
As well as maintaining our own services, we want
to help where we can with the economic impacts
COVID-19 is having. None of our employees have
been furloughed, and we accelerated payments to
suppliers as well as paying particular attention to the
more fragile elements of our critical supply chain as
part of the industry-wide incident response.
The most pressing economic impact for the sector
is on non-household retail where the closure of
businesses has interrupted payments to retailers,
causing liquidity issues in this market. The potential
implications on our non-household retail joint
venture, Water Plus, have led to a reduction in
the carrying value of our investment, along with
other charges. Ofwat has introduced a number of
measures to help support the industry and, while the
pandemic is ongoing and we do not yet know the
full impact it will have on the economy, as a result
of these measures and the actions we have taken,
Water Plus is now on a firmer footing.
Delivering a strong financial
performance
Our financial performance from an underlying
statutory perspective has been strong again this
year. Underlying earnings per share is 63.0 pence,
an increase of 5 per cent and more than covering
the dividend for the year. The main drivers of this
increase are our allowed regulatory revenue profile
and lower infrastructure renewals expenditure, partly
offset by an increase in the underlying net finance
expense due to higher RPI inflation applied to our
index-linked debt, higher depreciation, and a share
of small, underlying losses of joint ventures.
Our underlying tax charge at 13 per cent is lower
than the headline rate of corporation tax at 19 per
cent, reflecting a change in how we derive our
underlying profit after tax and EPS figures. We now
present our underlying profit measures excluding
the impact of deferred tax to better reflect the
regulatory revenue allowances. On our previous
basis, including the impact of deferred tax, our
underlying tax charge for 2019/20 would have
been 19 per cent, in line with the headline rate of
corporation tax.
Reported earnings per share is much lower at 15.7
pence due to around £300 million of adjusting items
during the year. This includes non-cash impacts such
as accelerated depreciation on bioresources assets
we are no longer using and a significant deferred tax
charge, as well as restructuring costs as we prepare
for the next regulatory period and the expected
impact of COVID-19. These adjusting items are
outlined in the reconciliation table on page 91, and
more information can be found on page 90.
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Key dates in
2019/20
Apr 2019
> 2020–25 draft
determination
(DD) published
May 2019
> Submission
of company
representations
on DD
Jul 2019
> Updated cost
of capital
guidance
published with
slow track DDs
Dec 2019
> 2020–25 final
determination
(FD) published
Jan 2020
> FD accepted
and AMP7
dividend policy
announced
Feb 2020
> Storms Dennis
and Ciara
Mar 2020
> Significantly
changed our
way of working
as a result of
the COVID-19
pandemic
“ We have shared over
£600 million with
customers in the last
ten years, out of over
£1 billion outperformance
earned, reinvesting this
into our services to deliver
further improvements.”
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020
Chairman and Chief Executive Officer’s review
The board has proposed a final dividend of 28.40
pence per ordinary share, taking the total dividend
for 2018/19 to 42.60 pence. This is an increase of 3.2
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 continue to maintain a strong balance sheet,
healthy liquidity, and a low-dependency pension
scheme that is in surplus on an IAS 19 basis. We
accelerated around £100 million of deficit repair
contributions in April 2019, getting us to this low-
dependency funding position, which is a significant
value driver for our business. We have a consistent
policy of targeting gearing of 55–65 per cent,
measured as net debt to regulatory capital value,
which has been supportive of United Utilities
Water Limited’s (UUW) A3 stable credit rating with
Moody’s. At 62 per cent, our gearing is one of the
lowest in the sector, our credit ratings are in line with
our targets, and as at 31 March 2020 we have around
£1.2 billion liquidity. This is a strong and responsible
position to be in, mitigating financial risk for all our
stakeholders and giving us a high degree of resilience
and financial flexibility as we move into AMP7.
Exceeding our targets for the 2015–20
period (AMP6)
We delivered outperformance against all four
principal areas of our regulatory contract in AMP6.
In customer service, we continued to improve year
on year in Ofwat’s Service Incentive Mechanism
(SIM). Last year was the final year of measurement
for this mechanism, and we were scored as
upper quartile in the sector and awarded a SIM
outperformance payment of £6 million for our
performance across AMP6.
Our outcome delivery incentives (ODIs) for AMP6
were heavily skewed to the downside, and we
started the period with a significant challenge that
saw the most likely net outcome at around a £90
million penalty. Our performance transformation and
acceleration of investment, along with tremendous
hard work from our people, has seen us earn a net
£43.9 million cumulative outperformance payment
over the period, which is a significant achievement
against our original expectations and sees us as one
of the top performers in the sector.
This year we earned a net ODI outperformance
payment of £22.4 million. This included our West
Cumbria pipeline project, a hugely complex project
that is ahead of schedule, meeting or beating all
its AMP6 targets, and earning an outperformance
payment of £21.6 million.
We delivered total expenditure (totex) outperformance
of around £100 million against the final determination
allowance, in addition to the significant cost savings
we were already delivering to close the gap between
the allowance and our original business plan
submission for AMP6.
Our industry-leading treasury management helped
us lock in a low cost of debt, which has delivered
significant financing outperformance compared with
the industry allowed cost for AMP6.
The total outperformance across these areas has
been shared with customers. We reinvested £350
million during AMP6, including £250 million that has
helped increase our operational resilience and £100
million that we invested this year to target improving
our performance against our most challenging ODIs
for AMP7. We are in a strong position as we move
into the next period.
Well prepared for the 2020–25 period
(AMP7)
Our embedded culture of innovation, including
our pioneering Systems Thinking approach,
alongside the acceleration of investment to deliver
improvements earlier in the five-year period,
underpins the business plan we submitted for AMP7,
helping us to achieve fast-track status.
We made a number of representations to Ofwat
during the year on the draft determinations, received
in April for fast-track companies, and we accepted
the final determination for 2020–25 in January 2020.
We announced that the board has set a group
dividend policy for AMP7 of annual growth by CPIH
inflation, based on expected returns from UUW for
AMP7 performance, including the base dividend
return of 4 per cent (nominal) on the equity portion
of the shadow RCV, together with accumulated
outperformance in prior periods that has been
retained by the group after sharing with customers.
Alongside this, we announced our intention to
continue with our 55–65 per cent target gearing
range and to maintain long-term issuer credit ratings
for UUW of A3 with Moody’s and BBB+ with Standard
& Poor’s (S&P), and a senior unsecured debt rating
for UUW of at least A- with Fitch.
The way Ofwat measures customer satisfaction
is changing in AMP7, with higher outperformance
payments available in this area. SIM will be
replaced by C-MeX measuring household customer
satisfaction and D-MeX measuring developer
satisfaction. This year has been used as a pilot for
C-MeX, and we were pleased that our contactor
scores ranked third of 17 companies for the year, and
first in the third and fourth quarter surveys. While
we expect to see an upward trend in scores for the
industry as a whole, this gives us confidence of being
in a strong position in AMP7.
Acceleration of capital spend in AMP6 proved to
be a successful strategy in delivering early benefit
against ODIs, and we plan to do the same again in
AMP7. Fast-track status gave us early visibility of
our targets – we have robust plans for the common
ODIs in AMP7, with the £100 million reinvestment
of outperformance already showing improvement in
our expected performance, and our bespoke ODIs
offer some unique opportunities. We have awarded
the first tranche of our capital programme at a value
of £300 million with the next tranche of £250 million
to be awarded in the next few months, and we have
continued with the majority of our construction
programme throughout the COVID-19 lockdown.
Read more about
our performance in
2019/20 on pages 78
to 91
Read more about our
plans for 2020–25 on
pages 42 to 45
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£44m
ODI
outperformance
earned over
2015–20
73%
reduction in our
carbon footprint
since 2005/06
Outlook
We can reflect on our performance improvements
across the last five-year price review period with
satisfaction. We have shared £350 million of our
outperformance through additional investment,
providing better service to customers and enhancing
the environment, and we have delivered financial
performance that supports the payment of the final
dividend in August 2020, in line with our AMP6
commitment.
The economic implications of COVID-19 will provide
a challenging backdrop to the AMP7 regulatory
period. United Utilities will continue to prioritise the
implementation of its delivery plans, albeit reviewing
and adapting these plans as necessary, and we fully
intend to play our part in the recovery of the north
west economy. It is, however, too early to predict the
full impact of COVID-19 on inflation, the economy
more generally and on our business, and we will
review our dividend policy for AMP7 as a clearer
picture of the post COVID-19 economic environment
emerges.
Grateful to our stakeholders for
their support
We want to say a huge thank you to our employees
for the dedication and hard work they have
demonstrated this year, to the trade unions for their
incredible support in helping us with the flexibility
to arrive at safe working practices during COVID-19,
and to customers and other stakeholders for their
continued support.
Sir David Higgins
Chairman
Steve Mogford
Chief Executive Officer
The strategic report on pages 14 to 105 was approved at
a meeting of the board on 21 May 2020 and signed on its
behalf by Steve Mogford, Chief Executive Officer.
The low cost of debt we have already locked in
compares favourably with the cost of debt allowance
for embedded debt, and we have historically
demonstrated our ability to raise debt at efficient
levels compared with the industry average,
underpinned by our robust credit quality. We expect
to continue to perform well against the rest of the
industry in financing across AMP7.
Strong environmental, social and
governance (ESG) performance
Behaving in a responsible manner is one of our three
strategic themes and has always been a core part of
how we operate. We have a strong track record of
performance across all the components of ESG.
We have reduced our carbon footprint by 73 per cent
since 2005/06, ahead of the target we set ourselves
for 2020, with 95 per cent of the electricity we use
having zero emissions. We lead the sector in our
approach to catchment management, including our
award-winning sustainable catchment management
programme (SCaMP) and more recently taking this
further with catchment systems thinking (CaST),
which sees us working with the EA and other
stakeholders to deliver the best overall approach to
catchment management in the most efficient way.
In the EA’s annual assessment of performance we
have demonstrated the best overall performance,
achieving industry-leading 4 star status in three of
the last four years and 3 star status this year, with
particularly strong performance in the way we
minimise pollution.
We focus on having a positive impact on society.
We lead the industry in affordability and vulnerability
assistance with a wide range of schemes for
customers, many of which are firsts for the industry.
This is more important than ever as we help those
customers struggling as a result of the economic
impacts of COVID-19. Over 120,000 customers
benefit from the most comprehensive range of
affordability schemes in the industry. We led the
sector in establishing Priority Services, a scheme
designed to provide additional support to customers
with health or financial difficulties during an incident.
We now have over 100,000 customers registered
for this service. We contributed over £35 million to
communities and our Trust Fund during AMP6 and
committed to provide £71 million to help customers
in difficulty over AMP7.
Excellent governance is part of who we are. We were
delighted to secure the Fair Tax Mark in July 2019, and
have attained World Class ranking in the Dow Jones
Sustainability Index for 13 consecutive years. Ofwat
has awarded us top self-assurance status for three
consecutive years – the only company in our sector
to achieve this – reflecting the highest level of trust
and confidence in our transparency and reporting.
We place great value on financial resilience, with the
strongest credit rating in the sector and a pension
position that compares favourably to most, if not all,
companies in the Financial Times Stock Exchange
(FTSE) index. This means the obligations to our past
and current employees are well funded, properly
resourced, and on a sound footing for the future with
minimal reliance on the company and protecting
employees and shareholders from the risk of a large
pension deficit.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020
2019/20 highlights
Operational highlights
Our operational performance transformation, sector-leading
Systems Thinking approach, and innovation culture continue to
deliver sustainable improvements in operational performance.
The best service
to customers
At the lowest
sustainable cost
In a responsible
manner
Our performance
Our operational performance over 2015–20
has delivered a total net wholesale ODI
outperformance payment of £43.9 million.
During the economic and social disruption
caused by the COVID-19 pandemic we have
been focused on customers, continuing
to deliver reliable water and wastewater
services and supporting those facing
financial difficulties. We have the widest
range of financial support schemes, are
now providing tailored support to over
100,000 vulnerable customers signed up
to our Priority Services scheme, and have
made £3.5 million available to help those
facing the most significant problems.
Key performance indicators
Wholesale ODI composite
SIM – qualitative
SIM – quantitative
Our future plans
Our plans for 2020–25 see us delivering
even better service alongside real
reductions in average customer bills, with
stretching targets including a 34 per cent
reduction in water quality contacts and 58
per cent reduction in supply interruptions.
Customers will receive matching benefits
where outperformance leads to dividends
that are much higher than proposed in our
business plan. This is in addition to £71
million voluntary funding committed to our
CommUnity Share scheme over 2020–25 to
provide financial assistance for customers
who need it.
Our performance
Our total expenditure (totex) allowance
for the 2015–20 period was a significant
challenge compared with the costs in
our original business plan. Through a
combination of efficiency in our capital
programme and Systems Thinking, we
closed the gap and outperformed our
allowance on an underlying basis by around
£100 million. Our excellence in treasury
management helped us lock in a low
cost of debt and, on an underlying basis
before an additional bad debt charge for
the expected future impact of COVID-19,
we outperformed our revenue allowance
(including margin) by around £13 million.
Key performance indicators
Totex outperformance
Financing outperformance
Household retail cost to serve
Our future plans
We have improved our efficiency
and reduced our totex needs through
innovation, market testing, and better
challenge of cost needs. Ofwat rated our
business plan one of the most efficient in
the sector, and we enter AMP7 at the run-
rate required to meet this totex.
We have locked in a cost of debt on our
embedded debt that is better than the
industry average, and maintain a robust
capital structure with a target gearing
range of 55–65 per cent, helping us
maintain efficient access to debt capital
markets throughout the economic cycle.
Our performance
We have reduced our carbon footprint 73
per cent since 2005/06, with over 95 per
cent of electricity from renewable sources,
and committed to six pledges to mitigate
climate change. We have been rated 'World
Class' on the Dow Jones Sustainability
Index for 13 consecutive years, and
achieved leading 4 star status for three
of the last four years in the Environment
Agency’s annual assessment. We have
reduced average household bills 10 per
cent in real terms since 2010 with further
reductions anticipated in AMP7, and gave
over £35 million to communities and our
Trust Fund during the 2015–20 period.
Key performance indicators
Annual average leakage
EA performance assessment
Dow Jones Sustainability Index rating
Our future plans
Through responsible and effective pension
risk management, we have secured a self-
sufficient position for our defined benefit
pension scheme, meaning current and
future pensioners are protected without
reliance on the company.
We have stretching AMP7 targets for the
environment, including a 15 per cent reduction
in leakage and 20 per cent reduction in
pollution incidents and our plans include
strategic water resource development to
support the North West and delivery of
a north-south water trading approach to
improve long-term drought resilience.
Read more about our operational
performance on pages 78 to 83
Read more about our operational KPIs
on pages 56 and 57
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United Utilities Group PLC unitedutilities.com/corporate W
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Financial highlights
We delivered a robust set of financial results for the year ended
31 March 2020, with strong underlying performance and maintaining
healthy liquidity and a responsible level of gearing.
Underlying operating profit*
Effective interest rate
Gearing: net debt to RCV
£743.9m
(2019: £684.8m)
3.4%
(2019: 3.3%)
62%
(2019: 61%)
Operating profit*
Liquidity
Dividend per share
£630.3m
(2019: £634.9m)
£1.2bn
(2019: £1.0bn)
42.60p
(2019: 41.28p)
Our performance
We have delivered another year of tight
control over our underlying cost base.
Our performance
Effective debt management continues to
give us a robust financing position.
Underlying operating profit increased by
£59 million, largely reflecting allowed
regulatory revenue changes and lower
infrastructure renewals expenditure, with
higher underlying depreciation largely offset
by a reduction in our remaining underlying
cost base.
Reported operating profit was £114 million
lower than underlying operating profit
mainly due to accelerated depreciation in
relation to bioresources assets and costs
relating to the ongoing COVID-19 pandemic.
Key performance indicators
Underlying operating profit
Underlying earnings per share
Our future plans
We have made great strides in efficiency
in recent years, driving sustainable cost
reductions in both wholesale and retail.
The total expenditure (totex) needs
projected in our business plan were
deemed to be one of the most efficient in
the sector, and we exit the 2015–20 period
at the run-rate needed to meet the required
level of totex for 2020–25.
The COVID-19 pandemic creates some
uncertainty in the economic environment
and practical considerations in the delivery
of our work, but we remain committed and
determined to deliver our plans for the next
period at a continued efficient cost.
Our average underlying interest rate
increased slightly this year from 3.3 per
cent to 3.4 per cent mainly due to higher
RPI inflation on our index-linked debt. We
have £3.5 billion RPI-linked debt at an
average rate of 1.4 per cent real, £0.5 billion
CPI-linked debt at an average rate of 0.2
per cent real, and £3.2 billion nominal debt
at an average rate of 2.9 per cent nominal.
We maintain a robust liquidity position,
with liquidity comfortably covering the £0.7
billion debt that falls due for repayment
across the next 12 months.
Our future plans
The low cost of debt we have already
locked in, due to our industry-leading
treasury management, compares
favourably with Ofwat’s cost of debt
allowance for embedded debt in the 2020–
25 period. The introduction of indexation
on new debt will mean companies neither
benefit nor suffer from outturn rates
being significantly different from the
rates assumed in setting the allowance,
but we have historically demonstrated
our ability to raise debt at efficient levels
compared with the industry average and
outperformed the benchmark index used
for setting the cost of debt. We expect to
continue to perform well against the rest of
the industry in financing across AMP7.
Our performance
We maintain a responsible approach, with
a responsible level of gearing that sits
comfortably within our target range and is
one of the lowest in the sector.
Over this five-year regulatory period we
have improved performance for customers
and the environment, shared £350 million
of our outperformance through additional
investment, and delivered financial
performance that supports the payment of
the final dividend this year, in line with our
AMP6 commitment.
Key performance indicators
Gearing: net debt/RCV
Dividend per share
Total shareholder return
Our future plans
We are maintaining our target gearing
range for AMP7 at 55–65 per cent,
supporting our stable A3 credit rating
with Moody’s, and our low-dependency
pension position means we are no longer
making deficit repair contributions and our
employees and shareholders are protected
from the risk of a large pension deficit.
We announced our AMP7 dividend policy
in January when we accepted the final
determination, targeting annual growth
by CPIH inflation. However, it is too early
to predict the full impacts of COVID-19,
and we will review this policy as a clearer
picture of the post COVID-19 economic
environment emerges.
Read more about our financial KPIs
on pages 58 and 59
Read more about our financial performance
on pages 84 to 91
* A guide to alternative performance measures and a reconciliation between underlying operating
profit and reported operating profit is shown on pages 90 and 91.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020
WHAT MATTERS
Customer service
and operational
performance
We have transformed our performance in
recent years and are well positioned as
we enter AMP7.
AMP6 net ODI
outperformance payout
£43.9m
We delivered another net outperformance
payment against our outcome delivery incentives
(ODIs) in 2019/20, leading to a cumulative
outperformance payment for the five-year period.
This demonstrates our continued commitment to
improving our performance, despite facing some
weather-related challenges this year.
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Progress this year
Our future plans
3rd
Ranked third water and wastewater
company in the shadow year of C-MeX,
with ongoing improvement resulting in us
ranking first overall in the third and fourth
quarter surveys. In AMP7 C-MeX replaces
SIM, in which we dramatically improved
from 13th to third ranking across AMP6.
£350m
We voluntarily reinvested around half of
our AMP6 outperformance, with
£250 million improving our resilience for
the future, and £100 million targeted at
the biggest challenges in our performance
targets for AMP7, enabling us to make a
flying start on further improvements.
Delivering our purpose
Our business model
– Our key resources
– Our external drivers and
relationships
– How we plan for the future
– Our plans for 2020–25
– How we create value for
stakeholders
– How we respond to
challenges
How we measure our
performance
Contributing to the UN SDGs
Our approach to climate change
(TCFD)
Our performance in 2019/20
Our risk management
S172(1) Statement
Non-financial information
statement
Glossary
Time for a tea break
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54
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78
92
102
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Delivering our purpose
Our strategic themes define the way we operate in order
to deliver our purpose and work towards our vision, and
our core values provide the cultural framework within
which we operate.
Our
purpose
To provide great water
and more for the
North West.
Our vision
To be the best UK
water and wastewater
company.
Our strategic themes
The best service to customers
Our core values
At the lowest sustainable cost
In a responsible manner
Customer focused
Customers are at the heart of everything
we do, and we aim to provide a great
and resilient service at the most
efficient cost.
Innovative
We continually look for new ways
to make our services better, safer,
faster and cheaper.
Trustworthy
We make promises knowingly
and keep them, behaving
responsibly towards all of
our stakeholders.
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United Utilities Group PLC unitedutilities.com/corporate Our strategy is broken down into three strategic
themes, which form the framework for what we do.
The best service
to customers
At the lowest
sustainable cost
In a responsible
manner
We put customers at the heart of
everything we do. As well as delivering a
reliable service of great-tasting water and
removing wastewater, we proactively keep
customers informed about any work we are
doing in their area and communicate with
them in ways that meet their individual
needs; for example, we now use ‘push texts’
to send updates and alerts to customers
within a specified location. The best service
to customers means being available when
they need to contact us, always interacting
in a friendly and helpful manner, and
offering tailored support and assistance
for customers when they need it. As well
as these day-to-day interactions, it means
consulting on what matters to them. This
shapes what we do; for example, we
redesigned our bills based on customer
research and feedback.
In order to run a resilient business, it is
important to ensure cost reductions are
sustainable so that we can keep them down
in the long term without compromising
on resilience or the quality of service we
deliver. When we develop our plans and
assess different options for consideration,
we look to minimise the whole-life cost
through a holistic approach. This fits
with the total expenditure (totex) model,
because the most cost-effective option
can vary between traditional operating
expenditure (opex) or capital expenditure
(capex) solutions. Our Systems Thinking
approach helps us look holistically at
all options, and operating our entire
network as a system rather than discrete
assets opens up new avenues that would
otherwise not have been available.
Our purpose drives us to deliver our
services in an environmentally sustainable,
economically beneficial and socially
responsible manner, looking after the
interests of the stakeholders with whom
we interact. This means protecting and
enhancing the natural environment, using
natural solutions where possible and
reducing our carbon footprint and waste.
It means promoting a safe, healthy and
engaging workplace for our employees,
supporting their physical and mental
health. It drives us to support local
communities on issues that matter to them,
and to work with local schools and training
facilities to promote skills for the future.
Above all it means we are open, honest and
transparent in our dealings and in reporting
our performance.
These strategic themes run through everything we do
Our operational performance measurement, key performance indicators, risk assessment
and remuneration policy are all aligned to these three strategic themes.
Read more about our KPIs
on pages 54 to 59
Read more about our risk
management on page 92 to 101
Read more about our operational
performance on pages 78 to 83
Read more about our remuneration
report on page 156 to 185
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Delivering our purpose
Providing great water means appreciating the circular nature of the water cycle
and interacting with it in a responsible way.
Delivering clean water
We depend on water that we collect from
the natural environment in rivers, lakes, open
reservoirs and boreholes, but we need to do a
lot of work before this water is safe and clean
for customers to drink. We maintain covered
reservoirs, water treatment works and thousands
of kilometres of water pipes across the region in
order to collect, treat, store and deliver billions of
litres of reliable, clean drinking water to millions
of customers 24 hours a day.
Removing wastewater
Once the water goes down customers’ drains, or
surface water flows into the sewers, our job begins
again as it requires separation and treatment
before it is clean enough to return to the natural
environment. We maintain wastewater treatment
works and thousands of kilometres of wastewater
pipes in order to collect, transport, treat and return
water to begin the cycle again. We waste nothing,
turning sludge by-product into compost for farmers
and capturing gas to generate renewable energy.
Household retail
We deal with new
connections, metering
and billing for millions of
household customers, and
help vulnerable customers
with our Priority Services and
other assistance schemes.
Cleaning and returning
wastewater
566
wastewater treatment works
7,000
kilometres of rivers
1,300
kilometres of coastline
Removing wastewater
and generating energy
78,000
kilometres of wastewater pipes
196,000
tonnes of sewage sludge every year
37
renewable energy facilities
18
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United Utilities Group PLC unitedutilities.com/corporate
Did you know...
We invested around £4 billion over 2015–20,
including £350 million additional investment of
outperformance earned over the period, and the
final determination for AMP7 sees us investing
around a further £3 billion over 2020–25.
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56,000
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166
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86
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Delivering water
to customers
42,000
kilometres of water pipes
1.8 billion
litres of clean water every day
7.3 million
customers served 24 hours a day
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT
WHAT MATTERS
Improving social
mobility in our region
This is important to help the
north west economy thrive and
offers us a diverse workforce.
We are committed to increasing the diversity of our
workforce and providing career and employment
opportunities to deprived and disadvantaged young
people to help improve social mobility in our region.
Our open employee recruitment practice promotes
a level playing field for people from disadvantaged
backgrounds and circumstances including lowering
qualification criteria to allow individuals to successfully
apply.
This year, we ran two youth programmes. We supported
over 20 young people, who were not in education,
employment and training, to graduate from our six-
week programme. The course is designed to break
down barriers and help the participants become more
employable and work ready. For the first time, we ran a
cohort in one of our targeted communities, Blackburn,
where 76 per cent of the participants went on to secure
paid employment immediately after graduating from the
programme.
This year, 12 of our managers volunteered to mentor a
care leaver student in their second year of study at the
University of Salford. Managers were given specialist
training on how to mentor a care leaver student. Their
role was to provide insight into progression within the
industry, give expert advice and guidance with CVs and
application forms, prepare students for the workplace
and provide mentees with opportunities to enhance their
knowledge and expertise in practical environments.
We recruited university ambassadors from four of
our targeted universities across the North West this
year. The ambassadors support us in promoting our
employment opportunities to under-represented
groups within their universities. We have recruited the
ambassadors based on their own diversity, and have
worked with them to promote our summer placements,
12-month internships and graduate opportunities.
Social mobility is fundamental for a fair society and for
regional economic prosperity. As a result of our activity
to recruit people from disadvantaged backgrounds and
circumstances into the business, we have converted
over 60 people into paid employment, providing a
pathway out of poverty and ultimately increasing an
individual’s social mobility. It is estimated the social
value of this is in the region of £9 million.
Generating value for:
Communities
Customers
Employees
Environment
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We serve the North
West of England
We are committed to
understanding the key factors
that make our region unique.
Economic factors
We are building resilience to continue serving our
growing population and support jobs and the tourism
industry.
›
›
›
7.3 million population expected to grow
significantly in the next 25 years
22,700(1) jobs actively supported by our work,
with over 5,000 direct employees
Tourism relied on by Lake District, Liverpool
and coastal area
Social factors
We are leading the sector on affordability and
vulnerability.
›
›
›
41 per cent of the most deprived areas in the
country
47 per cent of households have less than £100
savings to cope with unexpected bills
18 per cent of households are affected by
water poverty, 20 per cent higher than the
national average
Environmental factors
We have a large coastline, protected rural areas
and dense urban areas, all of which create different
demands.
›
›
›
30 per cent of land is National Park or Area of
Outstanding Natural Beauty or Sites of Special
Scientific Interest
29 designated bathing waters
830mm higher than average UK rainfall each year
Carlisle
Workington
Whitehaven
Barrow-in-Furness
Kendal
Lancaster
Blackpool
Preston
Blackburn
Burnley
Bolton
Manchester
Liverpool
Warrington
Stockport
Chester
Crewe
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Stock Code: UU.
Annual Report and Financial Statements for the year ended 31 March 2020
21
(1) based on our 2020 to 2025 business plan
STRATEGIC REPORT Delivering our purpose
Providing ‘more’ means creating value for our stakeholders.
We actively engage with our different stakeholder groups
in order to understand what matters most to them.
Identifying who our stakeholders are and
engaging to understand what matters to
them enables us to provide more for the
North West and create long-term value
for all.
We do not operate in isolation and it is not for us
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. We
value the diverse perspectives that a broad range
of stakeholders, representing different and often
competing interests, can bring to our decision-
making.
Understanding what matters to stakeholders will
only be achieved by building strong, constructive
relationships and engaging regularly. These
relationships 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 102. This is important to
building and maintaining trust. The board’s corporate
responsibility committee meets four times a year,
with stakeholder engagement as one of its standing
agenda items, and the chair of the independent
customer challenge group (YourVoice) regularly
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. Our analysis of what matters most to
stakeholders, and how these issues affect our ability
to create long-term value, is set out in our material
issues matrix on page 27.
There are nine key stakeholder groups that influence
our planning and activities:
Employees
Employees
Environment
Environment
Environment
c e w h a t we do and benefi t fro
m th
e v
Customers
Customers
n
e
f u
I n
Communities
Communities
Customers
Who are our
stakeholders?
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Shareholders
Investors
Media
Shareholders
Media
In
f uence what we do
Suppliers
Media
Employees
Politicians
Communities
Regulators
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United Utilities Group PLC unitedutilities.com/corporate
T
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I
WHAT MATTERS
Engaging our
stakeholders
Keeping Cumbrian
communities informed of
pipeline plans.
From 2022 we will need to stop abstracting
water from Ennerdale Water and the River Ehen
in West Cumbria to avoid the risk of damage to
the protected species that rely on these water
sources.
To achieve this, we’re linking customers in West
Cumbria to our regional water network by building
a major new pipeline from Thirlmere.
So far, we’ve completed the longest-ever tunnel
of its type in the UK and completed over a million
man hours with no lost time accidents while
making sure we work carefully to protect the Lake
District National Park.
Putting stakeholders at the heart of this project
has resulted in a sector-leading approach to
stakeholder management for major water
infrastructure in England.
We have worked closely with regulators,
stakeholders, local communities and contractors,
and this constant dialogue has ensured the
highest standard of environmental protection and
transparency.
This continuous engagement has helped minimise
the impact that construction on this scale
inevitably brings to local communities.
Working in partnership with local organisations
such as the Cumbria Community Foundation,
we established two funds of just over £1 million
in total to award financial grants to projects that
provide social and environmental benefits to the
local area.
These funds will leave a lasting legacy long after
the pipeline is finished, benefiting people and
communities across Cumbria for years to come.
Generating value for:
Customers
Environment
Communities
Customers
Media
Investors
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Stock Code: UU.
Annual Report and Financial Statements for the year ended 31 March 2020
23
Delivering our purpose
Our approach to engagement extends across all
of our stakeholders.
Communities
Customers
Communities
Customers
Customers
Employees
Environment
Employees
Why we engage
Our work puts us at the heart of local
communities: places where customers
and employees live and work. 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 what matters most to
communities we can develop solutions in
partnership.
Why we engage
Serving over seven million people and
200,000 businesses in the North West
means it’s important we get our services
right. But to deliver a great service in a way
that customers value, we need to listen and
engage with them in ways that are relevant.
We know customer expectations are ever
changing, and often more demanding, so we
constantly look for ways to engage with, and
understand, evolving customer expectations
of us as their water company.
Why we engage
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. We
know that the more engaged, skilled and
motivated our people are, the better service
they provide to our customers, at a lesser
cost. In addition to our own employees there
are over 13,000 as part of our supply chain
in the North West who are essential to our
performance.
How we engage
When communities come together,
whether that is around a particular issue
or location, they can often make powerful
representations to the company. Much
of this engagement is face to face,
although social media and other digital
communication is on the increase with
online communities such as Watertalk, our
online customer research panel.
We engage through facilitated workshops
and community partnerships, such as those
involving communities affected by the
construction of the West Cumbria pipeline.
Issues raised by communities can present
opportunities to improve what we do to
help others, while some can be complex
and difficult to handle, especially where
competing interests between different
stakeholder groups are present, and require
time and effort to work through.
Read more about our stakeholder
engagement in West Cumbria on page 23
How we engage
We are always interested to hear what
customers think about us and devote
considerable time asking for, receiving
and analysing customer feedback. We
get this through everyday interactions,
online customer panels and 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 Priority Services and our
Instagram account. Our business plan for
2020–25 was shaped by unprecedented
levels of customer engagement.
The independent customer challenge group,
YourVoice, aims to ensure customers are at
the heart of our business planning, and the
Chair regularly attends our board meetings.
YourVoice provides challenge and critical
support on the delivery of commitments as
well as contributing to the shape of future
business plans.
How we engage
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 and value
opportunities to learn new skills, and we
maintain an open and honest dialogue
between trade unions and the business.
Line managers play a vital role in supporting
employees, with regular one-to-one
meetings, and our engagement survey
now achieves UK high-performing norms.
Our Employee Voice panel consists of
24 members from across the company
providing a means by which employee
perspectives are heard by the board. We
have several employee-led networks such as
LGBT and multi-cultural networks, an early
careers board and we encourage employees
to share innovative ideas via many forums.
Read more about improving social mobility
in our region on page 20
Top three material issues
Land management and access
Community investment
Trust, transparency and legitimacy
Top three material issues
Customer service and operational
performance
Affordability and vulnerability
Leakage and water efficiency
Top three material issues
Health, safety and wellbeing
Diverse and skilled workforce
Employee relations
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United Utilities Group PLC unitedutilities.com/corporate Read more about our approach to
materiality on page 27
Environment
Shareholders
Environment
Investors
Suppliers
Media
Why we engage
We rely on the environment and play a key
role in protecting and enhancing it across the
North West. As the environment has no voice
of its own, we engage with interested groups
such as environmental regulators, non-
governmental organisations, campaigners
and local communities to find the best ways
to tackle environmental issues, like climate
change and reducing plastic pollution.
We work with other water companies to
collectively make a difference.
Why we engage
It is important that shareholders have
confidence in the company and how
it is managed, given their investment
in our business. We have over 70,000
shareholders, from large institutions who
manage the pensions of millions of people
to private individuals who are looking for a
return on their hard-earned money. So that
we can finance improvements to our assets
and services, we maintain relationships with
a diverse range of banks.
Why we engage
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 work with
around 2,500 suppliers to deliver our
services, and the availability of goods
and services in the market influences our
strategy and how we operate.
How we engage
The environment is one of our key
resources so it is important for the
sustainability of our business that we
protect and enhance it; see page 32.
We conduct facilitated workshops with
environmental stakeholders to understand
their priorities and have undertaken a large
number of customer research projects.
Environmental stakeholders tell us that
working together is the best way to ensure
resilience in the natural environment,
especially where climate change is
concerned. 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.
How we engage
Engagement with shareholders gives us a
broad insight into their priorities, which is
taken into account in our decision-making
and our strategic direction. By providing
updates on strategy and performance, we
can assist them in their understanding and
decision-making.
Through our investor relations programme,
we actively engage with shareholders and
analysts who write research reports on our
company and industry. Regular engagement
activities are supplemented by ad hoc events,
such as the capital markets day held this year
on the business plan determination for the
2020–25 period. We supply information to
several investor-led indices on environmental,
social and governance matters, such as the
Dow Jones Sustainability Index.
Read more about working with the
environment to find better solutions
on page 51
Read more about how we measure our
performance as a responsible business
on pages 62 to 63
How we engage
We rely on suppliers to deliver our services.
We engage suppliers through workshops,
including targeted sessions on innovation,
and one-to-one feedback. Like-minded
suppliers sign up to our sustainable
supply chain charter and support the
commitments set out within it, such as the
commitment on human rights.
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.
Top three material issues
Top three material issues
Resilience
Environmental impacts
Climate change
Customer service and operational
performance
Political and regulatory environment
Financial risk management
Top three material issues
North west regional economy
Responsible supply chain
Human rights
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Delivering our purpose
Media
Shareholders
Media
Politicians
Employees
Communities
Regulators
Why we engage
It is through both traditional media and
social media platforms that many of our
stakeholders receive their information
about us and our activities. The media is
influenced by the issues that matter to those
stakeholders as well as influencing them
through what it reports.
Why we engage
Politicians influence the long-term national
water strategy and environmental priorities,
matters that affect how all businesses
operate, and champion issues raised by their
constituents.
Why we engage
Through proactive, constructive
engagement with economic, quality and
environmental regulators, we agree to
deliver commitments over specified time
frames.
How we engage
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.
How we engage
We undertake direct engagement with
national and local government, as well
as elected representatives and devolved
administrations on topics of public interest,
helping 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 across the different political
parties.
Read more about our regulatory
environment on page 35
How we engage
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
Top three material issues
Top three material issues
Political and regulatory environment
Political and regulatory environment
Political and regulatory environment
Leakage and water efficiency
Leakage and water efficiency
Resilience
Social media
Trust, transparency and legitimacy
Trust, transparency and legitimacy
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United Utilities Group PLC unitedutilities.com/corporate Read more about how
we deliver value to our
stakeholders on pages
46 and 47
Read about how
the board considers
stakeholders in its
decision-making in
our S172 (1) Statement
on page 102
Managing our material issues
Our approach to materiality
Understanding what matters most to our stakeholders
is fundamental to being a purpose-driven
organisation. 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, investors
and employees) and there can be external value
(for customers, communities, suppliers and the
environment). Value may be financial or non-financial.
Our assessment of the level of interest to stakeholders
is based on a balance of views obtained from
customers, investors, 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 United Utilities'
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.
Material issues matrix
We consolidated feedback from our various
stakeholder groups, as detailed above, which
resulted in 26 material issues. These issues are
impacted by factors that may be external, internal
or both; for example, affordability and vulnerability
affect customers due to external social and
economic factors, and the support services we
provide for those customers 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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13
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21
22
18
19
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16
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23
24
25
26
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Lower
Higher
Effect on our ability to create value
Based on the potential effect on our ability to create value over the short, medium and long term.
Value can be created for United Utilities, investors, regulators, employees, the public, and/or the
environment. Value can be financial and non-financial.
External factors
5
7
12
15
17
21
24
26
Political and regulatory environment
Climate change
Cyber security
North west regional economy
Natural resources
Social media
Land management and access
Human rights
8
2
9
11
Internal factors
Resilience
Financial risk management
Corporate governance and business conduct
Innovation
Data security
Energy use
Responsible supply chain
Health, safety and wellbeing
Employee relations
Community investment
18
16
14
19
22
25
Both external and internal factors
1
3
4
6
10
13
20
23
Trust, transparency and legitimacy
Customer service and operational performance
Leakage and water efficiency
Affordability and vulnerability
Sewer flooding
Environmental impacts
Competitive markets
Diverse and skilled workforce
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT
Our business model
Our key resources
Natural resources
We rely on natural resources to supply water and take back
wastewater after treatment, as well as to generate renewable
energy. We own and manage large areas of land.
Assets
We invest significantly to maintain and enhance our assets
and build long-term resilience, and we use telemetry across
the network to monitor and control many assets remotely.
People
We rely on skilled and engaged employees and suppliers to
deliver our services, and must ensure skills are maintained
across the generations through training and development.
Financing
Financing allows us to preserve intergenerational equity for
customers while funding long-term capital investment, and
we maintain access to a range of markets to seek good value.
To provide
great water
and more for
the North
West
Read more about our key resources on pages 32 and 33
Our strategy and core values
Our strategy sets out how we
deliver our purpose, and is broken
down into three strategic themes,
which govern everything we do.
Our core values – to be customer-
focused, innovative and trustworthy
– provide the cultural framework
within which we operate.
Read more about our strategy
and core values on page 16
Our planning horizons
We undertake long, medium, and
short-term planning, taking into
account our external drivers and
what matters to stakeholders.
Read more about our approach
to planning on page 36
The best service to
customers
At the lowest
sustainable cost
In a responsible
manner
Our business is very long
term by nature and we must
build resilience to ensure we
can continue to provide this
essential service.
Medium-term planning reflects our five-year
regulatory periods, and aims to help us work
towards our long-term plans.
We set annual targets but retain flexibility in these short-term
targets to respond to challenges and meet our five-year goals
in the most effective and efficient way possible.
1 year
5 years
25+ years
Our external drivers and relationships
Natural environment
We must be resilient to changes such
as climate change and population
growth, and ensure our impact on the
natural environment is positive.
Technology and innovation
New technology and innovations create
opportunities for improvements in
service and efficiency, but can also
create risks such as cyber security.
Regulatory environment
Regulators’ priorities drive our five-year
commitments, and we must actively
engage to influence and prepare for
future market reforms in the industry.
Stakeholders
Our work and the huge areas of land
we manage impacts a wide variety of
stakeholders and we consult them to
help develop and execute our plans.
Economic environment
The economy impacts our financing,
through market rate movements such
as interest rates and inflation, and our
customers’ ability to pay their bills.
Political environment
This includes regional and national
politicians as well as policy makers,
and we must understand the key policy
issues affecting our industry.
Read more about external drivers and relationships on pages 34 and 35
28
United Utilities Group PLC
unitedutilities.com/corporate
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What we do
Our core activities are to deliver essential
water and wastewater services for
household and business customers across
the North West of England.
We maintain and operate thousands
of kilometres of pipes and hundreds of
treatment works, as well as renewable
energy facilities that use our land and
bioresources from wastewater treatment
to generate clean electricity to help
power our operations.
Read more about our water
cycle on pages 18 and 19
The
water cycle
How we do it
In order to deliver these essential
services in the most effective way,
we take an integrated approach
that considers what is most material
to our stakeholders and to our
ability to create value; our risk
management; our commitment
to environmental, social and
governance matters; and our
pioneering Systems Thinking
approach to operating our network
and assets.
Read more about our approach
on pages 4 and 5
Our prioritisation
of issues
We engage with
our stakeholders
to understand their
priorities and balance
their different and
often conflicting views
Our risk
management
We manage a wide
variety of risks to
enable us to focus on
delivering a sustainable
and resilient service for
the long-term
Our commitment
to ESG matters
We operate in an
environmentally and
socially conscious
manner and uphold the
highest standards of
corporate governance
Systems Thinking
We operate our
network as a system
rather than discrete
assets, and we have a
backbone of sensors
that enable remote
monitoring and control
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The value we generate
Communities
Customers
Employees
Environment
Shareholders
Communities
We build partnerships and work with
schools in our region to develop skills
and help people get back to work.
We encourage employee volunteering
programmes to help create better places,
stronger communities, and accomplish
more to address local issues together.
How we measure this
›
KPI – DJSI rating
› Other metrics including charitable
donations, community funding, and
employee volunteering
Employees
We focus on attracting, developing
and retaining a diverse workforce, and
ensuring we look after their health,
safety and wellbeing. We run graduate
and apprenticeship programmes, and
encourage younger students to pursue
science, technology, engineering and
mathematics careers, to help ensure the
next generation of skilled employees.
How we measure this
›
Engagement score, diversity and gender
pay, training and development, accident
frequency, and pensions
Investors
Many of our investors are pension funds
and charities and the income we provide
is relied on by millions. We manage risk
prudently and provide an appropriate
return, investing in our assets for growth
and resilience. Regulatory incentives help
align shareholder value with what matters
to customers and the environment.
Customers
Environment
Media
KPI – Totex outperformance
KPI – Financing outperformance
How we measure this
›
›
›
›
KPI – Household retail cost to serve
Financial metrics including RoRE and TSR
T
R
O
P
E
R
C
G
E
T
A
R
T
S
I
Customers
We put customers at the heart of everything
we do. Through innovation and efficiency
we provide a continually improving service
at an efficient low cost, and we support
thousands of vulnerable customers through
a wide range of assistance schemes.
KPI – SIM qualitative
KPI – Wholesale ODI composite
How we measure this
›
›
›
› Other metrics including complaints,
digital services, assistance schemes,
and water efficiency savings
KPI – SIM quantitative
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.
KPI – Leakage
How we measure this
›
›
›
› Other metrics including carbon
KPI – DJSI rating
KPI – EA performance assessment
footprint, waste to beneficial use,
and natural capital value added
Suppliers
We invest in the North West’s infrastructure
and generate jobs, skills and income across
the region through our capital programme
that supports the supply chain and our local
economy. We act fairly and transparently
with all our suppliers and are a signatory
to the Prompt Payment Code.
How we measure this
› Metrics such as average time taken
to pay invoices, and proportion of
suppliers paid on time
Read more about how we create value for
our stakeholders on pages 46 and 47
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Stock Code: UU.
Annual Report and Financial Statements for the year ended 31 March 2020
30
Our purpose is to
provide great water
and more for
the North West
Open the page to see how we
deliver our purpose and create
value for all our stakeholders
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Our business model
Our key resources
We rely on natural sources of water such
as reservoirs, rivers and boreholes, from
which abstraction licences permit us to
take water in a safe and sustainable way
to be treated and supplied to customers.
We rely on natural watercourses to take
wastewater back into the environment after
extensive cleaning. We generate renewable
energy from the sun and wind, and extract
bioresources from wastewater that we
break down into biogas (which is used to
generate renewable energy) and biosolids
(which are treated to provide a high-quality
fertiliser for farmers).
Coping with severe dry periods requires
action in relation to supply (ensuring
we have resilient water resources and
infrastructure to move water efficiently
around the region) and demand
(encouraging and supporting customers to
use water more efficiently). In periods of
heavy rainfall we need to deal with excess
surface water drainage and minimise the
risk of sewer flooding, pollution and spills.
How we manage this
key resource
Much of the water we abstract originates
on land before running off into the bodies
of water. We own and manage large areas
of this land, much of which is managed by
tenant farmers, or in partnership with other
organisations such as the RSPB and Wildlife
Trusts, and we focus on ensuring it is well
managed to improve water quality and help
protect habitats and species that live there.
Our Systems Thinking approach is central
to how we manage water supply. We
have an integrated supply zone covering
most of our region, our West-East Link
Main allows us to transfer water between
Manchester and Liverpool, and where there
is a potential shortfall we can bring more
supplies online to meet demand. 46 per
cent of households in our region now have
water meters installed, and we encourage
customers to save water by raising
awareness, sharing tips, and providing free
water-saving devices.
Traditional interventions to flooding, such
as storage tanks and enlarging sewers, are
costly and subject to space constraints.
We are innovating with new sustainable
drainage solutions by working with
partners to transform hard grey areas into
living planted places. We use integrated
catchment solutions, working with others
to improve the lakes, rivers and coastal
waters in our region, and often using
the natural environment as part of the
solution. We manage our own woodland in
a sustainable way to protect water quality,
conservation, access, recreation and
timber.
Our activities produce various wastes,
including sludges, which we manage in a
sustainable way with less than 2 per cent
going to landfill. We use recycled products
where practical, and are working to reduce
our use of plastics and raw materials to
minimise our environmental impact.
Our people are the face of our company
and essential in delivering our purpose. We
believe the most effective decision-making
comes from a diverse range of people
who feel encouraged to share their views,
and that having a skilled, engaged and
motivated team of employees, suppliers
and contractors is fundamental to the
performance we deliver.
Rewarding employees well has been
shown to enhance quality of work,
increase employee retention, and reduce
absenteeism, as well as providing societal
benefits. Employee retention helps ensure
efficient and effective training and higher
levels of performance.
promote employees on the basis of merit.
Read more about diversity on pages 133 to
135. We are committed to protecting the
health, safety and wellbeing of our people,
and have been awarded the workplace
wellbeing charter.
We measure employee engagement
through an annual survey, and regularly
achieve results 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 164.
How we manage this
key resource
We support thousands of jobs in the North
West, including graduate and apprenticeship
programmes, helping to secure a legacy for
the future in our region. We are committed
to paying our suppliers on time and are a
signatory to the Prompt Payment Code, and
we provide our employees with competitive
wages and benefits, an attractive pension
offering, and the opportunity to join the
employee healthcare scheme and our share
incentive plan.
We provide comprehensive training and
development opportunities, including
digital skills to help with our Systems
Thinking approach and enable remote
working where practical, which has
become more important this year with
restrictions during the COVID-19 pandemic.
We promote diversity and equal
opportunity to drive a comprehensive
and balanced skill set, and we recruit and
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32
Natural resources People United Utilities Group PLC unitedutilities.com/corporate Our network assets and treatment works
are essential to delivering our services
for customers and protecting public
health, and our energy assets enable us
to generate renewable energy, which
helps reduce costs and minimise our
environmental impact. It is important we
have the right systems and procedures in
place to monitor and control our assets
efficiently and effectively.
Many of our assets are very long term in
nature, such as our impounding reservoirs
that can last hundreds of years. We must
invest to maintain these assets in good
condition so they can continue to provide
for customers in the long term. We need
to make improvements to ensure we can
meet the needs of a growing population,
and increasingly high quality standards and
tighter environmental consents driven by
our quality and environmental regulators.
How we manage this
key resource
Since privatisation the significant
investment we have made in our assets has
provided substantial benefits to customers,
including reduced supply interruptions,
reduced sewer flooding incidents, and
improved water quality, and we expect
to continue with a substantial investment
programme for the foreseeable future as
current environmental legislation requires
continued investment. We plan for the
long term to help us understand where and
when we need to invest in our assets, and
we monitor the condition, performance
and health of our assets.
We manage our assets in a holistic way that
seeks to minimise whole life costs, and we
embrace new technology and innovation,
which is at the heart of our Systems
Thinking approach. This helps us deliver
efficient total expenditure (totex) without
compromising on quality of service or
long-term resilience, saving future
operating costs and reducing future
customer bills.
We saw in AMP6 the benefit of
accelerating our investment to deliver
improvements sooner, and we plan to take
the same approach in AMP7, bringing
forward some of our capital spend
earlier in the five-year period. During the
COVID-19 pandemic, we have halted non-
essential work but we are continuing with
construction projects where we are able to
do so safely for our employees and those
with whom they are in contact.
Our assets and infrastructure projects can
affect people who live nearby. We consult
with these communities in the planning
stage and work hard to minimise odours
from our wastewater treatment works and
other impacts.
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 investment in
building, maintaining and improving our
assets, networks and services.
It is important that we are able to raise
finance when needed to preserve adequate
liquidity, and that we manage financial
risks such as our exposure to movements
in interest rates and inflation, to ensure we
maintain long-term financial resilience.
We aim to avoid a concentration of
refinancing in any one year, and fund
long term where possible. Our debt
portfolio has a very long average life, and
we monitor liquidity forecasts with a policy
of having resources available to cover the
next 15–24 months of projected cash flows
to ensure forward funding needs are met.
We have clear and transparent hedging
policies covering credit, liquidity, interest
rate, inflation and currency risk, and these
are aligned with the regulatory model.
Read more about these policies on pages
232 to 239
Our prudent approach to managing
financial risks is one of our competitive
advantages, as set out on page 6.
How we manage this
key resource
We maintain a robust capital structure,
with a responsible mix of equity and debt
financing. We monitor our performance
against required thresholds for key credit
ratios to help us maintain strong and stable
investment grade credit ratings. This gives
us efficient access to debt capital markets
across the economic cycle.
We maintain relationships with a diverse
range of banks and access to a broad and
diverse range of sources of financing in
a number of markets, across which we
seek the best relative value when issuing
new debt. We periodically refresh our
EMTN programme to enable efficient debt
issuance under pre-agreed contractual
terms, and the board delegates authority
to the CFO, allowing us to respond quickly
to attractive financing opportunities. This
helps us to consistently raise efficient
financing at a cost cheaper than many of
our peers.
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Assets Financing Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our business model
Our external drivers and relationships
The way we work is impacted by a number of
factors external to our business that we must
consider and manage.
Natural environment
The natural environment is constantly changing, and
we must adapt and prepare for future impacts such
as climate change and population growth. We can
help mitigate climate change by minimising our own
emissions and environmental impact. 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.
Stakeholders
The nature of our work means we are at the heart of
communities in our region, and have an impact on a
large variety of stakeholders. We own and manage
huge areas of land in areas of natural beauty that are
valued by locals and tourists alike. It is important,
therefore, that we give consideration to what matters
to those stakeholders, and we build relationships
and consult with them in developing and executing
our plans.
Technology and innovation
New technologies and innovative ideas present
opportunities for us to make things faster, better,
safer and cheaper. These can come from a huge
variety of places – across different industries and
different countries as well as ideas from within our
business. 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. As well as opportunities, technology
can create risks, and this is why our approach to
cyber security is so important.
Economic environment
We are impacted by market rate movements, such as
interest rates and inflation, but we seek to manage
these prudently to reduce risk as far as practical.
As well as these direct impacts on the company,
the economic climate impacts our customers and
their ability to pay their bills. We operate in an area
with high levels of extreme deprivation, so helping
vulnerable customers is particularly important for us.
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. We engage actively and
regularly, both on progress with our ongoing plans,
and on consultations for future reforms where we
offer our views and influence where we can.
Political environment
Political decisions have the potential to significantly
impact on our operations. As a responsible business,
we ensure that we abide by the directions set by
government, and stay flexible to adapt according
to political and policy developments. Therefore,
we engage closely with politicians and other
policymakers from the government and other parties
on a constituency, regional and national level,
to understand the development of policy which
will affect our business, and to communicate the
economic, social and environmental value that United
Utilities delivers in the North West, and the UK
as a whole.
Stakeholders
One of the key
external drivers is
what matters to our
stakeholders, as
our plans and the
way we operate are
influenced by their
views.
Read more about
these material
issues on page 27
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United Utilities Group PLC unitedutilities.com/corporate To provide great water and more for the North West we must
first consider our economic, quality and environmental
regulation, and the particular characteristics of our region.
Our industry and market
Customers in England and Wales are served by
11 licensed water and wastewater companies and
smaller companies providing water-only services.
Our regulated entity, United Utilities Water
Limited, is the second largest, based on the size
of our Regulatory Capital Value (RCV). We serve
over seven million people, with over three million
household customers making up around two-thirds
of our revenue, and over 200,000 businesses. As
a monopoly provider of essential services, we are
regulated by various bodies as set out below.
Our economic regulator (Ofwat) sets the price,
service and incentive package that companies
must deliver in five-year periods, known as Asset
Management Plan periods (AMPs). These packages
are based on Ofwat’s methodology and priorities,
and consideration and scrutiny of company business
plans. We must therefore engage constructively
with Ofwat on its future priorities and methodology
consultations, and submit high-quality plans to help
ensure we receive a determination that targets the
best outcomes for us to continue creating value for
customers and all our stakeholders, and effectively
incentivises us to continue improving performance.
To ensure our plan is robust and balanced, we
consult with customers and other stakeholders
(including quality and environmental regulators) and
factor in long-term planning and resilience needs.
This was the final year of AMP6 and we have
accepted the final determination for AMP7,
covering the 2020–25 period.
Read more about our plans for 2020–25 on pages 42 to 45
Our focus is now on delivering and trying to
outperform our final determination through:
›
›
Spending less than our total expenditure (totex)
allowance through innovation and efficiency;
Beating the Outcome Delivery Incentive (ODI)
targets for operational performance;
› Delivering higher customer satisfaction than the
other companies in our industry; and
›
Raising debt finance at a cost below the industry
allowed cost of debt.
Since privatisation the water industry has invested
a significant amount, contributing to improvements
in public health and environmental standards, better
quality of services, and superior quality drinking
water. In its final determinations for AMP7, Ofwat
has allowed a further £51 billion across the industry
to deliver even more improvements.
Our regulators assess our comparative operating
performance against the other water and wastewater
companies in England and Wales, with the Drinking
Water Inspectorate (DWI) assessing performance
in water, the Environment Agency (EA) assessing
performance in wastewater, and Ofwat assessing
customer satisfaction. The latter two, which
were in place at the start of AMP6, are included
in our operational key performance indicators
(KPIs). Our vision is to be the best UK water and
wastewater company, so we regularly benchmark
our performance against these peers. As well as
assessment against our water peers, we benchmark
our customer service performance against other
leading service providers in our region.
11
licensed water
and wastewater
companies
2nd
largest water
and wastewater
company in
England and Wales
£51
billion
allowance across
the industry to
deliver further
improvements in
the next five years
E c o n omic regulation
Our regulators
We are subject to regulation of our price
and performance by economic, quality and
environmental regulators, as shown in the diagram.
These bodies exist to help protect the interests
of customers and the environment, but they can
have competing interests. For example, in agreeing
environmental improvements and over what
timeframe these will be delivered, we must consider
how much it will cost and the need to protect
customers from bill shocks. Balancing these interests
requires open and continuous dialogue.
The regulatory framework can change significantly
in the long term and we have seen substantial
tightening of laws and regulations since privatisation.
While much is outside our direct control, maintaining
good relationships enables us to engage positively
with regulators to influence future policy, aiming to
achieve the best outcome for all our stakeholders.
Read more about our stakeholder engagement on
pages 22 to 27
n
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t
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t
i
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a
u
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E
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT
Our business model
How we plan for the future
Our approach and short, medium and long-term planning
horizons help us continue fulfilling our purpose in a
sustainable and resilient way.
Our approach to planning
We take an integrated approach to everything we
do. To help us create and prioritise our plans, we
consider:
› What the material issues are, to stakeholders and
to our ability to create value;
› Our assessment of principal risks and
uncertainties;
› Our environmental, social and governance (ESG)
commitments; and
› How our plans will fit with our Systems Thinking
approach.
We undertake planning for long, medium and short-
term horizons.
Long-term (25+ years) planning helps us identify
what we need to do to address challenges and
opportunities that may arise, so we can ensure
resilience in order to continue to fulfil our purpose.
These long-term plans influence our medium-term
(five years) planning, which sets out how we will
deliver the commitments of our final determination
for each regulatory period, as well as our non-
regulatory activities, such as renewable energy.
Short-term (one year) planning enables us to monitor
and measure progress against our five-year plans and
regulatory targets. We retain flexibility in our one-
year plans to meet our five-year targets in the most
effective and efficient way as circumstances change.
Our planning horizons
Our business is very long term by
nature and we must build resilience
to ensure we can continue to
provide this essential service.
Medium-term planning reflects our five-year regulatory periods,
and aims to help us work towards our long-term plans.
We set annual targets but retain flexibility in these short-term targets to
respond to challenges and meet our five-year goals in the most effective and
efficient way possible.
1 year
5 years
25+ years
Materiality and
risk assessment
Our plans take into
account the issues
that have been
identified as material,
and our assessment
of principal risks and
uncertainties.
Read more about
our material issues
on page 27 and our
risk management
on pages 92 to 101
Monitoring
performance
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 measure
our performance
on pages 54 to 63
2022
2025
2025+
We will extend our
integrated water
supply network into
West Cumbria
We aim to lift 66,500
more customers out
of water poverty
through financial
assistance
We will work to
enable future national
water trading
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United Utilities Group PLC unitedutilities.com/corporate 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.
There is a section of our website dealing 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 at unitedutilities.com/
corporate/about-us/our-future-plans
This involves looking at a lot of current and
predictive data from various sources, such as
economic forecasts, expectations for population
growth in certain areas, climate and weather
predictions, legal and regulatory consultations
and changes, as well as the age and condition
of our assets, and keeping track of innovations
and technological advancements. We review this
information as part of our long-term planning and
our risk management process.
Over the next 25+ years we have identified many
challenges and opportunities that we are likely to be
faced with, including:
Population growth;
The UK’s exit from the European Union;
› Climate change;
›
›
›
› More stringent environmental regulations;
› Developments in technology; and
› Combining affordable bills with a modern,
A more open, competitive market;
responsive service.
This includes our 25-year Water Resources
Management Plan (WRMP) covering the 2020–45
period, which was developed and published in 2019
following consultation with stakeholders, and our
drought plan, which was published in 2018 with an
amendment appendix in 2018/19. 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, and the actions we will take to
manage the risk of a drought.
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.
2030
2045
2045
We will work with
others to achieve
‘Blue Flag’ beaches
along our coastline
We will install additional
water meters to achieve
coverage of around 75
per cent of households
We aim to reduce
leakage by over
40 per cent
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our APRs are
published in July
each year at
unitedutilities.com/
corporate/about-us/
performance
Information
on companies’
regulatory
performance
can be found at
discoverwater.co.uk
Our business model
How we plan for the future
Our five-year plans centre around regulatory targets. We set
one-year targets but maintain flexibility in these to adapt to
meet challenges that arise in the year.
Medium-term planning (5 years)
The majority of the group’s activities sit within our
regulated water and wastewater business, therefore
our medium-term planning predominantly sets out
how we will deliver against the final determination
(FD) we receive from Ofwat for each five-year period.
Short-term planning (1 year)
Short-term planning helps us work towards our
medium and long-term goals and provides us with
measurable targets so that we can continually monitor
and assess our progress, which helps us ensure the
long-term resilience and sustainability of our business.
It is important that our ambitions align with those
of our regulator, therefore we carefully evaluate all
consultation and methodology publications from
Ofwat and engage with them to put forward our
views and help ensure a balanced approach that
creates value for all stakeholders.
The business plans we submit for each five-year
period are designed to help us work towards our
long-term plans, build and maintain resilience, and
ultimately fulfil our purpose. We engage in extensive
research to ensure the plans we put forward are
robust and balanced, targeting the best overall
outcomes for all our stakeholders.
Following scrutiny and challenge from Ofwat we
receive the FD, which sets the price (in terms of total
expenditure and customer bills), level of service,
and incentive package that we must deliver over the
five-year period, and an allowed return we can earn
(expressed as a percentage of Regulatory Capital
Value). When we receive the FD, we refine our
company business plan for any changes, such as in
allowed expenditure or performance level targets,
and we must decide whether to accept the FD.
The improvements we delivered in operational
performance, efficiency, bad debts and cash
collection over the 2015–20 period helped us put
forward efficient totex proposals in our business
plan for 2020–25, and this was reflected in Ofwat’s
assessment in which we were awarded fast-track
status and given one of the lowest cost challenges
in the sector. This gave us time to get a flying start
on our plans for 2020–25. We accepted the FD in
January 2020 and are well prepared for this next
period, having invested £100 million over 2019/20
to accelerate planned improvements and achieve a
flying start.
Read more about how we've invested to deliver early
improvement on page 45
Our strategy of delivering the best service to
customers at the lowest sustainable cost in a
responsible manner helps us create value for our
stakeholders by delivering or outperforming the FD,
as set out on page 17. Since 2015 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, on
an annual and cumulative basis for each five-year
period.
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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,
designed to help deliver further improvements in
service delivery and efficiency, and to help move
us towards achievement of our five-year goals.
Performance against these annual targets determines
annual bonuses for executive directors and employees
right through the organisation, who are remunerated
against the same bonus targets as the executive team.
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 remunerated through long-term
incentive plans that assess three-year performance,
measured during the current period through total
shareholder return, sustainable dividends and customer
service.
See details of the 2019/20 annual bonus and vested
long-term incentive plans for our executive directors
on pages 166 to 167
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.
The challenges presented by COVID-19 and its
impacts in the latter part of this financial year
and continuing into 2020/21 are a clear example
of why this flexibility is crucial. We enacted our
robust contingency plans, enabling us to quickly
and efficiently move thousands of our people to
home-working and introduce additional safeguarding
measures for those that remained on sites or in
the field, while maintaining reliable water and
wastewater services that are critical for public health
at this time.
Read more about our response to the challenges of
COVID-19 on page 83
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Securing resilience in
our largest aqueduct
It took over ten years of planning
and preparations to be able to
drain and inspect the aqueduct.
The Haweswater Aqueduct (HA) is the most significant
supply of potable water to Manchester and critical to other
supply areas. Completed in the 1950s, the aqueduct is
capable of transporting 500 million litres of potable water,
by gravity alone, to customers in our region. Having served
us well for over half a century, we needed to get inside it and
carry out inspections of the structure.
It took over ten years of planning and preparations to keep
customers supplied while the HA was temporarily drained
for inspection and essential repairs. More than 400 workers
delivering 45 separate projects ensured the network of
supporting treatment works could take the strain while the
HA was offline. This included building a brand new pipeline
(the WestEast Link Main) to allow us to move water from
North Wales into Manchester if needed. We started pre-
construction work on this pipeline in 2006, and by 2010 it
was operational. This was a crucial step in allowing us to
drain and shut down the HA for the first time in its history in
2013 and again in 2016.
The inspections revealed a number of issues that could
potentially lead to service failures in the future. We
undertook an extensive risk analysis and mitigated those
risks where we could by carrying out localised repairs, but it
was clear that significant further investment is needed. We
took the decision to immediately address one section of the
existing aqueduct that was in more urgent need of attention.
Construction is well underway and this section will be
commissioned at the start of AMP7.
We established the Haweswater Aqueduct Resilience
Programme (HARP), which will be one of the largest
infrastructure projects in the UK, to manage the replacement
of six separate tunnel sections of the aqueduct, totalling
50 kilometres in length and up to 3.5 metres in diameter.
This will be delivered through a new delivery model, Direct
Procurement for Customers (DPC), and this is the largest
scheme being undertaken using this approach during AMP7
by any water company. Under this model we will appoint
a third party to design, construct and finance the scheme
under a long-term contract. We anticipate that this will allow
more innovation from the market to deliver even better value
to customers for this critical project.
Generating value for:
Customers
Shareholders
Media
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Our business model
How we plan for the future
Read more about our
approach to climate
change on pages 66
to 77
In its initial assessment of our business
plan for 2020–25, Ofwat commended our
approach to resilience as sector leading.
Our approach to resilience
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 allow 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. 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.
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
climate change and population growth forecasts.
Our 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 (UKCP09) at the time of
creating the plan); 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,
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which outline our holistic, integrated and partnership
approach to a range of short and long-term
challenges, including a changing climate.
Our plans for 2020–25 include engaging with
suppliers on a Direct Procurement for Customers
(DPC) project to address our biggest operational
asset risk: the Haweswater Aqueduct.
Read more about our Haweswater Aqueduct Resilience
Programme on page 39
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 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.
Read more about how we're building skills resilience
on page 41
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 6
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Building
skills resilience
We train and develop
our employees as well as
recruiting for the future
through active graduate and
apprentice programmes.
Every year we offer dozens of the North West’s
brightest talents a place on one of our sought-after
training schemes.
Investing in new talent is essential to ensure we
have the skills and leaders we need for the future.
We’re proud of our contribution to the wider
economic health of our region. We’re responsible
for around 1 per cent of all jobs in the North
West and every year help to launch successful
careers with our award-winning apprenticeship
and graduate schemes and our scheme for young
people who are not in education, employment or
training.
As part of our skills agenda, we deliver tens
of thousands of training days for our staff and
support hundreds more in further education.
This year, we added some new roles to our
apprenticeship scheme and promoted the
programme more widely with LearnLive.
We delivered two separate youth programmes
in partnership with the Department for Work
and Pensions, and our supply chain, to targeted
communities in the North West.
We’ve supported more than 20 young people, who
are not in education, employment or training, to
become work ready. Our scheme provides under-
represented communities with opportunities,
aims to break down existing barriers and support
participants into the workplace.
This year, we hosted five mentoring circles
sessions in partnership with our recruitment
provider Rullion. The sessions were targeted
at unemployed 18–24 year olds who are black,
Asian and minority ethnic (BAME), or living with
disabilities or long-term health conditions.
Our graduate recruits have made an invaluable
contribution to our COVID-19 incident team.
Generating value for:
Communities
Customers
Customers
Employees
Shareholders
Environment
Media
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Our business model
Our plans for 2020–25
What we plan
to deliver in AMP7
“ We have transformed our performance and
exit the current period as a high-performing,
responsible company – well prepared for
the next period. One of the benefits of
being fast-tracked was the ability to begin
implementation of our delivery plans and make
a fying start. We are confident we will rise to
the challenges ahead and continue to create
long-term value for all of our stakeholders.”
Steve Mogford
Chief Executive Officer
21 May 2020
Our business plan was shaped by what
matters to stakeholders
In preparing our business plan, we undertook
our most extensive ever engagement campaign,
reaching 1.7 million people and asking over 140,000
customers and stakeholders across our region for
their views on what matters most to them.
The feedback was very clear – stakeholders
wanted lower bills, improved services (including
extra support for those customers in vulnerable
circumstances), and a commitment to continue to
protect the environment in the region. This feedback
was fundamental in shaping our proposals.
Read more about
our future plans at
unitedutilities.com/
corporate/about-us/
our-future-plans/
We have made a fying start to our plans
for the 2020–25 period (AMP7)
Fast-track status allowed us to start early with our
delivery plans. We have tendered and selected our
two delivery partners for the period and awarded
contracts for the first tranche of our capital
programme, getting us ahead of the curve and giving
our partners time to start the design stage.
We reinvested £350 million of outperformance
earned over the 2015–20 period, with £250 million
targeted to increase our resilience, and £100
million invested in 2019/20 to give us a flying
start to the 2020–25 period. We have used this to
improve performance sooner in areas with the most
challenging outcome delivery incentive (ODI) targets
such as leakage, supply interruptions and sewer
flooding. This means we will start the period in a
stronger position.
We will deliver further improvements
and share our success
We are targeting stretching service levels for
customers and the environment, and aim to support
even greater numbers of vulnerable customers, while
average bills are predicted to fall in real terms.
We are committed to sharing success with
customers, who will receive matching benefits if
outperformance leads to dividends that are much
higher than proposed in our business plan, consistent
with our responsible approach over the last ten
years, during which we have voluntarily shared over
£600 million of our delivered outperformance.
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Delivering a better service
and real bill reductions
Key deliverables:
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13.8 per cent real reduction in average customer
bills over 2020–25 in the final determination
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Targeting 34 per cent reduction in customer
contacts about water quality and 58 per cent
reduction in supply interruptions
Our 46 performance commitments contain a broad
spectrum of areas in which we are targeting further
improvements for customers and the environment in
2020–25. We aim to reduce the number of customer
contacts about taste and smell and the number of
supply interruptions, all at an efficient cost with
the help of our Systems Thinking approach and
innovation culture. As a result, the average customer
bill is expected to reduce in real terms over the
period, on top of the 10 per cent real bill reductions
we have already delivered since 2010.
Link to strategic themes:
Helping vulnerable
customers
Key deliverables:
› Committed £71 million voluntary funding to
provide financial assistance for customers
›
Targeting to help 66,500 customers out of
water poverty through financial assistance
› One of the first water companies to achieve BSI
accreditation for Priority Services
In its initial assessment Ofwat commended our plan
for including “ambitious, innovative and sector-
leading proposals to make customers’ bills affordable
and on providing support for vulnerable customers”.
This is particularly important in our region, which has
high levels of extreme deprivation. Our planned bill
reductions will help customers struggling financially,
and on top of this we are aiming to lift thousands
out of water poverty through financial assistance,
and have committed £71 million voluntary funding
into our CommUnity Share scheme to provide help
for customers who need it. We lead the sector with
over 100,000 customers now registered for Priority
Services, and this year we became one of the first
water companies to achieve British Standards
Institution (BSI) accreditation for this, in line with the
common ODI target for 2020–25.
Link to strategic themes:
Strategic themes
The best service
to customers
At the lowest
sustainable cost
In a responsible
manner
Driving further environmental
improvements
Key deliverables:
›
Targeting 20 per cent reduction in pollution and
15 per cent reduction in leakage
› Committed to targets for improving water
quality in the natural environment, and a unique
commitment to enhance natural capital value
Our targets for 2020–25 include stretching
performance improvements for the environment,
with significant reductions in pollution and leakage.
We have committed to targets for improving water
and air quality, reducing the risk of sewer flooding,
and protecting the environment from the impact of
growth and new development. Our unique natural
capital ODI incentivises us to create added value for
stakeholders by using non-conventional catchment
solutions to deliver water quality improvements
through natural capital approaches and assets.
Link to strategic theme:
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STRATEGIC REPORT
Our business model
Our plans for 2020–25
Opportunities represented by
our ODIs
Key deliverables:
› More balance in our ODI outperformance
payment/penalty ranges compared with the
2015–20 period
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Range of 1.5 per cent reward to 1.8 per cent
penalty (as a percentage of regulated equity)
set out in the final determination
£100 million flying start investment improves
our most likely performance
We have 46 performance commitments for the 2020–
25 period, including seven that are comparable with
the same targets set across the industry, five common
commitments that have company-specific targets, 27
bespoke commitments with financial incentives, and
seven that are purely reputational. The likely range
of possible outcomes presented by Ofwat in the final
determination equates to a total over the 2020–25
period of between £337 million outperformance
payment and £387 million penalty on ODIs, including
C-MeX and D-MeX. However, our projected
performance has been improved by the reinvestment of
£100 million of earned outperformance during AMP6,
targeted at improving performance against our three
most challenging targets – sewer flooding, leakage and
supply interruptions. Outperformance payment and/
or penalties against ODIs in AMP7 will be applied as an
adjustment to revenues on a two-year lag basis.
Link to strategic theme:
Sharing our success with
customers
Key deliverables:
› Customers will receive matching benefits where
outperformance leads to dividends that are
much higher than proposed in our business plan
› Consistent with our responsible approach over
the last ten years
Over the last two regulatory periods (2010–15 and
2015–20) we have voluntarily shared over £600 million
with customers from the outperformance we have
delivered, as part of being a responsible business.
For the 2020–25 period we will continue to share our
success with customers, and have committed to this
upfront. If dividends are much higher than proposed in
our business plan, through us earning and distributing
additional outperformance over the period, customers
will receive matching benefits through us making
further contributions to the CommUnity Share scheme
(in addition to the £71 million voluntary contribution
we have already committed to). We will consult
with customers and shareholders, overseen by the
independent customer challenge group, YourVoice, to
determine the best use for any additional funding.
Link to strategic theme:
Strategic themes
The best service
to customers
At the lowest
sustainable cost
In a responsible
manner
Efficient total expenditure
(totex) proposals
Key deliverables:
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› We exit this year at the required run rate for our
£5.8 billion net totex allowance
totex allowance for the 2020–25 period
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50:50 customer cost sharing rates for out/
under-performance on totex
We submitted efficient totex proposals in our
business plan, as reflected in Ofwat’s assessment
in which we were given one of the lowest cost
challenges in the sector. The sustainable savings
we have delivered in the 2015–20 period give us
confidence in our ability to deliver, and we exit the
current period at the required totex run rate. In the
areas where out/under-performance against our
totex allowance is shared with customers, our fast-
track status means we benefit from more favourable
cost-sharing rates than many of our peers. Our totex
allowance includes £57 million for preparatory work
needed to progress with our Haweswater Aqueduct
Resilience Programme through Direct Procurement
for Customers and £44 million for strategic water
resource development.
Read more about our Haweswater Aqueduct Resilience
Programme on page 39
Link to strategic theme:
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Investing to deliver
early improvement
£100 million of earned
outperformance has been
reinvested to give us a flying
start to our AMP7 targets.
One of the benefits of being fast-tracked was that we
could immediately start building programmes of work to
deliver service improvements. We used the £100 million
outperformance reinvestment to give us a flying start
against our most challenging performance targets in the
2020–25 period.
Supply interruptions – we have seen dramatic
improvements in our performance in recent years due in
no small part to our investment in a fleet of alternative
supply vehicles (which enable us to inject water directly
into the network rather than customers experiencing a
loss of supply), and our use of technology and artificial
intelligence (with sensors across our systems and
predictive analytics to spot potential issues before
they impact customers). We have used our flying start
money to invest in around 700 sensors on our pressure
monitoring valves, enabling us to control pressure
remotely from our Integrated Control Centre.
Leakage reduction is critical to the long-term resilience
of our water supply. We have met our leakage targets
for many years but these get tougher in AMP7 as this
is a more prominent area of focus for customers and
other stakeholders, particularly with the likely impact of
climate change on water availability. Meeting these new
targets requires us to look at conventional interventions
alongside our continued use of Systems Thinking. Using
our flying start investment we have deployed around
44,000 of a planned 100,000 acoustic loggers across our
system in order to identify leakage that would otherwise
be very hard to find.
Sewer flooding is another area of focus. Around 80 per
cent of sewer flooding in the North West is caused by
blockages, and around 80 per cent of those blockages
are caused by customers flushing things they should
not. Our strategy for reducing blockages will drive
improvements in sewer flooding. We have developed
integrated drainage area studies to understand the
connections in our network, and models that can run
live scenarios so we can understand where there are
potential problems in our network and ensure we are
doing the right maintenance at the right time. We have
used our flying start investment to conduct over 1,000
kilometres of sewer surveys and used latest modelling
technologies to prioritise the repair and re-lining of
sewers.
Generating value for:
Customers
Environment
Shareholders
Media
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Our business model
How we create value for stakeholders
Communities
Customers
Communities
Short-term
› We look after beautiful landscapes
and beaches and open our land
to the public, which supports the
regional tourism industry and offers
communities 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.
Customers
Customers
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.
› Managing land responsibly means we
leave the north west environment in a
better condition for future generations.
› 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
Promoting our support services and
campaign messages places us at the
heart of communities and builds trust
with hard to reach groups.
By working with community partners
we can share resources, access new
funding opportunities and achieve
more together.
Providing access to our land enables
communities to enjoy the physical and
mental wellbeing benefits that green
spaces can bring.
Short-term
› We focus on delivering a reliable
Long-term
› Our water and wastewater services
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.
make a major contribution to the long-
term health and wellbeing of customers
in the North West.
›
Through long-term financing and
the regulatory framework, we are
delivering multi-million pound
infrastructure projects to improve
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.
Employees
Environment
Employees
Link to strategic themes
We will continue to invest in our
assets and people over the next five
years to meet stretching targets
customers support.
By achieving sustainable cost
reductions we can provide an
efficient service, keeping bills low and
maintaining good value for money.
We provide assistance schemes to
those who need it most and provide
practical advice on how to manage
water in the home.
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
›
Investing in the development of
current, and future employees, means
we will have a workforce with the right
skills for the future.
› Health, safety and wellbeing extends to
mental as well as physical health. We
promote awareness of stress and other
mental health issues, promoting an all-
round healthy lifestyle in the long term
which, in turn, reduces the burden on
health care services.
› We provide pension offerings that
support employees in later life.
Read more about how we're maintaining a
secure pension position for employees
on page 89
Link to strategic themes
Improving our performance creates
employee pride in a job well done,
enhancing employee satisfaction and
a desire to do more.
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, ensuring
we send everyone home each day safe
and well.
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United Utilities Group PLC unitedutilities.com/corporate Strategic themes
The best service to customers
At the lowest sustainable cost
In a responsible manner
Environment
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.
› Our investment in renewable energy
generation is reducing our carbon
footprint and contribution to climate
change.
› We have invested in new infrastructure,
such as our West Cumbria project,
to allow us to transfer water around
the region more efficiently to avoid
depletion of individual water sources.
Shareholders
Investors
Long-term
›
By promoting campaigns to educate
the public and younger generations
on water usage, it helps protect this
valuable resource and reduce usage
now and for years to come.
› We innovate and invest in new
technologies to solve environmental
challenges for future generations.
› 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 plan far ahead to ensure our
activities and investment enhance the
long-term resilience of the environment.
Link to strategic themes
Many customers care about the
environment so providing the best
service to customers involves
protecting the places they live in and
love.
Many ways we protect the
environment 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.
Short-term
›
Since many of our shareholders
are pension funds, charities and
employees, the income we provide
through dividends benefits millions of
people every year.
› We are committed to high ethical
Long-term
› Our shareholders have placed their
money into our business as a long-
term investment and we provide
an appropriate return through a
combination of short-term dividend
income and long-term growth.
standards of business conduct, strong
corporate governance and acting with
integrity so shareholders can have
confidence in the way we do business.
› We plan far into the future and invest
in our infrastructure to ensure the
sustainability of the business and the
services we provide.
› We maintain a high level of quality and
transparency, enabling shareholders
to have trust and confidence in what
we report. To illustrate this, we were
delighted to secure the Fair Tax Mark
in July 2019.
› 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 incentives are
greater with better performance for
customers, so aligning shareholder
return with improving customer
service.
By reducing costs in a sustainable way
through innovation and efficiency,
we can target outperformance of
our allowed expenditure without
compromising operational
performance.
Our strong corporate governance,
prudent risk management, and clear
and transparent reporting create a
lower risk investment and build trust.
Suppliers
Media
Short-term
› We spend significant amounts of
money 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.
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.
›
By investing in our infrastructure we are
helping to keep the economy flowing.
We generate thousands of jobs through
our capital programme and provide
income for workers in the region.
› 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 helps us deliver the best service
to customers.
Developing innovations with
suppliers, and ensuring they deliver
goods and services efficiently,
contributes to a sustainably low cost
for customers.
Working with responsible suppliers
who share our sustainability
objectives helps us achieve more in
tackling environmental and social
issues.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our business model
How we respond to challenges
In an increasingly digital and instant
economy, customers expect more from
services now than ever before. This
includes the water sector, with high
expectations not just for the reliability of
services but the water we supply and the
assets we operate. Many of our assets are
ageing compared to other utilities. In order
to meet the expectations of customers and
regulators, it is critical that we combine
modern technology into our networks and
management of customer service. Quick
response to issues raised by stakeholders,
often through digital means such as social
media, is part of this growing expectation.
Ensuring a reliable service in the face of a
growing population, changing climate and
increasing expectations of service requires
integrated long-term thinking and targeting
investment to ensure both short and
longer-term reliability.
The importance of how we respond to
this challenge can be seen in some of the
material issues identified:
Resilience
Innovation
Customer service
and operational
performance
How we respond
Our culture of innovation and Systems
Thinking approach drive us to adapt our
assets and the way we operate to use
modern technology and the best new ways
of working. Examples include sensors
across our network that allow remote
monitoring and control from our integrated
control centre, and our fleet of alternative
supply vehicles (ASVs) that can inject
treated water directly into supply while we
undertake repairs. We have a substantially
enhanced social media presence to
respond quickly to stakeholders.
During the year we needed to react quickly
to repair a pipeline damaged by severe
flooding during Storm Ciara, which was
further impacted by the remote location
of the pipeline and adverse weather
conditions. Co-ordinating the incident
through our Integrated Control Centre we
were able to mobilise our fleet of ASVs to
keep customers supplied during the repair
and ensure regular communications with
our customers.
Read more about responding to extreme
weather on page 49
The availability of regional water supply
was also impacted during the year by
restricted production capacity at our
Oswestry water treatment works due to
ongoing work trialling a potential solution
to a water discolouration issue.
Link to strategic themes
We are installing over 100,000
sensors across our networks to
proactively manage issues and
sort them before customers are
impacted.
We balance our capital and
maintenance expenditure to ensure
affordability and reliability over the
short, medium and long term.
We are targeting a 15 per cent
reduction in leakage over the
2020–25 period to further protect
the reliability of service and water
resources.
Our future plans
We have a number of challenging targets
for the 2020–25 period that will help
improve the reliability of our service,
including helping and encouraging
customers to use less water. Further
deployment of Systems Thinking will
deliver further improvements in the
reliability of services.
It is vital to our operational resilience that
we have plans in place to manage future
challenges and maintain the provision of
our essential services to customers. Our
assets must be prepared to cope with
a growing population, and comply with
increasingly challenging environmental
constraints in areas such as water
abstraction and wastewater treatment
levels. We must build increased resilience
to cope with the anticipated impacts
of a changing climate in the long term,
including improvements to flood defences.
Balancing the risk of service interruptions
against investment for the future is a
constant challenge for water companies.
Understanding what matters to stakeholders
to plan our investment programme requires
in-depth engagement and analysis,
especially in the context of longer-term
challenges that span more than five years.
The importance of how we respond to
this challenge can be seen in some of the
material issues identified:
Resilience
Customer service
and operational
performance
How we respond
It can take many years and require substantial
investment to increase the resilience of
existing assets or build new ones, which is
why our long-term planning is so important.
We have detailed plans in place to anticipate
future challenges and understand what we
need to do to address these, and we build
these needs into our business plans for each
five-year regulatory period to ensure we
can agree the funding we need to act at the
right time. We have invested an additional
£250 million over 2015–20, from the
outperformance we earned over the period,
to improve our operational resilience further.
Read more about our approach to resilience
on page 40
We monitor the performance and health
of our assets, with the help of sensors
across the network, and this allows us to
be proactive. For example, by monitoring
pressure in the water network we can
spot issues and fix them before we get a
burst, saving costs and sparing customers
the impact. Where possible, we design
our assets to work in tandem with the
natural environment, which provides more
sustainable and efficient solutions, such
as our innovative catchment management
approach. Read more on page 51.
Link to strategic themes
Our Systems Thinking approach
is improving the reliability and
resilience of our assets, reducing
unplanned service interruptions,
and enabling us to be more
proactive.
By monitoring the health and
performance of our assets we can
ensure we invest at the right time
in solutions that offer the lowest
whole life cost.
We invest in training centres to
build technical skills and promote
future skills through our education
programmes.
Our future plans
Systems Thinking provides opportunities
for us to increase our resilience further. Our
Haweswater Aqueduct Resilience Project
(HARP) will be progressed through direct
procurement for customers in AMP7 and
AMP8, addressing our biggest operational
risk in a critical pipeline that transports
water from the Lake District to Greater
Manchester.
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WHAT MATTERS
Responding to
extreme weather
Keeping the taps flowing
during Storm Ciara.
Hundreds of employees worked around the clock
in treacherous conditions to keep customer taps
flowing as Storm Ciara swept across the UK on
Sunday 9 February 2020.
In Cumbria, the heavy rain and strong winds
damaged a 100 metre section of water main
where it crossed a river near Shap. The damage
jeopardised water supplies to approximately 8,000
properties in the Eden Valley area.
The Cumbria Local Resilience Forum co-ordinated
a response including prioritising snow clearance
on the A6 to allow access by our water-on-wheels
tankers.
In all, around 500 employees pulled out all the
stops so that by 6pm on Wednesday 12 February
the water main was repaired. It was then fully
recharged with 90 million litres of water and all
customer taps were turned back on by Friday 14
February.
Contingency planning for the storm began three
days before it hit the UK to make sure we were
well prepared. This included:
> More than 40 water-on-wheels tankers to help
maintain supply;
> 144,000 litres of bottled water made available
from ten manned water stations. More than
60,000 bottles were handed out to customers;
> 347 deliveries of bottled water to Priority
Services customers;
> A special helpline for farmers struggling to make
sure livestock had access to water. Around 100
farmers were assisted with tankers or bowsers;
and
> 17,000 proactive messages, 5,500 social media
interactions and 16 broadcast interviews to keep
the community updated.
Feedback from the community after the incident
was overwhelmingly positive, including a letter
of gratitude from a local Parish Council and even
an offer of discounted fish and chips for United
Utilities employees.
Generating value for:
Customers
Communities
Customers
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our business model
How we respond to challenges
The UK government’s current goal is
to be the first generation to leave the
environment in a better state than we
found it. Water management is a key part
of this and our industry has a leading role
to play. However, the cost of solutions has
an impact on customer bills and so we
need to balance this goal with the need to
maintain affordability and avoid bill shocks.
Environmental regulators set stringent
consents for our activities to ensure the
environment is protected. We take these
obligations seriously and work hard to
maintain compliance. This requires striking
a balance with environmental impacts,
such as the use of natural resources and
emissions of greenhouse gases.
Our region is fortunate to have some of
England’s finest countryside and wildlife,
much of it legally protected being
designated as National Parks and Sites of
Special Scientific Interest. There is growing
realisation of the physical and mental health
benefits that access to green space has for
people and communities.
The importance of how we respond to
this challenge can be seen in some of the
material issues identified:
Natural
resources
Land management
and access
Environmental
impacts
How we respond
The EA assesses water companies’
performance across a basket of measures,
and we were the joint best performing
company over the last five years.
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.
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
by agreeing to spread some of the spend
required by legislation over several years.
Our catchment land is open to the public
with millions of visits a year, and we work
with partners to improve the quality of
rivers and bathing waters in our region,
providing access to the recreational
benefits of the natural environment and
boosting the local tourism industry.
Link to strategic themes
Our consultation tells us customers
value the natural environment in
our region and want us to protect
and enhance it, while maintaining
affordable bills.
We use pioneering catchment
projects that combine multiple
partners and access to other
sources of funding to achieve more
together for less.
We provide free public access to
our land, many of which are in areas
of outstanding beauty, with over
nine million visits every year.
Our future plans
We are expanding our catchment systems
thinking approach to more catchments
to create further value for the natural
environment, and we have started some
of our AMP7 environmental improvement
plans early this year.
Read more about our catchment systems
thinking approach on page 51
The biggest anticipated impact on our
natural environment comes from climate
change. We must plan well into the future
to understand what changes we are likely to
experience in our region as a result of climate
change, and continually adapt to meet the
risks and opportunities this presents.
The main opportunity is the potential
for water sharing, as our region typically
receives more rainfall than the comparatively
drier south.
The main risks from climate change 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.
We need to ensure we have access to
resilient water resources, reduce leakage,
and encourage less water use in the future
to protect this critical resource. We need
to ensure our infrastructure can cope with
increased surface water to reduce the risk of
flooding.
The importance of how we respond to
this challenge can be seen in some of the
material issues identified:
Environmental
impacts
Leekage and
water efficiency
How we respond
Our response to climate change risk
involves mitigation (minimising our
greenhouse gas emissions) and adaptation
(ensuring our services are resilient to a
changing climate). Where practical, we
generate renewable energy on our sites
through solar panels, wind turbines, and
the use of bioresources at wastewater
treatment works, helping to reduce our
emissions. We have reduced our carbon
footprint by 73 per cent since 2005/06.
During the year we have committed to
six pledges to help us achieve significant
further reductions in emissions.
Read more about our approach to climate
change on page 66 to 77
We have detailed plans that set out how
we will adapt to meet the challenges of
climate change, and we are targeting a 15
per cent reduction in leakage over AMP7.
We work with third parties to encourage
sustainable drainage solutions to help cope
with surface water in periods of heavy
rainfall, and we encourage customers to
use less water.
Link to strategic themes
We help customers to use less
water, with advice and free water
saving gadgets, saving them money
as well as protecting this resource.
Our renewable energy generation
helps to reduce our reliance on
purchasing energy and therefore
save costs.
We have reduced our carbon
footprint significantly in recent
years and are committed to further
reduce our emissions.
Our future plans
We have a detailed 25-year Water
Resources Management Plan, Drought
Plan, and two adaptation reports published
in 2011 and 2015 that set out how we aim
to adapt to meet the challenges of climate
change. Read more at unitedutilities.com/
corporate/about-us/our-future-plans
Climate
change
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Challenge: Protecting and enhancing the natural environment Challenge: Adapting to a changing climate United Utilities Group PLC unitedutilities.com/corporate T
R
O
P
E
R
C
G
E
T
A
R
T
S
I
WHAT MATTERS
Catchment
systems thinking
Working with the
environment to find better
solutions.
We’re moving away from purely asset-based
solutions towards a more integrated approach
where man-made and natural assets work
together more effectively to improve the water
environment.
This catchment systems thinking includes blue-
green infrastructure solutions and looks at a
catchment as a wider system where our assets
are only a part of the whole. By understanding
all the risks and benefits we can consider how
to combine asset and catchment solutions for
better outcomes, aligning the needs of multiple
stakeholders and pooling investment.
As part of this innovative approach we’re working
with leading academic institutions, customers and
stakeholders to design and deliver sustainable
treatment solutions, alongside interventions, in 26
catchments across our region.
One of the best ways to deliver this integrated
catchment strategy is by using markets which
engage multiple stakeholders, aligning their
interests and allowing them to trade catchment
interventions effectively. We are adopting the use
of alternative market mechanisms and innovative
business models to align our interests with others
in the catchments and incentivise different ways
to deliver improvements. Through this combined
approach, we are exploring the concept of
‘blended finance’ (which offers both financial and
non-financial returns) to deliver environmental
schemes that go beyond statutory requirements
because they seek added natural capital value.
We are piloting this model in the River Elms
catchment with representation from a wider group
of stakeholders including Green Alliance, 3 Keel,
Natural England, Nestlé and First Milk. This pilot
is assisting Defra’s development of its catchment
system operator concept.
Our natural capital performance commitment will
ensure the natural environment is protected and
improved in the way we deliver our services.
Generating value for:
Customers
Environment
Shareholders
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Stock Code: UU.
Annual Report and Financial Statements for the year ended 31 March 2020
51
Our business model
How we respond to challenges
The socio-economic situation in the UK is
still very challenging and water poverty
is an important issue. The COVID-19
lockdown and slow down of the economy
will only make this more difficult for many
customers. How we respond will be crucial
to securing and maintaining customers’
trust and confidence in the sector in the
years ahead.
Our region suffers high levels of extreme
deprivation. 18 per cent of households
in the North West are affected by
water poverty, higher than the national
average, and research indicates that
many customers who are behind on water
charges are behind on other bills and many
have a pay-day loan. Our stakeholders are
interested in how we provide support for
customers in vulnerable circumstances
other than financial distress as well, such as
disability, first language not being English,
or temporary vulnerability brought on by
illness or a life event.
The importance of how we respond to
this challenge can be seen in some of the
material issues identified:
How we respond
We have a leading approach to affordability
and vulnerability, with the sector’s widest
range of assistance schemes. We are
helping over 120,000 customers through
our affordability schemes, more than
double the commitment we made at the
start of the 2015–20 period, and through
our Payment Matching Plus scheme 15,000
customers became water debt free this
year. We offer flexible payment plans
and the option for customers to take a
payment break if they experience a change
in circumstances and we have widened
eligibility for our ‘Back on Track’ social tariff
for an initial interim period to 2020/21 and
2021/22.
We led the sector in establishing our
Priority Services scheme, with dedicated
teams providing additional support to
customers with health, mental or financial
difficulties during an incident. This scheme
is now accredited by the British Standards
Institute (BSI), and over 100,000 customers
are now registered for this support with
more joining every day.
Affordability and
vulnerability
NW regional
economy
Read more about our affordability and
vulnerability support on page 79
Link to strategic themes
We have a wide range of schemes
that help customers struggling with
affordability concerns and other
vulnerable circumstances.
Through initiatives such as
our affordability schemes, our
underlying household bad debt
expense has halved in the last five
years.
For three years, we have brought
together regional organisations
through our Affordability Summit
and launched the ‘North West
Hardship Hub’.
Our future plans
Through bill reductions and financial
support we will help move over 300,000
customers out of water poverty by 2025,
extend our Priority Services offering to over
210,000 customers, and improve the quality
and scale of the support we provide.
Strong relationships are based on trust.
Being open, honest and transparent is
key to building and maintaining trust and
legitimacy. As well as reporting openly
this means setting out commitments and
delivering on them. Our stakeholders want
to know that we are treating suppliers fairly,
safeguarding human rights, and protecting
personal information from the risk of cyber-
crime.
The increasing pace of globalisation means
many customers feel disconnected from
a lot of large businesses. This has led to
growing calls for companies to demonstrate
how they are contributing to society as a
whole and operating in the public interest.
In recent years the UK water sector has
faced challenges to its legitimacy, amplified
by some specific issues at a small number
of companies. Consequently, trust has
been eroded and questions raised about
the ownership structure of the sector, and
Ofwat has called for further transparency
and disclosure around board leadership and
decision-making processes.
The importance of how we respond to
this challenge can be seen in some of the
material issues identified:
Trust,
transparency
and legitimacy
Corporate
governance
and business
conduct
52
How we respond
We have open and transparent reporting
around all of our equity and debt financing
arrangements, do not use offshore
financing vehicles, and our reporting is
trusted by Ofwat who has awarded us ‘self-
assurance’ status three years in a row.
Our human rights policy can be found on
our website, with links to other related
policies including our modern slavery
policy and sustainable supply chain charter.
Read more at unitedutilities.com/
corporate/responsibility/our-approach/
human-rights
Cyber-crime has been on the increase and,
as the holder of customer information, is
a threat we take very seriously. Read more
about how we manage this risk on page 99.
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 fully comply with rules on
reporting payments to suppliers.
Link to strategic themes
We engage continually with
customers to understand their
expectations in relation to service
and behaviour, through things like
our quarterly Brand Tracker.
We maintain a stable A3 credit
rating with Moody’s for United
Utilities Water Limited, which helps
us maintain efficient access to the
debt capital markets.
We obtained the Fair Tax Mark and
retained self-assurance in Ofwat’s
Company Monitoring Framework
assessment for three years.
Our future plans
Operating in a responsible manner is a key
driver of trust with our stakeholders. Our
continued compliance with the corporate
governance requirements of a listed
company helps ensure the transparency of
our reporting and behaviour.
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The availability of skilled engineers depends
on economic and social conditions, and we
need to ensure an appropriate pipeline of
skills in younger generations too, especially in
the areas of science, technology, engineering
and mathematics (STEM). As the world
becomes increasingly digital, we need to
have the right people and skills to manage
our business in the modern world.
We believe the most resilient and effective
companies have a diverse, engaged and
motivated workforce, who can bring their
different ideas and perspectives to help us
find solutions.
Long-term financial resilience starts with a
robust balance sheet and management of
financial risks. Companies have to be aware
of their own financial situation and make sure
that they understand the financial resilience
of others such as suppliers and former
employees.
The importance of how we respond to this
challenge can be seen in some of the material
issues identified, such as resilience, and
financial risk management.
Affordability and
vulnerability
NW regional
economy
How we respond
We build skills resilience through training
and development, including digital
skills. We have graduate and apprentice
schemes, and ambassadors that work
with schools and education institutes
to encourage the younger generation
to pursue STEM careers. We maintain
good relationships with employees and
trade unions, to ensure an engaged and
motivated workforce, and we continually
strive to build diversity across all types of
role and all levels within our business. We
have a Gender Equality Network that helps
by providing role models, mentoring and
opportunities. Women are represented at
all levels of our company, and a third of
our combined board and executive team
is female, as can be seen below. Further
information on diversity can be found on
pages 133 to 135.
As a public listed company, we consistently
adhere to the highest levels of governance,
accountability and assurance. We have a
strong and robust balance sheet, a secure
pension position, and take a prudent
approach to financial risk management, as
detailed on page 6.
Group board(1)
Executive team(2)
Senior managers(3)
Wider employees(4)
6
3
8
4
28
5
3,571
1,880
Link to strategic themes
In its initial assessment of our
business plan for 2020–25, Ofwat
commended our approach to
resilience as sector leading and
setting the standard for others to
follow.
Our robust capital structure and
relatively low gearing provide long-
term financial resilience and future
financial flexibility.
We have award winning training
centres, the only ones in the water
industry approved to run Ofsted
accredited programmes.
Our future plans
Creating strong relationships with
employees and suppliers will help build
a resilient value chain, and our focus on
good corporate governance and prudent
financial management ensures we have a
basis for long-term success.
(1) Group board as at 31 March 2020
(2) Executive team excludes CEO and CFO, who
are included in group board figures
(3) As at 31 March 2020, there were eight male and
three female employees appointed as statutory
directors of subsidiary group companies but
who do not fulfil the Companies Act 2006
definition of ‘senior managers’
(4) Wider employees as at 31 March 2020
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Challenge: Protecting corporate and financial resilience Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT How we measure our performance
Find more
information on
our performance
Read more about our
performance against our
regulatory commitments
in our APR, published
in July of each year
on our website at
unitedutilities.com/
corporate/about-us/
performance
In addition to our
KPIs and regulatory
targets, we monitor our
performance against an
assortment of metrics
that are of interest to
our many stakeholders.
We report against
these within this report
on pages 60 and 61
and on our website
at unitedutilities.
com/corporate/
responsibility/
our-approach/cr-
performance
To help measure progress on how well we are delivering our
purpose and adding value for all our stakeholders, we monitor
and measure our performance against a range of operational
and financial key performance indicators (KPIs), as well as
other performance indicators for each stakeholder group.
Our APRs for previous years are available on our
external website, and the APR for 2019/20 will be
published in July 2020.
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 22 to 27, 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 pages 60 and 61 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 on page
60 we report 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, and on page 61 we
report 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 regularly report on numerous corporate
responsibility performance measures on our external
website.
Our KPIs for the 2015–20 period
We have a range of metrics for our KPIs for the
current regulatory period, covering important
areas such as customer service and environmental
performance, as well as financial indicators.
Our operational KPIs are aligned with our
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 pages 56 and 57.
Our financial KPIs assess both the profitability
and sustainability of our business from a financial
perspective. A description of these financial KPIs
and our performance against our targets can be seen
on pages 58 and 59. We set internal budgets for
financial KPIs but we do not have externally declared
targets for these.
Our operational and financial KPIs remain consistent
with last year, being the final year of the current
regulatory period, albeit we have updated the
definition of underlying earnings per share, as we
now report this measure excluding the impact of
deferred tax, in line with the approach taken by our
listed peers. We have set new KPIs for the 2020–25
period, as set out on the next page.
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 162.
Annual Performance Report (APR)
Performance against our regulatory contract is
monitored and assessed each year, and reported
within an Annual Performance Report (APR), as
required by Ofwat for all water companies since
the start of the current regulatory period in 2015/16,
replacing the previous ‘regulatory accounts’.
Most 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 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. This differs
from IFRS reporting, and 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.
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performance
indicators in
AMP7
We have selected
one main metric as
the key performance
indicator for each
stakeholder group.
We will, however,
continue to report
our performance
against the many
other metrics for our
stakeholders, as we
have done this year,
within our annual
reports, our APRs,
and on our corporate
website.
Planned changes for the 2020–25 period (AMP7)
Aligning closer to our stakeholders
In line with our purpose, we measure our performance by reference to the value we create for each of our
stakeholder groups. We have increased this alignment for the 2020–25 period (AMP7), in which we have
selected one operational key performance indicator (KPI) for each of our stakeholder groups. We will retain
the linkage with our strategic themes, recognising that there is some overlap and therefore not restrict
measures to just one of these themes.
Our KPIs for the 2020–25 period
Our financial KPIs will be largely the same as the 2015–20 period, with the addition of having low-dependency
defined benefit pension schemes with nil deficit. This recognises the increasing importance of this strong and
secure position for our people, which represents a significant driver of relative value.
For our operational KPIs we have selected one main metric for each stakeholder group, based on the top
material issues identified through our stakeholder engagement as set out on pages 22 to 27.
Communities
Customers
Communities
Shareholders
Investors
We will report our community investment over the
2020–25 period as the key measure for communities.
We will target increasing this investment by at least
10 per cent over the period compared to the average
between 2010 and 2020. This measure links to “In a
responsible manner”.
Customers
Customers
We will report Return on Regulated Equity (RoRE)
as the key measure for shareholders, encompassing
regulatory out/under-performance across financial
and operational efficiency, customer satisfaction,
and regulatory performance targets. Our targets
will be updated throughout the period in line with
guidance on the individual components of RoRE.
This measure links to both “The best service to
customers” and “At the lowest sustainable cost”.
We will report our ranking on Ofwat’s customer
measure of experience (C-MeX), as customer
sentiment is likely to be influenced by a broad
range of service components and so best satisfies
the spectrum of what matters to customers. We
will target being upper quartile within the industry
each year. This measure links to “The best service to
customers”.
Suppliers
Media
We will report the percentage of invoices paid within
60 days as our main metric for suppliers, targeting at
least 95 per cent in line with the requirements of the
Prompt Payment Code. This measure links to “In a
responsible manner”.
Employees
Environment
Employees
We will report employee satisfaction as the key
measure for employees, with a target to be at least
as good as the UK high performance norm. This
measure links to “In a responsible manner”.
Environment
Environment
We are retaining the Environment Agency’s
Environmental Performance Assessment as a key
metric for our performance to create value for the
environment in AMP7, and will target upper quartile
performance within the industry each year. This
measure links to “In a responsible manner”.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT How we measure our performance
Our operational KPIs
The best service to customers
At the lowest
Wholesale outcome delivery incentive (ODI) composite
Total expenditure (totex)
Definition
Net outperformance payment/(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
£40 million cumulative net ODI outperformance
payment.
Link to bonus/LTP
Bonus – direct
LTP – indirect
Status
Achieved/confident of achieving target
Performance
We delivered another strong performance against
our ODIs this year, against our toughest targets to
date. This reflects us delivering great service to
customers and other stakeholders, and results in a
net outperformance payment for the year.
›
2019/20: £22.4 million outperformance
payment (cumulative £43.9 million
outperformance payment)
2018/19: £19.2 million outperformance
payment (cumulative £21.4 million
outperformance payment)
2017/18: £7.0 million penalty (cumulative £2.2
million outperformance payment)
2016/17: £6.7 million outperformance
payment (cumulative £9.2 million
outperformance payment)
›
›
›
Definition
Progress to date on delivering our promises
to customers within the cumulative 2015–20
wholesale totex final determination allowance.
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
Service incentive mechanism (SIM) – qualitative
Financing
Definition
Ofwat-derived index based on quarterly customer
satisfaction surveys, measuring the absolute and
relative performance of the water companies. Each
company receives a score in the range of zero to
five, with five being the best attainable score.
Target
To move towards the upper quartile in the
medium term.
Link to bonus/LTP
Bonus – direct
LTP – direct
Status
Achieved/confident of achieving target
Performance
We ended the four-year SIM measurement period
to 2018/19 ranked as fourth water and wastewater
company, earning an outperformance payment
of £6 million. For AMP7 SIM is being replaced
by C-MeX, which we reported against this year,
ranking third water and wastewater company and
fourth of 17 companies, achieving first place on the
contactor element in the last two quarters.
2018/19
2017/18
2016/17
2015/16
2014/15
Sector worst
Sector best
4.53
4.49
4.42
4.27
4.24
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.
Link to bonus/LTP
LTP – indirect
Status
Achieved/confident of achieving target
Service incentive mechanism (SIM) – quantitative
Household retail cost
Definition
Ofwat-derived composite index based on the
number of customer contacts, assessed by type,
measuring the absolute and relative performance
of the 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
Achieved/confident of achieving target
Performance
As reported above, we ended the four-year SIM
measurement period to 2018/19 ranked as fourth
water and wastewater company overall, across
qualitative and quantitative SIM. The new C-MeX
measure does not separate out qualitative and
quantitative measurements.
2018/19
2017/18
2016/17
2015/16
2014/15
70
71
77
95
99
Sector worst
Sector best
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.
Link to bonus/LTP
Bonus – indirect
LTP – indirect
Status
Achieved/confident of achieving target
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sustainable cost
In a responsible manner
outperformance
Leakage – average annual leakage
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
closed the gap to our allowance as well as now
outperforming it.
›
2015–20: Outperformed the final
determination allowance for its original
scope by around £100 million over the
2015–20 regulatory period
›
Totex was a new measure for the 2015–20
period, hence no prior years’ comparators
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.
Link to bonus/LTP
Bonus – indirect
Status
Achieved/confident of achieving target
Performance*
In 2019/20 we have met our regulatory leakage
target for the 14th consecutive year.
›
›
›
›
›
›
* Final figure for leakage will be reported in our
Annual Performance Report, available on our
website in July
2019/20: Met target
2018/19: Met target
2017/18: Met target
2016/17: Met target
2015/16: Met target
2014/15: Met target
outperformance
Environment Agency performance assessment
Performance
Our leading treasury management helped us
lock in a low cost of debt, which has delivered
significant financing outperformance for the
2015–20 regulatory period compared with the
industry allowed cost.
›
2015–20: Exceeded £450 million
outperformance
›
2010–15: Exceeded our £300 million target
outperformance
Definition
Composite assessment produced by the
Environment Agency (EA), measuring the absolute
and relative performance of the 11 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
In the EA’s latest assessment, published in July
2019 for the 2018 year, we were awarded three
stars (out of four) across a range of operational
metrics, placing us joint second alongside four
other companies. Our performance has earned
industry-leading 4 star status in three of the last
four years, in line with our target of being an
upper quartile company on a consistent basis.
›
›
›
›
›
2018: Joint 2nd
2017: Joint 1st
2016: Joint 1st
2015: Joint 2nd
2014: 2nd
to serve
Dow Jones Sustainability Index rating
Performance
On an underlying basis we delivered a good
performance in 2019/20, outperforming this year’s
revenue allowance (including margin) by around
£13 million. This excludes an additional regulatory
bad debt charge of £20 million associated
with the higher risk of future non-payment of
household customer bills as a result of COVID-19,
which is an adjusted item as set out on pages 90
and 91.
›
2019/20: £13 million outperformance on an
underlying basis
›
›
›
›
2018/19: £5 million outperformance
2017/18: £9 million outperformance
2016/17: £14 million outperformance
2015/16: £10 million outperformance
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
We have a strong focus on operating in a
responsible manner and are the only UK water
company to have a World Class rating as
measured by the Dow Jones Sustainability Index.
For 2018/19, which is the latest year for which
information is available, we achieved World Class
rating for the 13th consecutive year.
›
›
›
›
›
2018/19: ‘World Class’
2017/18: ‘World Class’
2016/17: ‘World Class’
2015/16: ‘World Class’
2014/15: ‘World Class’
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT How we measure our performance
Our financial KPIs
Underlying
operating profit
Underlying earnings
per share
Dividend
per share
£744m
63.0p
42.60p
2019/20
2018/19
2017/18
2016/17
2015/16
£744m
£685m
£645m
£623m
£604m
2019/20
2018/19
2017/18
2016/17
2015/16
63.0p
2019/20
42.60p
59.8p
49.0p
48.9p
51.1p
2018/19
2017/18
2016/17
2015/16
41.28p
39.73p
38.87p
38.45p
Definition
This measure divides total dividends
declared by the average number of shares
in issue during the year.
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 that 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 90 to 91.
Definition
This measure deducts underlying net
finance expense and underlying taxation
from underlying operating profit to
calculate underlying profit after tax and
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 deferred tax (including any tax
credits or debits arising from changes in
the tax rate from reported taxation), any
prior year adjustments or exceptional tax.
Reconciliations to the underlying measures
above are shown on pages 90 to 91.
Link to bonus/LTP
Bonus – direct
LTP – indirect
Status
Link to bonus/LTP
LTP – indirect
Link to bonus/LTP
LTP – direct
Status
Status
Close to achieving target but more work
to be done
Close to achieving target but more work
to be done
Achieved/confident of achieving target
Performance
Underlying operating profit of £744 million
was up £59 million, largely reflecting
the inflationary increase in our allowed
revenue and lower infrastructure renewals
expenditure (IRE), which was mainly due to
the phasing of our five-year capital projects
that had a significant element of IRE spend.
Performance
Underlying earnings per share was up 3.2
pence at 63 pence due to the increase in
underlying operating profit partly offset by
a higher underlying net finance expense
due to higher RPI inflation on our index-
linked debt, and a share of small underlying
losses of joint ventures.
Performance
Recognising the strong performance we
have delivered in the year, and finishing
the 2015–20 period as a leading company,
the board has proposed an increase in
the dividend of 3.2 per cent to 42.6 pence
per share, in line with our AMP6 policy of
targeting growth in line with RPI inflation.
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.
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Gearing:
net debt to RCV
Total shareholder
return
62%
+17%
2019/20
2018/19
2017/18
2016/17
2015/16
62%
61%
61%
61%
61%
2019/20
2018/19
2017/18
2016/17
2015/16
+17%
+20%
+19%
-25%
+2%
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 in line with previous
methodology.
Definition
This measure calculates the return to
shareholders based on the movement in
the share price plus dividends over each
financial year.
Target
Maintain gearing within a range of 55 per
cent to 65 per cent.
Link to bonus/LTP
LTP – direct
Status
Status
Achieved/confident of achieving target
Performance
Our gearing has increased slightly this year
but remains within our target range of 55
per cent to 65 per cent, supporting a solid
investment grade credit rating.
Close to achieving target but more
work to be done
Performance
Our total shareholder return was 17 per
cent positive over the year to 31 March
2020.
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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 156 to 185.
Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT
How we measure our performance
Our other performance indicators
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.
Communities
Customers
Communities
Area
Measure
Status Performance
Further information
Employee
volunteering
Charity
Community
Investment
(LBG data)
Number of hours employee
volunteering
Match funding to charity through
employee efforts
—
Total community investment
2,373
2,620
£101,004
£157,046
£2,261,374
£2,931,479
Responsibility pages on our website
Responsibility pages on our website
Responsibility pages on our website
How investment was made
Cash £1,959,502 Time £47,454 In-kind £2,632 Management costs £251,786
Cash £2,717,856 Time £52,409 In-kind £0 Management costs £161,214
Type of support
Charitable gift £38,823 Community investment £1,818,035 Commercial initiative £152,730
Charitable gift £159,545 Community investment £2,610,719 Commercial initiative £0
Customers
Customers
Area
Complaints
Measure
Status Performance
Further information
Total number of domestic customer
complaints
Average speed of complaint resolution
5,942
7,007
3 days
3 days
Fines
Digital
Drinking Water Inspectorate (DWI)
fines
Number of customers using online
services – My Account
Customer
assistance
Number of customers assisted by
Priority Services
Customer water
efficiency
Total customer water savings from
measures promoted by United Utilities
0
2 (£150,000 and £50,000)
984,780
860,648
99,992(1)
74,505
4.25 Ml/d
4.43 MI/d
Employees
Environment
Employees
Our performance (best service to customers) on
page 78
Our performance (best service to customers) on
page 78
Our performance (best service to customers) on
page 78
Our performance (best service to customers) on
page 78
Our performance (best service to customers) on
page 78
Our business model (key resources) on page 32
Area
Measure
Status Performance
Further information
Employee
engagement
Gender pay
reporting
Overall employee engagement
Percentage of employees with trade
union membership(2)
—
Mean gender pay gap
Median gender pay gap
84%
81%
45%
45%
11.3%
13.2%(3)
13.8%
15.3%
Employee
development
Average number of days of training
per FTE per year
4.44 days
3.57 days
Health and safety Employee Accident Frequency Rate
(per 100,000 hours)
Contractor Accident Frequency Rate
(per 100,000 hours)
0.110
0.152
0.083
0.092
Our performance (in a responsible manner) on
page 82
Our business model (key resources) on page 32
Corporate governance report on pages 132
to 135
Corporate governance report on pages 132
to 135
Our performance (in a responsible manner) on
page 82
Our performance (in a responsible manner) on
page 82
Our performance (in a responsible manner) on
page 82
Workforce
profile
2020 84% White 2% BAME 14% non-disclosed 66% Male 34% Female 1.91% Disability (including long-term
health conditions)
2019 83% White 2% BAME 15% non-disclosed 65% Male 35% Female <1% Disability (including long-term
health conditions)
(1) This figure increased to over 100,000 shortly after the year end.
(2) Based on employees who pay their union subscriptions via their payroll.
(3) The mean gender pay gap figure for 2019 has been amended from 13.1 per cent to 13.2 per cent since the production of last year’s Annual Report.
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Environment
Area
Measure
Status Performance
Further information
Carbon and
Energy
Carbon footprint
Energy used
Waste
Total waste
Waste to beneficial use
Leakage
Total leakage at or below target of
462.65 Ml/d
Fines
Number of incidents resulting in fines
Enforcement undertakings
Natural capital
Number of trees planted on catchment
land
No net loss of biodiversity across
capital programme
Shareholders
Investors
159,243 tCO2e
167,856 tCO2e
984 GWh
976 GWh
752,480 tonnes
694,846 tonnes
98%
96%
Met Target
Met target
0
0
1 (£511,000)
5 (£1.5 million)
29,696
27,190
100%
100%
Our approach to climate change on pages 66
to 77
Our approach to climate change on pages 66
to 77
Responsibility pages on our website
Responsibility pages on our website
Annual Performance Report published in July
Our performance (in a responsible manner) on
page 82
Our performance (in a responsible manner) on
page 82
Responsibility pages on our website
Responsibility pages on our website
Area
Measure
Status Performance
Further information
Compliance
UK Corporate Governance Code
Dow Jones Sustainability Indices
Compliant
Compliant
World Index
World Index
Director’s report on pages 188 to 190
Summary of investor indices on page 63
Suppliers
Media
Area
Payment
statistics
Measure
Status Performance
Further information
Average time taken to pay invoices
Suppliers paid on time
14 days
25 days
97%
98.57%
Supplier pages on our website
Supplier pages on our website
Status key:
Deterioration on previous year
Same as previous year
Improvement on previous year,
no scope for improvement
or the target has been achieved
— Not applicable
Performance key:
2019/20
2018/19
We have used a red, amber green colour coding to indicate whether performance in 2019/20, when compared to 2018/19, has improved,
stayed broadly the same or deteriorated. Measures where there is no scope for improvement, or the target has been achieved, are also
recorded green.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT How we measure our performance
Responsible
business
One of our strategic themes deals with
operating and behaving in a responsible
manner. This is a core part of who we are as a
business and has been for many years.
Responsible business is in our DNA
We have a strong track record leading on environmental, social
and governance matters. Over the past 20 years we have measured
ourselves against national and international benchmarks of
responsible business practice, often breaking new ground in the
way the water sector approaches challenges such as catchment
management schemes and support for vulnerable customers.
This is not just about what we do, but how we do it. A key strength
is the continuity of our approach with a clear purpose and strategic
objectives. This long-standing commitment to responsible business
has provided a solid foundation upon which to evolve existing
programmes, develop new initiatives, and respond to the changing
world in which we operate.
Creating long-term value for all
Having tangible, externally recognised measures of our behaviour
and performance helps retain the trust of those who take an
interest in the way we do business. We collate and monitor a wide
range of performance measures to assess our progress and report
these publicly. We align ourselves to recognised management
standards and accreditations to give confidence in the way we are
operating.
For more information on how we manage our business in a
responsible manner, please visit unitedutilities.com/corporate/
responsibility
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United Utilities Group PLC unitedutilities.com/corporate 2000Business in the Community ‘Company of the Year’2001Established director level committee focused on responsible business2005Led sector’s approach to catchment management through SCaMP2006Set our first carbon reduction target2010First disclosure to CDP2009Business in the Community ‘Company of the Year’2007Secured world class status for the first time2015Building Public Trust Award –Excellence in Reporting in FTSE10020192011Three strategic themes introduced2014Early adopter of integrated reporting2019Achieved self-suffiency of pensions scheme2016Priority Services launched201923% female apprentices (sector average 5–7%)2000–20052005–20102010–20152015–2020Planted over 2 million trees£35m community investmentOver £600m outperformance reinvested Index/rating
Description
Performance
The Dow Jones Sustainability Index ranks the
sustainability approach of the top 10 per cent of
the world’s biggest companies based on long-term
economic, environmental and social criteria.
For 2019, our overall performance was 79 per cent and
we attained World Class status for the 13th consecutive
year. We were awarded SAM Silver Class in the
Sustainability Yearbook 2020.
The FTSE4Good Index measures the performance of
companies who demonstrate strong ESG practices
against globally recognised responsible business
standards.
We have been named in the FTSE4Good Index every
year for the last 17 years. Latest review June 2019.
ISS recently expanded its methodology used by
investors to identify governance risks within their
portfolios to include environmental and social risks.
In the annual review of November 2019 our status was
assessed as Prime.
Provides ESG ratings on an AAA to CCC scale
according to exposure to industry specific ESG risks
and ability to manage those risks relative to peers.
As of 2019, United Utilities Group PLC received an
MSCI ESG rating of AA.
Sustainalytics provides ESG risk ratings which
summarise company performance in relation
to industry peers and gives an overview of ESG
controversies.
Euronext Vigeo Eiris indices are composed of the
highest-ranking listed companies according to an
evaluation of their ESG performance.
In 2020 Sustainalytics has given us a low risk rating
with a score of 19.1. This positions us as 2 out of 40 in
the water utility sector.
We are part of the UK 20 (the 20 most advanced
companies in the UK) as of December 2019.
Composition of the Ethibel Sustainability Indices
is based on a best-in-class approach to companies
included in their sustainable Investment Register
combined with ethical exclusion criteria.
United Utilities Group PLC has been reconfirmed as
a constituent of the Ethibel Sustainability Index (ESI)
Excellence Europe since 8 May 2020.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT
Contributing
to the
UN SDGs
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.
Our approach to operating in a responsible manner
aligns quite naturally with these goals. We have
identified six that are the most material to our
business and the nature of the essential services that
we provide, and to which we contribute the most.
The following details how we contribute to meeting
each of these six SDGs.
Read more at unitedutilities.com/sdgs
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United Utilities Group PLC unitedutilities.com/corporate 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.
Read more about catchment systems thinking on page 51
T
R
O
P
E
R
C
G
E
T
A
R
T
S
I
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 22,700 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, programmes for young people experiencing
difficulties securing employment, offer equal opportunities to all and value diversity
among our employees.
Read more about building skills resilience on page 41
Industry, innovation and infrastructure – Build resilient infrastructure,
promote inclusive and sustainable industrialisation and foster innovation
We invest heavily in infrastructure, including just under £4 billion in capex between 2015–20
to improve the performance and resilience of our assets and operations to impacts such as
those arising from climate change.
We embrace innovation, especially in an increasingly digital world, to ensure the region where
we operate has reliable, sustainable and resilient infrastructure, now and into the future.
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
at least 25 years into the future to prepare for increases in the population and new housing
that will need connections for water and wastewater services. We are exploring ways to do
this using natural solutions to manage water and wastewater.
To find out more about our community activity see unitedutilities.com/globalassets/
documents/pdf/community-activity-booklet.pdf
Climate action – Take urgent action to combat climate change and
its impacts
Responding to the climate emergency is an imperative for us all.
Reducing our greenhouse gas emissions and ensuring that we, and the region we serve, are
resilient to the impacts that a changing climate might bring are key to our long-term planning.
Read more about our approach to climate change on pages 66 to 77.
Read more about our approach to climate change on pages 66 to 77
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 in a responsible manner, and trustworthy 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.
Read more about how
we deliver value to our
stakeholders on pages
46 and 47
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Stock Code: UU.
Annual Report and Financial Statements for the year ended 31 March 2020
65
Our approach to climate change
Task Force on Climate-related Financial Disclosures (TCFD)
Overview
Climate change has been a subject of strategic and operational
focus for us for over two decades. The impact of the environment
on our activities, and the impact of our activities on the
environment influences how we deliver water and wastewater
services to customers. Our response to climate change focuses on
its two component parts:
Adaptation – we have used scenario analysis in our business
planning and risk management since 1999 to ensure we adapt and
improve our resilience to effects of climate change. Our approach
to enhancing the resilience of our service is based on Systems
Thinking which enables us to look at individual elements of a
bigger system and how they interact with the other constituent
parts in any given scenario.
Mitigation – we seek to minimise our contribution to climate
change by reducing greenhouse gas emissions, especially through
our energy and land management strategies, in line with reduction
targets first set in 2006. Our contribution to limiting climate
change comprises six company-specific pledges.
This is supported by clear and effective governance, strategy, risk
management, metrics and targets.
Decades of understanding and responding to
climate change
Climate change and the resultant shifts in weather patterns have
the potential to significantly impact our operations and the broader
environment and ultimately the long-term viability of the water and
wastewater services we provide. Hazards such as droughts, floods,
storms or heatwaves will continue to become more frequent and
more intense. At the same time, we need to decarbonise our
operations and limit the amount of greenhouse gases we emit. The
illustration below summarises some key activities we’ve undertaken
since 2000 to manage both.
AMP3
AMP4
AMP5
AMP6
AMP7
Climate Change
Act (2008)
The basis for the UK
approach for responding
to climate change
Published Climate Change
Adaptation Report (2011)
setting out how we prepare for
climate change and manage
associated material risks
Climate Change
Adaptation Progress
Report (2015)
WRMP
25-year plan to
maintain balance
between water
supply and
demand using
climate change
scenario planning
2000
WRMP incorporating
projections UKCP09
2014
WRMP
2015
2009
WRMP
SCaMP 1
27,000 hectares of
woodland creation
(over 400,000 trees
planted)
SCaMP 2
30,000 hectares of peatland
restoration
Planted 350,000 trees to
create new woodland
Signed TCFD Statement
Support
PR19 Business Plan
submission has ‘sector
leading approach’ to
resilience covering 2020
to 2025
Wastewater Network Model baseline
scenarios include latest UKWIR
climate change uplift factors, scaled
for UK Climate Change Projections
for 2018
2016
2017
2018
Davyhulme Biomethane
plant went live delivering
40GWh/a
Winning the
IChemE 2017
Global energy
award
2019
WRMP
2019
t
a
r
g
e
t
o
f
5
0
%
r
e
d
u
c
t
i
o
n
i
A
c
h
e
v
e
d
2
0
2
0
e
m
i
s
s
i
o
n
s
Energy optimisation programme
Installation of combined heat and power plants for increased
energy generation at key wastewater treatment works
Signed up to Water UK Public
Interest Commitment to achieve
net zero emissions by 2030
CDP ranks UU as Supplier
engagement leader
Since 1995 we have planted over 2 million trees across our capital projects and catchment land
European LIFE Funding
Enhanced our investment of £1 million in peatland restoration in the Peak District
66
WRMP to
incorporate
Climate
projections
UKCP18
r
i
s
k
r
e
v
i
e
w
C
o
m
p
a
n
y
-
w
d
e
C
i
l
i
m
a
t
e
-
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e
a
t
e
d
l
2020
M
i
t
i
g
a
t
i
o
n
P
e
d
g
e
s
l
P
u
b
l
i
s
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e
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o
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r
s
i
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m
a
t
e
C
h
a
n
g
e
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United Utilities Group PLC unitedutilities.com/corporate
Adapting service to a changing climate
Our first climate change adaptation report in 2011, and the second in 2015, highlighted over
100 climate change risks, focusing our strategic planning on the most significant physical
risks. Our next adaptation report will include an increased focus on transitional risks.
Over the last eight years, we have adopted a Systems Thinking approach which enables us
to forecast how changes in weather conditions will impact us in a predictable way. It allows
us to understand how areas of our service are vulnerable to climate change and adapt our
plans to improve performance and resilience across key service areas; for example, water
supply, leakage, sewer flooding and pollution.
Transparency and disclosure
We are committed to transparency and
regularly publish carbon and climate
change disclosures. For over a decade,
we have participated in CDP's Climate
Change Programme assessment, where
we have been ranked in the top 3 per cent
of companies globally and recognised as a
Supplier Engagement Leader in 2019.
Systems Thinking enables us to adapt to climate change over multiple time horizons. In
our Water Resource Management Plan (WRMP), climate data is embedded in over 1,000
scenarios to understand how we can create the right supply demand balance against
significant uncertainty for the next 25 years.
A similar baseline risk and vulnerability assessment is being taken as part of our Drainage
and Wastewater Management Plans (DWMPs) to understand future performance compared
to a baseline. This will identify where we are at risk of failing to meet strategic planning
objectives such as internal flooding or wastewater treatment works compliance.
In the shorter term, flooding and droughts have become more prevalent across the North
West and they are the forerunners to longer-term climate change impacts. Operationally,
Systems Thinking enables us to use big data including weather forecasts to predict
demands week to week and set out our system appropriately to manage this – which,
despite these extreme weather events, has supported delivery of some of our best
performance.
Our contribution to mitigating climate change
As part of our strategy and commitment to decarbonisation we have been tracking and
publishing our greenhouse gas emissions since 2001. Our most recent target, set in 2015,
was to reduce our greenhouse gas emissions by 50 per cent from the 2005/06 baseline by
2020 (and to achieve a 60 per cent reduction by 2035).
Our gross greenhouse gas emissions since 2005/06(1)
i
t
n
e
l
a
v
i
u
q
e
e
d
i
x
o
d
n
o
b
r
a
c
s
e
n
n
o
T
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
Carbon dioxide
Methane
Nitrous oxide
Reported emissions
50% reduction from 2005/06 baseline
Outperforming
our 2020 target
(2)
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
(1) Our gross greenhouse gas emissions include scope 1, 2 and 3 as detailed on page 75.
(2) The significant reduction in greenhouse gas emissions between 2017/18 and 2018/19 was due to the
purchase of a large proportion of our electricity from certified renewable sources. As a result, in
2018/19 we switched from the location-based accounting method to the market-based method to
report our headline emissions (see page 75 for more details).
As part of our mitigation strategy, we have outperformed our target, reducing emissions
by 73 per cent since 2005/06. Through this strategy we have embedded greenhouse gas
emission impact assessments in our project appraisals and financial approvals processes
and signed up to the ambitious industry-wide Water UK Public Interest Commitment to
achieve net zero emissions by 2030.
In addition to our CDP submission, we
report in adherence with the Greenhouse
Gas Protocol Corporate Accounting and
Reporting Standards (2015) and the Science
Based Targets Initiative (SBTi).
We have signed the Statement of Support for
the Financial Stability Board’s Task Force on
Climate-related Financial Disclosure (TCFD)
which was published in June 2017, and we
report in line with its recommendations
across its four thematic areas.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT
Our approach to climate change
TCFD
Governance
Chief Executive Officer Steve Mogford has the highest level of responsibility for the group’s preparedness
for adapting to climate change and driving our mitigation strategy. Russ Houlden, Chief Financial Officer, has
executive responsibility for risk management, a large part of which relates to climate change. Non-executive
directors have a collective responsibility to challenge constructively and monitor the delivery of the risk and
control framework set by the board, as described on page 136.
We have a strong track record of risk management and disclosure of climate change and we continually
mature our understanding of the risks. The table below summarises progress over the last investment cycle
(2015–20) and sets out plans for the coming year.
Risk management
Progress (2015–20):
›
Identification and alignment of climate change
risks and opportunities into company risk
management framework;
› Completed robust review to identify which
corporate risks would be influenced by climate
change; and
›
Published the risks identified as being
particularly sensitive to climate change.
Plans (2020/21):
›
Further formalisation of climate change
physical and transitional risks into corporate
risk framework and integration into risk
management systems.
Metrics and targets
Progress (2015–20):
›
Achieved highest mark ‘leadership level’ in
2019 CDP assessment of targets and emission
reductions initiatives;
›
›
Step change in maturity of understanding our
GHG emissions; and
Refreshed climate change mitigation strategy
to deliver science-based targets and carbon
commitments and pledges.
Plans (2020/21):
›
Review scope 3 emissions for consistency with
the GHG protocol principles to set a science-
based scope 3 target by 2021;
› Manage scope 3 emissions as part of our
‘United Supply Chain’; and
›
Establish tracking and reporting against our
climate mitigation strategy commitments.
Governance
Progress (2015–20):
› CEO led engagement with executive team to
deliver required standards in managing climate
change risks and opportunities through our
existing governance structure (see page 116);
›
Executive led improvements to governance of
climate change – achieved ‘leadership level’ in
2019 CDP governance category; and
› Carbon valuation appraisal model and
guidance included across capital approval
processes and governance.
Plans (2020/21):
›
Executive oversight of required enhancements
to attain an overall top score across all
categories for the 2020 CDP assessment.
Strategy
Progress (2015–20):
›
Set out AMP7 performance commitments with
financial incentives for air quality and natural
capital (see page 43);
› Water resources and flood models including
climate scenario analysis, informed by CP09
forecasts;
›
Published our second adaptation report, in
2015, outlining our holistic, integrated and
partnership approach to a changing climate;
› Climate change resilience explicitly set out in
our PR19 business plan;
›
›
Strategic commitments and pledges made for
emissions reductions; and
Recognised as a Supplier Engagement Leader
by CDP in 2019.
Plans (2020/21):
› Whole life costing and investment appraisals
changes, with prioritisation to include variable
carbon pricing;
› Company-wide climate-related scenario
analysis;
Publication of a climate change adaptation
progress report (2020) which will include a
review of climate risks in line with Defra’s
categorisation for adaptation;
Implementation of climate change resilience
plans (physical and transitional) in AMP7; and
PR24 strategic planning to include climate
mitigation pledges and long-term climate
projections.
›
›
›
68
1st
comprehensive
report covering
the TCFD
recommendations
Governance
Strategy
Risk management
Metrics and targets
The TCFD has four core
elements under which it
recommends organisations
report on their approach to
climate change.
Corporate
Citizenship
Review
The text of our
TCFD disclosure
was reviewed by
Corporate Citizenship,
a leading sustainability
consultancy, to ensure
that it accords with
current Task Force
on Climate-related
Financial Disclosures
best practice.
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United Utilities Group PLC unitedutilities.com/corporate Risk management
Climate-related risks (physical and transitional) are
managed through our embedded risk management
framework and across our governance and reporting
processes. Our approach ensures the identification,
assessment and management of climate change
risks to reduce impact and likelihood and maximise
opportunities.
Mitigation metrics are aligned to limiting global
temperature rises to 1.5°C. Adaptation metrics
account for the risks and uncertainties associated
with higher temperature rises (including 2°C and
4°C) and how the many potential variations in
climate change impact the delivery of service
improvements. Targets are set with risk and
uncertainty included.
While climate change is largely a downside risk for
our business, we have identified some potential
opportunities. For instance, in addition to energy
generation, a reduction in the frequency of extreme
cold weather could reduce the number of freeze-
thaw burst events and warmer conditions may
improve the efficiency of biological treatment
processes.
As part of our risk management activities, we have
assessed our risks to identify those most adversely
impacted by climate change. While the most
significant are all physical risks, transitional risks
are also managed through our risk management
framework.
Many of these risks are subject to complex modelling which incorporates
the impact of climate change and the associated adaptation options in our
long-term plans.
Our 25-year WRMP is a sophisticated example of a climate change risk
assessment. We’ve worked with the United Kingdom Meteorological Office for
many years to understand how weather metrics, like temperature and rainfall,
affect the consumption of water by customers. We understand the likely
fluctuations in how our supply system responds in different circumstances,
defining the headroom required to take into consideration climate change
uncertainty using the latest UK climate projections and drought indicators.
Our plan considers how resilient our water supply system is to a host of non-
drought hazards related to climate change, including flooding, freeze-thaw,
contamination, asset failure and power failure. We are planning a programme of
work to improve resilience across the next 25 years.
DWMPs are being developed to offer the same level of climate change scenario
assessments for sewerage planning.
We are in the process of incorporating longer-term climate change impacts more
explicitly in our corporate risk framework by considering the scale of impact
based on current controls under two scenarios to 2050 and 2100. This will be
undertaken initially for the most significant climate risks, then all other climate
risks, bringing several benefits. It further raises the profile of climate change
adaptation and allows the board enhanced insight into climate risks from within
existing risk management processes. It will highlight where climate risks are not
well understood or where existing controls are deemed inadequate to manage the
risk in the long-term to allow corrective action to be taken.
Looking ahead, we will need to undertake research to better understand how
climate factors will impact some aspects of performance, continue to collaborate
with others to better understand interdependencies and work in partnership to
address risk, and cultivate innovation to find new ways to cope with operating in
a different environment.
Failure to treat wastewater
(exceedance of permits)
Failure of above ground water and
wastewater assets (fooding)
Failure of the wastewater network
(sewer fooding)
Water network failure
Failure of wastewater assets
(serious pollution)
Water sufficiency event
Failure to treat sludge
The following table highlights where further details recommended by the TCFD
can be found in this report.
Topic
Governance
Strategy
Where to find out more
See our corporate governance report. Our corporate
responsibility committee report on pages 152 to 155
provides a summary of committee discussions on
climate change.
A summary of the board and its management
committees can be found on page 116.
Details of our corporate strategy are on pages 16 to
19 and our business model is on pages 28 to 31. See
how we plan for the future on pages 36 to 44 and our
approach to managing resilience on page 40.
Risk management Our risk management framework is presented on pages
92 to 101, including our principal risks and uncertainties.
Metrics and targets Our KPIs and other performance indicators can be
found in how we measure our performance on pages
54 to 63, with operational performance on pages 78 to
83 and financial performance on pages 84 to 91.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our approach to climate change
TCFD
Strategy to
manage climate
related risk and
issues
›
›
›
Incorporating the
wide range of
uncertainty when
planning for the
long-term;
Scenario analysis
to understand
the business
impact of climate
change and plan
accordingly; and
Ambitious
greenhouse gas
emissions targets
to contribute to
limiting global
temperature rise.
Strategy: adapting to and mitigating climate change
Our strategy to adapt to a changing climate and how we manage uncertainty
Adapting to the impacts of climate change needs to accommodate the levels of uncertainty in the global
delivery of a 1.5°C rise. There is a large degree of uncertainty in the longer term because of outcomes from
different emissions scenarios and the complexity of climate modelling.
Climate change trends are occurring slowly against the backdrop of normal, natural weather variation which
makes it challenging to identify when climate change is happening and when trigger levels are reached. Our
strategies are increasingly cognisant of that uncertainty and seek to deliver flexible and adaptive plans that
can evolve as the reality emerges.
Across our strategy and planning framework we assess the impact of climatic change in rainfall, temperature
and storms (wind speed). In addition to the 1.5°C rise targeted globally, we assess various scenarios at
both 2°C and 4°C. This is critical to managing uncertainty and establishing a baseline from which we can
understand future performance and where we are at risk of failing to meet strategic planning objectives such
as internal flooding, wastewater treatment works compliance and the supply demand balance.
Understanding the range of weather impacts is therefore central to our scenario baseline and the potential
future variations used are set out below.
Projected changes for North West England at a global mean warming of 2°C above pre-industrial levels.
Aligned to the UK Climate Projections 2018 (UKCP18) Derived Projections of Future Climate over the UK, Met
office (November 2018)
Type of change
Winter temperature
Summer temperature
Winter rainfall
Summer rainfall
Winter wind speed
Summer wind speed
Daily temperature (min/max) – winter
Daily temperature (min/max) – winter
Low
0 to +1°C
Median
+1 to +2°C
High
+2 to +3°C
0 to +1°C
+1 to +2°C
+2 to +3°C
-10%
-30%
-0.6m/s
-0.4m/s
+1.5°C
+2.0°C
+10%
+10%
-0.2m/s
-0.2m/s
+20%
+20%
+0.4m/s
+0.2m/s
+1.0°C
+2.0°C
Projected changes for North West England at a global mean warming of 4°C above pre-industrial levels.
Aligned to the UKCP18 Derived Projections of Future Climate over the UK, Met office (November 2018)
Type of change
Winter temperature
Summer temperature
Winter rainfall
Summer rainfall
Winter wind speed
Summer wind speed
Daily temperature (min/max) – winter
Daily temperature (min/max) – winter
Low
+1 to +2°C
Median
+2 to +3°C
High
+3 to +4°C
+2 to +3°C
+3 to +4°C
+4 to +5°C
+20%
-30%
+0.2m/s
-0.4m/s
+10%
-40%
-0.4m/s
-0.6m/s
+3.0°C
+4.5°C
+20%
-10%
+0.4m/s
-0.2m/s
+3.0°C
+4.5°C
In the next 12 months, we will test thousands of weather scenarios for our WRMP, including the impact of a
high scenario. This assumes a 5°C increase by 2100 on our supply capabilities. A complicated hydrological
assessment of the process of turning rainfall into flow will be undertaken to understand the impact on
water resource levels. Across the 10,000 climate change projections investigated, we take a well-balanced
distribution to narrow these down to 100 scenarios. They are then put through our rainfall runoff model so we
can understand the impact on supply from the amount of water available year on year. We work closely with
the Environment Agency and leading experts to select the most appropriate scenario to use in planning. The
uncertainty brought from the other scenarios is then analysed and included in our headroom calculations, thus
ensuring we can quantifiably understand the levels of risk in our available water supply.
As always there is stringent governance to ensure these projections are correctly developed and used.
Internal, external and regulator audits are undertaken to ensure we use these projections in line with UK Water
Industry Research (UKWIR) best practice and Defra guidelines.
The next 12 months are critical for DWMPs as we complete and publish the outputs of our Baseline Risk and
Vulnerability Assessment. This will be the result of modelling our systems and applying several impacts,
including climate change, to determine future performance and risks associated with that performance.
70
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United Utilities Group PLC unitedutilities.com/corporate Model updates currently in progress (2020) to understand the climate change impact of service delivery for drainage and wastewater
Model
Hydraulic network models Rainfall scenarios alongside future population
Climate change impact
Risk and performance level assessment
Future hydraulic flooding performance
change and urban creep
Asset risk projection
model (Pioneer)
Apply climate change impacts via changes in
blockage rates
Future flooding and pollution performance with
optimised system recommendations for asset
interventions
Wastewater treatment
works model
Changes to permit limits based on environmental
models (rainfall and temperature)
Future likelihood of wastewater treatment works
compliance
Source Apportionment
– GIS
Input models using rainfall impacts on increasing
river levels alongside temperature increases
Future water quality in the receiving water course
informing the risk in achieving future permit limits
This assessment will allow us to
understand, for our base-allowed
investment, the levels of service expected.
Coping with 3°C will require higher levels
of investment than coping with 1.5°C
and so, if that were to become the likely
scenario, we would need to engage with
stakeholders on the appropriate sharing
of that cost between generations of
customers.
With this understanding, a primary
objective of our adaptation strategy is
to prioritise interventions that deliver
resilience for all climate variables.
For example, reducing leakage and
encouraging lower water consumption
will create headroom within our
supply-demand balance and provide
an increasingly resilient service. This is
especially important as changing rainfall
patterns will affect the rate at which our
reservoirs refill. Similarly, encouraging
more sustainable drainage and reducing
surface water into combined sewer
systems will help reduce the impact of
variations from future storm intensity, and
frequency, on performance for customers
and the environment.
A further objective of our adaptation
strategy is to address the transitional
risks we have as an energy intensive
business, including those resulting from
decarbonisation and exposure to additional
taxation. Our energy strategy is focused on
using less and generating more. This year
we generated 191 Gigawatt hours (GWh),
equivalent to almost a quarter of the
electricity we consumed.
Future contributions to limiting
global temperature rise to 1.5°C –
a science-based target
Our emissions reduction strategy is
focused on scope 1 and 2 emissions (see
‘greenhouse gas emissions by scope’ on
page 75). We have committed to achieve
science-based targets, based on the Paris
Agreement’s highest level of ambition, to
limit global temperature rise to 1.5°C above
pre-industrial levels. This is in line with
the SBTi Criteria and Recommendations(1)
guidance on the most recent emissions
scenarios, policies and greenhouse gas
accounting standards.
SBTi guidance requires a medium and long-
term target to be set based on those global
temperature limiting ambitions. It requires
a new baseline to be set from the most
recent year for which data is available,
which for us is 2019/2020.
We have committed to a medium-term
target for a further 42 per cent reduction
in emissions by 2030 from a new 2019/20
baseline. The science-based approach
presents a target of a 100 per cent
reduction by 2050.
We share the water sector’s ambition to
achieve net zero emissions by 2030 and
this is likely to require purchasing some
carbon offsets given the challenge to
eliminate wastewater treatment process
emissions. Our strategy accommodates the
different accounting rules for purchasing
offsets. Under the guidelines set by the
SBTi, purchased offsets are not permitted
in the delivery of any science-based
targets, so these will not be an option for
our 2030 and 2050 science-based target
commitments. However, in delivering the
sector commitment of net zero by 2030,
purchase of offsets are permitted and will
therefore be assessed alongside other
strategic options.
(1) Science Based Target initiative Criteria and
Recommendations Version 4.0
150,000
125,000
100,000
75,000
50,000
25,000
0
e
2
O
C
s
e
n
n
o
T
Science-based target: 42%
reduction from the new
2019/20 baseline
If we hit this target we will have
reduced our emissions by 85%
from the previous 05/06 baseline
Carbon dioxide
Methane
Nitrous oxide
Net GHG emissions S1 + S2 + S3
Net GHG emissions S1 + S2
SBT trajectory 1.5°C scenario
2020
2025
2030
2035
2040
2045
2050
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Our approach to climate change
TCFD
Our climate change mitigation strategy
Our strategy to deliver these science-based targets covers three key areas: to optimise energy consumption; generate more renewable
energy; and lower our emissions. Our work to reduce emissions includes: wastewater process and storage; sludge process; biogas use and
sludge disposal; fleet fuel and management; fuel use; renewable energy; land use; natural capital; and waste and resources. Our current
strategy is summarised in a series of six pledges:
Our pledges to reduce
our carbon footprint
Pledge 1:
Commitment to meet our science-
based emissions targets (scope 1&2)
with a further 42% reduction by 2030
and 100% reduction by 2050
72
Pledge 2:
100% renewable
electicity by 2021
Pledge 3:
100% Green
Fleet by 2028
Pledge 4:
1000 hectares of peat
restoration by 2030
Pledge 5:
Planting 1 million trees to
create 550ha woodland by 2030
Pledge 6:
Commitment to set science-based
scope 3 emissions target by 2021
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United Utilities Group PLC unitedutilities.com/corporate The chart below sets out the key areas of our strategy and the contribution they make in delivering our
science-based target to limit global temperature rise to 1.5°C above pre-industrial levels. The data presented
shows scope 1 and scope 2 emissions.
e
₂
O
C
t
s
n
o
i
s
s
i
m
e
s
a
g
e
s
u
o
h
n
e
e
r
g
t
e
N
120,000
105,000
90,000
75,000
60,000
45,000
30,000
15,000
0
Pledge 2: 100% renewable electricity
Pledge 3: 100% green fleet
Pledge 4: 1000 hectares
of peat restoration
Grit & screenings recycling
Pledge 5: Plant 1 million trees
to create 550 hectares of woodland
Further effect of 1m trees
More woodland and peatland restoration
Fossil fuels to green alternatives
2019/20
Baseline
emissions
115,454 tCO₂e
Pledge 1: 42%
reduction from
2019/20 baseline
2030
Science-based
target
66,964 tCO₂e
Forecasts are estimated using the Water Industry Carbon
accounting workbook v13 2020
Low carbon sludge
treatment
Renewable energy
exports
Pledge 1: 100%
reduction from
2019/20 baseline
Low carbon innovations to
eliminate process emissions
Next year, we will focus on reducing scope 3 emissions(1). This will cover influencing emissions of employees,
commercial partners and suppliers and emissions of customers. Further, we will develop future standards,
technologies, markets and financial solutions to support the delivery of our net zero ambition with a further
commitment to set a science-based scope 3 target by 2021.
(1) The Greenhouse Gas Protocol classifies scope 3 emissions as indirect upstream and downstream emissions that occur in
the value chain of the reporting company.
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Our approach to climate change
TCFD
Metrics and targets
Failure to treat sludge
140
l/day
Per capita
consumption
39%
reduction in supply
interruptions
100%
sludge treatment
compliance
Adaptation – delivering an improved service
despite climate change
We have a number of key metrics and targets that
demonstrate our capability of adapting to climate
change and increasing the resilience of our service.
These metrics and targets are focused on the
corporate risks identified in our adaptation report
that are most adversely impacted by climate change.
Water sufficiency
In order to release headroom in our water supply
demand balance we have set short and long-term
targets against key performance commitments. Our
targets for reducing per capita consumption (how
much customers use) and leakage will reduce the
demand for water in all climate scenarios.
Per capita consumption: Household consumption
has increased slightly over the last five years with
the average person currently using around 140
litres per day. Our plan is to work with customers
and stakeholders to reduce that figure to around
135 litres by 2025 and to around 115 litres by 2045.
We have developed an AMP7 water efficiency
programme, primarily aimed at reducing household
consumption, and working with the non-household
sector to drive water efficiency across the board.
Leakage: We have achieved our regulatory leakage
target every year for 14 years. From 2015 to 2020, we
have delivered a stable level of leakage and, by 2025,
we plan to reduce leakage by 15 per cent. In the
longer term, to 2045, we plan to reduce leakage by
just over 40 per cent. In the last 12 months, we have
installed around 44,000 noise monitoring devices
(100,000 by 2025) to locate hidden leaks in the most
challenging parts of our water network and enable
overall reductions in leakage.
Water network failure
We have assessed our ability to maintain water
supply to our customers, even in extreme weather
events, and we have set improving targets for supply
interruptions.
We have reduced interruptions to supply by nearly
40 per cent since 2015. Supported by Systems
Thinking and the use of machine learning and artificial
intelligence, we are targeting a further 50 per cent
reduction by 2025, from a 2020 baseline.
Failure of the wastewater network
To reduce the impact of variations from future storm
intensity and frequency on the performance of our
wastewater network we are targeting significant
reductions in sewer flooding.
We have set ourselves a target to reduce it by 20 per
cent by 2025 and 70 per cent by 2045.
Climate change puts an additional strain on the
treatment and recycling of sludge particularly with
the flooding of farmland which is the outlet for
recycled sludge (biosolids). By taking a Systems
Thinking approach and managing our assets as a
regional system we can mitigate for loss of treatment
capacity by transporting the sludge to other
treatment centres or by using capacity in the market.
To measure the success of this approach we set
stringent targets for 100 per cent sludge treatment
compliance with regulatory requirements and we
have achieved this for five consecutive years.
In addition, and new for AMP7, we are targeting 100
per cent conformity to best practice requirements
set out by the national Biosolids Assurance Scheme.
Failure to treat wastewater (exceedance
of permits)
The impact on climate change can affect the
wastewater treatment process in a number of ways:
prolonged dry periods can lead to septicity and rivers
to run low; high rainfall intensity can cause high
flows to be passed through to treatment facilities,
outfalls to block and river banks to erode.
We have managed this risk through our treatment
compliance metric which assesses our wastewater
treatment compliance against environmental
permits. Having delivered a stable level of service
over AMP6 we are joint industry leaders in the
Environment Agency’s Environmental Performance
Assessment across AMP6 and achieved 4 star status
for three consecutive years.
We are striving to meet 100 per cent level of
compliance for this measure in AMP7.
Failure of wastewater assets
(serious pollution)
Pollution incidents can occur when the sewer system
becomes overwhelmed and it overflows into the
nearby watercourse.
Despite the upward pressure from climate change,
since 2012 we have achieved 37 per cent reduction
in the total number of pollution incidents (category 1,
2 and 3) and an industry-leading position for serious
pollution incidents (category 1 and 2).
We have set targets to reduce the number of
pollution incidents by a further 27 per cent by the
end of AMP7.
74
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United Utilities Group PLC unitedutilities.com/corporate reporting is compliant with the international
carbon reporting standard (ISO 14064, Part 1) and
assured by the Certified Emissions Measurement
and Reduction Scheme (CEMARS).
Key energy and
carbon metrics
2019/20
Our contribution to mitigating climate
change – carbon and energy
Careful operational energy management and
increasing renewable energy generation means we
have achieved a further reduction of 8,613 tCO2e
this year.
Our total greenhouse gas emissions for the
financial year 2019/20 were 159,243 tCO2e, 73 per
cent below the 2005/06 baseline.
This performance means we have outperformed
our target to reduce our operational greenhouse
gas emissions by 50 per cent from the 2005/06
baseline and to achieve a 60 per cent reduction
by 2035.
We are now committing to achieve new medium
and long-term science-based targets, based on
the Paris Agreement’s highest level of ambition, to
limit global temperature rise to 1.5°C above pre-
industrial levels.
2019/20 scope 1 and 2 net emissions, which were
115,424 tCO2e, will form the baseline for our
science-based targets.
Reporting and assurance
We measure and report the greenhouse gases
that result from all United Utilities’ activities. We
have used the financial control approach so our
energy and greenhouse gas emissions reports are
aligned with the consolidated financial statements
for United Utilities Group PLC. This includes its
subsidiaries listed in section A8 on page 251.
Our measurement and reporting is aligned
to the GHG Protocol Corporate Accounting
and Reporting Standard (2015) and the
recommendations of the TCFD. We report as
required under the Companies Act 2006 (Strategic
Report and Directors’ Reports) Regulations
following the 2019 UK Government Environmental
Reporting Guidelines: Including streamlined
energy and carbon reporting guidance and our
Greenhouse gas emissions by scope
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 (tCO2e). 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.
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. We report results using both methods
and use the gross ‘market-based’ figure to report
our headline emissions.
PFC
Perfluorocarbons
N2O
Nitrous
oxide
CH4
Methane
CO2
Carbon dioxide
SF6
Sulphur
hexafluoride
HFC
Hydrofluorocarbons
159,243
tCO2e
total greenhouse
gas emissions
73%
reduction from our
2005/06 baseline
191 GWh
renewable energy
generated – equivalent
to 23.8 per cent
of our electricity
consumption
95%
electricity
consumption from
renewable sources –
760.5 GWh
115,424
tCO2e
science-based target
baseline (scope 1 and
2 net GHG emissions)
Avoided emissions
Renewable electricity purchased
Renewable electricity exported
Biomethane exported
WILL REVERT TO
PREVIOUS YEAR
DIAGRAM
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
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our approach to climate change
Energy and Carbon
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 Market-based(1)
Location-based
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
Market-based(1)
Location-based
Current
year
2019/20
tCO2e
Previous years
Baseline
Year
2018/19
tCO2e(2)
2017/18
tCO2e
2005/06
tCO2e
17,129
16,809
14,324
17,638
84,048
88,136
91,456
125,032
15,739
116,916
14,409
119,354
11,803
117,583
7,514
150,183
11,789
164,521
18,503
187,171
28,287
230,167
357,660
11,789
18,503
230,167
357,660
2,123
2,236
2,504
2,374
27,410
26,186
23,048
42,712
1,005
13,967
30,538
159,243
1,577
15,955
29,999
167,856
2,644
21,520
47,072
394,822
33,088
78,174
586,017
(3,979)
(3,434)
(2,303)
(1,597)
(9,302)
(8,446)
(8,577)
–
–
Total Scope 3 Other indirect emissions
GROSS GHG EMISSIONS(2)
Avoided emissions from renewable
electricity exported
Avoided emissions from biomethane
exported
Avoided emissions from renewable
electricity purchased
Total avoided emissions
NET GHG EMISSIONS(3)
Location-based
–
(13,281)
145,962
–
(173,876)
(11,880)
155,976
(184,756)
(1,597)
210,066
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) Operational emissions for 2005/06 and 2017/18 use the location-based method, 2018/19 and the current year use the
market-based method.
(3) Emissions from our regulated business have been estimated using the Water Industry Carbon Accounting Workbook V13
2020 v3 which encompasses the UK Government GHG Conversion Factors for Company reporting 2019.
United Utilities’ greenhouse gas emissions intensity
As in previous years we state our emissions as tonnes CO2e per £million revenue. We also report 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.
Gross emissions per £m revenue
Net emissions per £m revenue
Regulated emissions per megalitre of treated water
Regulated emissions per megalitre of sewage treated
tCO2e
tCO2e
Kg CO2e/Ml
Kg CO2e/Ml
Current
year
2019/20
85.7
78.5
27.19
83.80
2018/19
92.3
85.7
38.22
102.43
2017/18
225.6
121.0
60.43
116.75
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United Utilities Group PLC unitedutilities.com/corporate Energy use, generation and export
Renewable energy generation by technology
Energy use
Electricity
Gas
Other fuels(1)
Total energy use
Electricity purchased
Renewable Tariff
0g CO2e/kWh
Supplier Standard Tariff
289g CO2e/kWh
Total electricity purchased
Renewable energy generated
CHP
Solar
Wind
Hydro
Biomethane(3)
2019/20
GWh
2018/19
GWh
801.3
38.3
144.4
984.0
602.9
40.8
807.8
33.0
135.0
975.8
601.5
59.7
643.7
661.2
121.5
42.6
5.7
6.8(2)
14.2
115.7
34.6
4.8
4.6
13.2
172.9
13.0
13.2
26.2
Total renewable energy generated
190.8
Renewable energy exported
Electricity
Biomethane(3)
Total renewable energy exported
18.1
14.2
32.3
(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) Renewable energy from hydro includes Oswestry which was not
incorporated into the emission reporting pending review of ROC.
(3) Biomethane generated and exported to grid is expressed as an
electricity equivalent.
Emissions and energy use
This year we consumed 984 GWh of energy including electricity,
gas and other fuels purchased for use on-site and for transport.
We increased generation across all our renewable sources of
hydro, solar photovoltaics, wind, biomethane and energy recovery
using sewage sludge to power combined heat and power (CHP)
generators. We generated the equivalent of 191 GWh of renewable
electricity, an increase of 18 GWh on last year and though we
exported 6.1 GWh more we reduced our electricity purchased
by 17.5 GWh.
Having largely addressed emissions from electricity, it is mostly
methane and nitrous oxide emissions arising from wastewater
treatment that remain. Understanding and reducing these
emissions forms a long-term challenge for the industry as a whole.
Energy efficiency action taken
Our energy management strategy aims to achieve an appropriate
balance between managing 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.
We have continued to develop our Energy Management
Programme which brings together processes, asset optimisation
and data analytics. We have implemented a wide range of projects
to reduce consumption and drive more dynamic control of our
assets to reduce energy costs. To improve data capabilities we
have rolled out an innovative sub-metering solution installing over
1,200 meters. Two major solar installations were completed with a
combined capacity of 11.5 MW.
h
W
G
200
180
160
140
120
100
80
60
40
20
0
2014/15
2015/16
2016/17
2017/18
2018/19
2019/20
Energy recovery from bioresources
Biomethane (gas to grid)
Solar
Wind
Hydro
In the past year we completed our Energy Saving Opportunities
Scheme (ESOS) submission to the Environment Agency which
includes potential opportunities for efficiency and generation
improvements. We were shortlisted for the Energy Institute Energy
Management Award in November 2019.
Breakdown of our 2019/20 emissions by activity
and greenhouse gas
Sludge process
Mechanical treatment
& storage of wastewater
40,883
38,511
Sludge to land
27,031
17,129
15,739
11,789
Burning of fossil fuels
Fuels used for transport
Grid electricity
purchased
Biogas combustion
other than by CHP
Heat & power
(from CHP)
Business travel
Grid electricity
purchased (T&D)
2,455
2,176
2,123
1,005
Screenings & grit
to landfill
379
Refrigerants
24
Exported renewable
electricity
-3,979
Exported biomethane
-9,302
Carbon dioxide
Methane
Nitrous oxide
HFC refrigerant
0
0
0
0
2
-
,
0
0
0
0
1
-
,
tCO₂e
0
0
0
0
1
,
0
0
0
0
2
,
0
0
0
0
3
,
0
0
0
0
4
,
0
0
0
0
5
,
Summary: good progress – ambitious,
deliverable plans
We’ve been focused on climate change for over 20 years and have
made good progress. We have committed to playing our part in
limiting climate change to 1.5°C, we aim to maintain and improve
services whether the climate change is 1.5°C, 2°C or 4°C, and we
have the appropriate governance, strategy, risk management and
metrics to make sure this happens.
Summary: good progress – ambitious,
deliverable plans
We’ve been focused on climate change for over 20 years and
have made good progress. We have committed to playing our
part in limiting climate change to 1.5°C, we aim to maintain and
improve services whether the climate change is 1.5°C, 2°C or
4°C, and we have the appropriate governance, strategy, risk
management and metrics to make sure this happens.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our performance in 2019/20
Operational performance
The best service to customers
Customer service: Putting customers at
the heart of everything we do has helped
us deliver substantial improvements in
customer service 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. We
outperformed against Ofwat’s SIM measure
across the first four years of AMP6 (the
measurement period) and have performed
well this year against the shadow C-MeX
pilots. We finished third out of the water and
wastewater companies, and fourth out of
the 17 companies in the sector in total, for
the year overall. We finished first in the third
and fourth quarter surveys of customers
who have contacted us. This performance is
mirrored in the number of complaints that
we receive. Since 2015/16 we have seen a 41
per cent reduction in complaints and a 65
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, and now have over 100,000
customers registered.
We have received external recognition for
the improvements that we have made in
the quality of service that we deliver to
customers. We are one of only 14 companies
nationally to be awarded the Service
Mark with Distinction from the Institute of
Customer Service, the only water company
to receive Shaw Trust Accessibility status for
our website and the only water company to
be awarded the ‘Best Practice’ Accreditation
(CICMQ) from the Chartered Institute of
Credit Management.
Leading north west service provider: We
are consistently ranked in the top three
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
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being both environmentally and socially
responsible. We are behind only Amazon
and Aldi, and ahead of seven other major
organisations across utilities, telecoms,
media, banking and retail.
Robust water supply: Customers benefit
from our robust water supply and demand
balance, along with high levels of water
supply reliability; although, with our water
resources predominantly being from
impounding reservoirs, we remain at risk
from short intense dry periods of weather.
Our overall water quality continues to be
good, and our water quality service index
and Mean Zonal compliance both slightly
improved compared with the prior year. We
have consistently delivered a reliable water
service. Although we have experienced
some water no-supply incidents in the
2015–20 regulatory period, our Systems
Thinking approach and the largest water
tanker fleet in the industry has resulted
in sustainable year on year performance
improvements.
Throughout February 2020 the UK
experienced a succession of severe winter
storms. Although the storms did cause
some service interruptions, our workforce
worked tirelessly throughout this period to
minimise the impact on customers and the
environment.
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
included a target of reducing sewer
flooding incidents by over 40 per cent,
in line with customers’ affordability
preferences. During that period, we have
delivered an average reduction of 38 per
cent. Although marginally below our target,
this represents strong performance given
the unprecedented storm events over the
five year period. In terms of internal repeat
flooding (occurring more than once in ten
years) we have delivered a reduction of
over 70 per cent over AMP6.
Our final determination for the 2020–25
regulatory period includes a target of
reducing internal sewer flooding by 73 per
cent. Although a challenging target, we
have invested some of our outperformance
reinvestment in 2019/20 targeting improved
performance in this area. Our wastewater
network will continue to benefit from
significant investment going forward in
terms of innovative proactive targeting of
operational flood risk and through ground-
breaking monitoring of the sewer network
which will be underpinned by artificial
intelligence techniques to interpret and
forecast flood risk. In addition, we will
continue to seek to work in collaboration
with other external flood authorities and
associated partners, paying our fair share,
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, ten of
which are structured to provide the potential
to earn a reward for good performance or
for us to be penalised for poor performance.
The other nine wholesale financial ODIs are
structured in order to protect customers
in key areas and do not offer a reward for
good performance, only a penalty for poor
performance.
In 2019/20 we have delivered another
strong performance against our ODIs,
resulting in a net outperformance payment
of £22.4 million. During the year we
achieved the final AMP6 milestone in
relation to our West Cumbria project,
earning an outperformance payment of
£21.6 million. We are pleased with our
overall AMP6 performance, having earned
a total net outperformance payment of
£43.9 million over the five-year period. This
demonstrates the benefits of our targeted
investment alongside our Systems Thinking
approach and given the ODI targets have
typically become tougher each year,
it is particularly pleasing that our best
performance has been achieved in the
final two years of the AMP. This gives us
confidence heading into AMP7.
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 and earning an
outperformance payment of £6 million.
In AMP7, SIM will be replaced by a new
customer service measure, C-MeX,
with the industry reporting against
C-MeX for the year 2019/20 (although
not contributing to any outperformance
or underperformance) before the
measurement period begins in AMP7.
There are two elements to C-MeX, a
contactor survey based on a survey
of customers who have contacted the
company and a perception survey of a
random selection of individuals who may
or may not have had a previous interaction
with the company.
For the contactor element, we achieved
first place (out of 17 companies) in each of
the final two quarters. For the perception
survey, we achieved eighth place in the
fourth and final quarter. This means on the
combined scores we were fourth in the
final quarter and also fourth out of the 17
companies and third out of the water and
wastewater companies for the year overall.
Key stat or
fact lorem
Key stat or
fact lorem
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WHAT MATTERS
Supporting
vulnerable
customers
Delivering industry-leading
assistance schemes.
With more than a quarter of households in the
North West earning less than £21,000 a year and
just under a fifth experiencing water poverty,
affordability continues to be a key focus for us.
We’ve continued to build on our affordability
support and became the first water company to
have our affordability schemes included in the Turn
2 Us customer support search tools.
We introduced a friends and family helpline for
customers who want to assist loved ones who
are struggling financially, and we held our third
Affordability Summit in Liverpool, welcoming more
than 180 attendees.
The Hardship Hub continues to prove a useful tool
for the region’s debt advice community, with over
500 registered users.
In the last 12 months an additional 25,487 customers
registered for our Priority Services scheme, meaning
we now have more than 100,000 customers
benefiting from our tailored services which help
support their particular needs.
After completing a number of audits with
British Standards Institute, in February 2020 we
successfully passed the verification for ‘inclusive
service provision for identifying and responding
to consumer vulnerability for water supply and
wastewater services’.
We continue to work with external charities and
organisations from around the region, with expertise
in customer vulnerability, to help promote the
Priority Services scheme. We provide financial
assistance to more than 100,000 customers, and
through our Payment Matching Plus scheme, 15,000
customers became water debt free in 2019/20.
To help prevent customers getting into debt we
provide flexible payment plans and the option for
low income customers to take a payment break if
they experience a change of circumstances.
We continue to actively promote our support
schemes through customer communications,
doorstep visits, social media and partner
organisations. Last year, our customer outreach
managers carried out over 250 visits to 120
organisations to spread awareness of our schemes.
Generating value for:
Customers
Shareholders
Communities
Customers
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Annual Report and Financial Statements for the year ended 31 March 2020
79
Our performance in 2019/20
Operational performance
At the lowest sustainable cost
Power and chemicals: Our Systems
Thinking approach and more effective use
of operational site management continues
to optimise power and chemical usage
alongside 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
£62 million across the 2015–20 regulatory
period. We continue to lock-in our power
commodity costs, providing greater cost
certainty for the next 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.
Customer receipts and financial support:
Our region suffers from high levels of
income deprivation and we offer wide-
ranging schemes to help customers
struggling to pay. We now have 120,000
customers on affordability schemes, more
than double the commitment we made
at the start of AMP6. Notwithstanding
our industry-leading debt management
processes, we expect bad debt to continue
to be a challenging area for us due to the
level of deprivation in our region and the
impact COVID-19 will have on the ability of
customers to pay their bills.
Prior to any COVID-19 impact, our
household bad debt expense had been
maintained at the 1.8 per cent of revenue
we communicated at the half year. This
is a reduction from the 2.1 per cent last
year, reflecting our ongoing attention to
bad debt through initiatives such as our
affordability schemes. At 31 March 2020,
recognising the higher risk of future non-
payment of household customer bills as a
result of COVID-19, we have increased our
reported bad debt expense by £17 million.
Although this is excluded from underlying
profit measures as an adjusted item, on a
reported basis the impact is to increase
household bad debt to 3.1 per cent of
revenue.
Pensions: We have taken progressive
steps to de-risk our pension provision.
The group had an IFRS retirement benefit
surplus of £754 million as at 31 March 2020,
compared with a surplus of £484 million
as at 31 March 2019. Further details of the
80
group’s pension provision are provided in
the pensions section on pages 222-223 and
240-224.
a combination of driving efficiency into our
capital programme and through Systems
Thinking.
Financing outperformance: Our leading
treasury management helped lock in a
low cost of debt, delivering significant
financing outperformance for the 2015–20
regulatory period compared with the
industry allowed cost.
Household retail cost to serve: We have
continued to deliver against a challenging
benchmark set for AMP6. Our target has
been to minimise our costs compared
with our revenue allowance and on an
underlying basis we have delivered a good
performance in 2019/20, outperforming
this year’s revenue allowance (including
margin) by around £13 million. This reflects
underlying performance and therefore
excludes an additional regulatory bad debt
charge associated with the higher risk of
future non-payment of household customer
bills as a result of COVID-19. The statutory
bad debt charge component of this (£17
million) is excluded from underlying profit
measures as an adjusted item as outlined
in the underlying profit measures table on
pages 90 and 91. On an underlying basis,
cost to serve is in line with the regulatory
cost allowance of £35 per household
and we are confident that our cost plans
will move us towards upper quartile
performance in AMP7.
In April 2019, the group accelerated £103
million of deficit repair contributions to
its defined benefit pension schemes. This
represents the final acceleration of deficit
repair contributions agreed with the
schemes’ trustees and reduces the pension
scheme deficit repair contributions due
from the company down to £nil.
Capital delivery and regulatory
commitments: We place great emphasis
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 have
worked with a single engineering partner
and four design and construction partners
to deliver our regulatory capital investment
programme of just under £4 billion. We
have involved our partners much earlier
in project definition and have packaged
projects by type, geography and timing
in order to deliver efficiencies. Projects
have been allocated on an incentive or
competitive basis leading to our partners
presenting a range of solutions, innovations
and pricing.
We accelerated our 2015–20 investment
programme in order to improve services for
customers and deliver early operational and
environmental benefits. Regulatory capital
investment in 2019/20 was £722 million
including £143 million of IRE, £184 million
of additional investment made available
through sharing our net outperformance
and £13 million additional capex associated
with the dry weather in the summer of
2018. This, combined with our investment
in the first four years of the regulatory
period, brings our total spend to just under
£4.0 billion across the 2015–20 regulatory
period.
We are driving more effective and efficient
delivery of our capital programme
and applying a tougher measurement
mechanism to our time, cost and quality
index (TCQi) score for this regulatory
period. Despite this tougher approach, our
TCQi score remains high at 95 per cent,
representing very good performance.
Key performance indicators:
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. Not only have we closed the gap
but we have now delivered the original
scope for around £100 million less than our
allowance. This has been achieved through
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WHAT MATTERS
Improving cost and
service levels in
our procurement
process
New methodology makes
significant savings, helping
us deliver more efficient
services for customers.
When we co-sponsored a PhD programme in
partnership with the University of Salford and
the Engineering and Physical Sciences Research
Council (EPSRC), we realised that there was the
potential to engage with markets and our supply
chain differently.
That was the beginning of our journey towards
the introduction of the Market Engagement
Methodology (MEM), which has resulted in £359
million in savings for customers and led to us
winning the Chartered Institute of Procurement
and Supply (CIPS) Best Process Improvement
Award.
From the formation of our AMP6 and AMP7 capital
works agreements through to our major networks
delivery transformation, we sought to engage our
supply chain by focusing on what is best for both
parties and looking at where we can improve in
terms of cost and service level.
The MEM process moves beyond the confines
of traditional approaches. Working with more
than 20 different organisations over an 18-month
programme, we analysed, challenged and tested
the entirety of our spend base.
By using automated tools and through rigorous
challenges with new and existing suppliers, we
transformed our procurement approaches towards
over £2 billion worth of spend across a variety of
categories through the AMP, and committed to the
delivery of £359 million worth of savings directly
through to our customers.
Generating value for:
Customers
Shareholders
Media
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Annual Report and Financial Statements for the year ended 31 March 2020
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STRATEGIC REPORT Our performance in 2019/20
Operational performance
In a responsible manner
Behaving responsibly is fundamental to
delivering on our purpose, 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 year, we achieved
a World Class rating in the Dow Jones
Sustainability Index for the 13th 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, acoustic loggers, satellite
technology and the UK’s first leakage
sniffer dogs specially trained to pinpoint
the exact location of leaks.
We continue to encourage customers
to save water through water efficiency
programmes as this enables them to help
preserve this precious resource and can
save money on their water bill.
Our final determination for 2020–25
assumes a 15 per cent reduction in leakage.
Although a challenging target, we have
invested some of our outperformance
reinvestment in 2019/20 in our water
network to help further improve our
performance in this area.
Environmental performance: This is a high
priority for us and an area where we have
performed well, achieving Industry Leading
Company status in the Environment
Agency’s annual assessment in three of
the last four years. This is a result of our
approach to managing our assets in an
integrated way to minimise the number of
environmental incidents. Further detail is
provided in the KPI section on the right of
this page.
Carbon footprint: We set a target to
reduce our carbon footprint by 50 per cent
by 2020 compared with a 2005/06 baseline
,and achieved this target a year early. A
major contributor to this has been the
purchase of certified renewable electricity,
with over 95 per cent of the electricity we
use having zero emissions. This year our
total greenhouse emissions were 159,243
tonnes of carbon dioxide equivalent, a
reduction of 73 per cent since 2005/06.
We generated the equivalent of 191
gigawatt hours, an increase of 18 gigawatt
hours on the previous year. This illustrates
good progress in our energy strategy to use
less and generate more renewable energy.
We have committed to six climate change
mitigation pledges – see page 72.
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Employees: Our primary concern
throughout the COVID-19 pandemic has
been to protect the safety of our employees
and those they work alongside. We have put
safeguarding measures in place, distributed
additional personal protective clothing
and issued key worker cards to frontline
employees to explain their presence in
communities. We have not furloughed any
employees and recognising that some may
face challenging financial issues within
their own families as a result of changing
circumstances, we created a Staff Outreach
Scheme to provide one-off grants through a
confidential application process.
We continue to work hard to engage all
of our employees in the transformation
of the group’s performance. Employee
engagement was at 84 per cent this
year, consistent with the UK high-
performing norm. We remain committed
to 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
2019/20. We now have a total of 36 graduates
and 102 apprentices across the business.
Our investment in recruiting graduates
and apprentices is already benefiting the
company, with 269 employees who have
previously been on either the graduate
or apprentice scheme having secured
permanent roles across our business.
Over the last 12 months all of our
employees have attended health, safety
and wellbeing training as part of our home
safe and well programme, which has been
designed to support colleagues understand
how our individual decision-making
and behaviour can ensure we look after
ourselves and each other.
More than 300 colleagues then
volunteered to become front line coaches
and following their training are now ‘peer
influencing’ colleagues to think again about
the activities they are undertaking and
consider if there is a safer way to do it. We
are seeing a positive improvement in our
performance.
Our employee accident frequency rate for
2019/20 was 0.110 accidents per 100,000
hours, representing a 27.6 per cent
improvement on last year’s outturn of 0.152.
Our contractor accident frequency also
showed improvement, with 0.083 accidents
per 100,000 hours compared to 0.092 in
2018/19. We retained our Gold award status
with the Royal Society for the Prevention
of Accidents, achieving this status for the
eighth year.
We are continuing our strong focus on
health, safety and wellbeing and have
undertaken extensive engagement
across our business to enable the further
development of our plans.
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 partnership with Beamont Collegiate
Academy FabLab and STEM centre which
will enable students from across the North
West to gain first-hand experience of using
hi-tech equipment and learn more about
STEM in a fun and engaging way.
Key performance indicators:
Leakage: Although leakage is included
within our outcome delivery incentives, we
publish our leakage position separately,
with it being an important measure from
a corporate responsibility perspective. In
2019/20 we have again met our regulatory
leakage target of 463 megalitres per day.
Environmental performance: In the
Environment Agency’s latest assessment,
published in July 2019, we were awarded
three stars (out of four) across a range of
operational metrics. This is lower than our
performance in the previous year where
we were awarded the industry-leading
4 star status for the third consecutive
year. Our lower score in the most recent
assessment was primarily the result of a
slight deterioration of performance against
the delivery of our National Environment
Programme where two projects were
delivered late. The two projects were
delayed due to unforeseen issues with
land purchase, planning difficulties and
complex interactions with a flood risk
scheme. We have since made good progress
with delivery and we are now operating
the relevant assets in line with their new
Environmental Permit requirements. We
brought forward the delivery of two other
major schemes to offset the environmental
impact. Overall, our performance, earning
industry-leading 4 star status in three of the
last four years is in line with our medium-
term goal of being an upper quartile
company on a consistent basis.
Corporate responsibility: We are
committed to operating in a responsible
manner and are the only UK water
company to have a World Class rating as
measured by the Dow Jones Sustainability
Index. For 2018/19, we achieved our World
Class rating for the 13th consecutive year.
We demonstrate a very strong performance
across a number of leading corporate
responsibility indices and report these
publicly in our annual report and on our
website; for example, we have been named
in the FTSE4Good Index every year for the
last 17 years, and reconfirmed as part of the
Euronext Vigeo Index UK 20.
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Protecting
customers and
employees
Our response to the
COVID-19 pandemic.
We’ve responded to the COVID-19 pandemic by
focusing on the essential services we provide,
with our primary concern being the safety of our
people and those they work alongside. Many of
our employees are designated as key workers
and it’s important that during this challenge
customers know they can rely on us to continue
to supply their drinking water and take away their
wastewater.
Where customers have found it difficult to pay
their bills we’ve increased the extensive financial
assistance we already provide, for instance by
widening eligibility for our ‘Back on Track’ social
tariff for an initial interim period to 2020/21
and 2021/22, alongside encouraging those in
vulnerable circumstances to sign up to our Priority
Services scheme.
For our employees, we’ve put safeguarding
measures in place, distributed additional personal
protective clothing and issued key worker cards
to frontline employees to explain their presence
in communities. We have not furloughed any
employees and recognising that some may face
challenging financial issues within their own
families as a result of changing circumstances,
we created a Staff Outreach Scheme to provide
one-off grants through a confidential application
process.
To assist our suppliers and contractors we have
committed to temporarily accelerating payment
terms to seven days.
To safeguard communities, we injected £3.5
million into the United Utilities Trust Fund and
took the difficult decision to close our recreational
car parks, while keeping pathways open for local
walking and exercise.
We’ve shown our support for other key workers
and supported employee fundraising with
additional matched funding. We regularly liaise
with local resilience forums to provide help dealing
with the pandemic wherever we can.
We’ve been issuing weekly updates to key
stakeholders, openly sharing details of our actions,
and using social media channels to communicate
regularly with customers.
We will continue with this wide-ranging response
until restrictions are removed.
Generating value for:
Communities
Customers
Customers
Employees
Environment
Media
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Annual Report and Financial Statements for the year ended 31 March 2020
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Our performance in 2019/20
Financial performance
United Utilities delivered a robust set of financial results for
the year ended 31 March 2020.
Revenue
2019/20
2018/19
£1,859.3m
£1,818.5m
Underlying operating profit(1)
0
100
200
300
400
500
600
700
800
2019/20
2018/19
£743.9m
£684.8m
Reported operating profit
0
100
200
300
400
500
600
700
800
2019/20
2018/19
£630.3m
£634.9m
RCV gearing(2) (%)
62%
Total dividend per
ordinary share (pence)
42.60p
(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 90 and 91.
(2) Regulatory capital value (RCV) gearing
calculated as group net debt/United Utilities
Water Limited shadow RCV (out-turn prices).
84
Revenue
Revenue was up £41 million, at £1,859 million, largely reflecting our allowed
regulatory revenue changes.
Consistent with Ofwat’s annual wholesale revenue forecasting incentive
mechanism (WRFIM), we have reduced revenue by £14 million in 2019/20 (outturn
prices). This consists of two components; first reflecting actual volumes being
higher than our original assumptions during AMP6, and secondly reductions
relating to the 2014/15 ‘AMP5 blind year’, which is £5 million in 2019/20.
The impact of COVID-19 has resulted in reduced consumption from businesses
and has therefore reduced revenue by around £5 million in 2019/20 with a more
significant impact likely in 2020/21. By way of illustration, for every 1 per cent per
annum reduction in non-household consumption, revenue will reduce by around
£4 million. However, a significant amount of uncertainty persists and therefore, at
this point, it is difficult to predict the impact for 2020/21. Furthermore, shortfalls
in revenue are recovered in future years under the regulatory revenue control.
Operating profit
Underlying operating profit at £744 million was £59 million higher than last year.
This reflects the £41 million increase in revenue and a £22 million decrease in IRE
partly offset by a £7 million increase in underlying depreciation. The remaining
cost base has decreased by £4 million as a result of a £19 million decrease in
property rates largely due to an £8 million refund received and an £8 million
reduction in accrued property rates relating to wastewater assets, and smaller
reductions across the rest of the cost base partly offset by a £10 million credit in
the prior year resulting from the settlement of a historical commercial claim and
a £9 million increase in power costs largely due to electricity price increases.
During the current year operating costs of £3 million and infrastructure renewal
expenditure of £4 million were incurred in response to Storms Ciara and Dennis
that occurred in February 2020.
Reported operating profit decreased by £5 million, to £630 million, reflecting the
increase in underlying operating profit being more than offset by an increase in
adjusted items. Adjusted items for 2019/20 included £83 million of accelerated
depreciation of bioresources assets that have been taken out of use. A further £19
million relates to costs associated with COVID-19, principally reflecting a higher
bad debt charge recognising the higher risk of future non-payment of household
customer bills, and £12 million relates to restructuring costs. In the prior year,
adjusted items 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.
Investment income and finance expense
The underlying net finance expense of £246 million was £15 million higher than
last year, mainly due to the impact of new debt and interest rate swaps traded
since March 2019, and higher RPI inflation on the group’s index-linked debt.
Interest of £95 million on non index-linked debt was £11 million higher than last
year due to a higher level of debt following new issuances and associated interest
rate swaps traded in the period. The indexation of principal on index-linked debt,
including the impact of inflation swaps, amounted to a net charge in the income
statement of £100 million, compared with a net charge of £98 million last year.
As at 31 March 2020, the group had approximately £3.5 billion of RPI-linked debt
at an average real rate of 1.4 per cent, and £0.5 billion of CPI-linked debt at an
average real rate of 0.2 per cent.
The higher RPI inflation charge compared with last year contributed to the group’s
average underlying interest rate of 3.4 per cent being higher than the rate of 3.3
per cent for the year ended 31 March 2019. The average underlying interest rate
represents the underlying net finance expense divided by average debt.
Reported net finance expense of £289 million was £84 million higher than
last year, principally reflecting an increase in the fair value losses on debt and
derivative instruments, from a £9 million gain in 2018/19 to a £76 million loss in
2019/20 and the £5 million expected credit losses on our loans to Water Plus.
27061-UU-AR2020-Strategic.indd 84
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United Utilities Group PLC unitedutilities.com/corporate
The group fixed the interest rates on the majority of
its non index-linked debt for the 2015–20 regulatory
period at a net effective nominal interest rate of around
3.2 per cent (excluding the impact of cost of carry).
Profit before tax
Underlying profit before tax was £492 million, £32
million higher than last year. This reflects the £59
million increase in underlying operating profit, partly
offset by the £15 million increase in underlying net
finance expense and a £6 million share of underlying
losses of joint ventures compared with a £7 million
profit last year.
Our joint venture Water Plus has been operating in
a challenging environment due to billing data issues
stemming from the market opening in April 2017, and
delivered a disappointing operating result for the year
to March 2020. Prior to the onset of COVID-19, Water
Plus had been making progress with its recovery
plan but the impact COVID-19 has had on the ability
of business customers to pay has resulted in a far
more challenging operating environment for Water
Plus. Our share of Water Plus losses for the year
amounted to £51 million, of which £46 million has
been recognised in the income statement, comprising
our £14 million share of Water Plus underlying losses
and our £32 million share of Water Plus losses arising
as a result of COVID-19. As a result of the £46 million
of losses recognised in the income statement, our
long-term interest (comprising our equity investment
in and zero coupon shareholder loans to Water Plus)
has been written down to £nil. In addition we have
recognised an allowance for expected credit losses
of £5 million on our loans to Water Plus. Further
detail is provided in note 12 (Joint Ventures) of our
consolidated financial statements.
The underlying measure of profit before tax reflects
the adjusted items, as outlined in the operating profit
section above, the Water Plus adjustments, and other
consistently applied presentational adjustments, as
outlined in the underlying profit measures on pages
90 and 91.
Reported profit before tax decreased by £133 million
to £303 million reflecting the £5 million reduction
in reported operating profit, a £84 million increase
in reported net finance expense including fair value
movements and a £38 million share of losses of joint
ventures compared with a £7 million share of profits
last year.
Tax
The group continues to be fully committed to
paying its fair share of tax and acting in an open and
transparent manner in relation to its tax affairs and
we were delighted to secure the Fair Tax Mark in
July last year.
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
over further amounts for its 5,000 strong workforce.
The total payments for 2019/20 were around £250
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 2019/20, we paid corporation tax of £72 million,
which represents an effective cash tax rate on
underlying profits of 15 per cent, which is 4 per cent
lower than the headline rate of corporation tax of
19 per cent. We paid six rather than the usual four
quarterly instalment payments as we transition to the
new quarterly instalment regime. After adjusting for
these one off additional payments, the key reconciling
items to the headline rate of corporation tax continue
to be allowable tax deductions 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.
We have expressed the effective cash tax rate in terms
of underlying profits as this measure excludes fair value
movements on debt and derivative instruments and
thereby enables a medium-term cash tax rate forecast.
We expect the average cash tax rate on underlying
profits to remain below the headline rate of tax for the
medium term. The key risk to sustaining this rate is
any unexpected changes in tax legislation or practice
and, as necessary, we would actively engage with the
relevant authorities in order to manage this risk.
As well as the payments we also received a
repayment of corporation tax of £16 million which
relates to agreement of prior years’ UK tax matters.
The current tax charge was £51 million in 2019/20,
compared with £42 million in the previous year.
There were current tax credits of £12 million
in 2019/20 and £3 million in 2018/19, following
agreement of prior years’ tax matters.
Summary of net debt movement
7,750
7,250
6,750
6,250
5,750
Operating activities
Investing activities
Financing activities
7,067.3
6,867.8
(1,005.5)
(995.5)
195.2
163.2
Net debt
Net debt
at
at
31.03.19
31.03.18
Operating
Operating
cash flows
cash flows
Interest
Interest
and
and
Tax
Tax
645.3
(4.9)
(12.0)
624.9
6.0
(1.0)
(34.5)
(2.2)
284.5
60.9
98.3
100.8
274.4
58.8
5.5
7,361.4
27.3
4.1
Net
capex
Net
capex
Dividends
from
joint
ventures
Loan to
joint
ventures
Proceeds
Proceeds from
from
disposal of
disposal of
investments
investments
Loans
to joint
ventures
Dividends
from
joint
ventures
Dividends
Inflation
Dividends
uplift on
index linked
debt
Other
Non-cash
Inflation
movements
uplift on
in lease
index linked
liabilities
debt
Fair value
movements
(including
foreign
exchange)
Fair value
movements
(including
foreign
exchange)
Other
Net debt
at
31.03.20
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our performance in 2019/20
Financial performance
For 2019/20, the group recognised a deferred
tax charge of £158 million, compared with
£34 million for 2018/19. Of the deferred tax
charge for 2019/20, £136 million relates to
the government’s reversal of the planned
reduction in the rate of corporation tax from
19 per cent to 17 per cent from 1 April 2020.
Excluding the deferred tax adjustment for
the change in tax rate of £136 million in the
current year, the total effective tax rate was
around 20 per cent for the current year and
around 17 per cent for the prior year. Subject
to any legislative or tax practice changes, we
would expect the total effective tax rate to be
in line with the headline rate of corporation
tax for the medium-term. In 2019/20, there
are £157 million of tax adjustments taken to
equity, primarily relating to remeasurement
movements on the group’s defined benefit
pension schemes – including the adjustment
arising from a change in the rate at which the
deferred tax liabilities are measured, from
17 per cent to 35 per cent, being the rate
applicable to refunds from a trust.
Profit after tax
Underlying profit after tax of £430 million
was £22 million higher than last year,
principally reflecting the £32 million
increase in underlying profit before tax.
For 2019/20 we have changed the approach
we use to derive underlying profit after tax
to exclude the impact of deferred tax. This
approach is in line with the regulatory model
whereby cash tax is recovered through
revenues, with future revenues allowing
for cash tax including the unwinding of any
deferred tax balance as it becomes current.
By making this adjustment, the group’s
underlying tax charge does not include tax
that will be recovered through revenues in
future periods, thus reducing the impact of
timing differences. This approach is consistent
with the approach taken by our listed peers
and with what we believe to be the direction
of travel of the International Accounting
Standards Board’s (IASB) rate-regulated
activities project. Our prior year numbers have
been restated for comparability.
Reported profit after tax decreased by £257
million to £107 million, principally reflecting
the £133 million decrease in the reported
profit before tax and a £124 million increase
in the reported deferred tax charge largely
resulting from the Government’s reversal
of the planned reduction in the rate of
corporation tax from 19 per cent to 17 per
cent from 1 April 2020.
Earnings per share
Underlying earnings per share increased
from 59.8 pence to 63.0 pence. This
underlying measure is derived from
underlying profit after tax. As noted above,
we have changed the approach we use to
derive underlying profit after tax to exclude
the impact of deferred tax, with our prior
year numbers restated for comparability.
86
Basic earnings per share decreased from 53.3
pence to 15.7 pence for the same reasons that
caused the decrease in profit after tax.
Dividend per share
Reflecting performance in the year and
across AMP6 more generally, the board
has proposed a final dividend of 28.40
pence per ordinary share in respect of the
year ended 31 March 2020. Taken together
with the interim dividend of 14.20 pence
per ordinary share, paid in February, this
results in a total dividend per ordinary
share for 2019/20 of 42.60 pence. This is
an increase of 3.2 per cent, compared with
the dividend relating to last year, in line
with the group’s AMP6 dividend policy
of targeting a growth rate of at least RPI
inflation each year through to 2020. The
inflationary increase of 3.2 per cent is
based on the RPI element included within
the allowed regulated revenue increase
for the 2019/20 financial year (i.e. the
movement in RPI between November 2017
and November 2018).
The final dividend is expected to be paid
on 3 August 2020 to shareholders on the
register at the close of business on 26 June
2020. The ex-dividend date is 25 June 2020.
The AMP7 dividend policy announced in
January 2020 targets a growth rate of CPIH
inflation each year through to 2025, with
further details set out below. It is, however,
too early to predict the full impact of
COVID-19 on inflation, the economy more
generally and on our business, and we
will review our dividend policy for AMP7
as a clearer picture of the post COVID-19
economic environment emerges.
Policy period – the dividend policy aligns
with the five-year regulatory period which
runs from 1 April 2020 to 31 March 2025.
Policy approval process – the dividend
policy was considered and approved by
the United Utilities Group board in January
2020, as part of a comprehensive review of
the 2020–25 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
2020, the company had distributable
reserves of £3,105 million. The total
external dividends relating to the 2019/20
financial year amounted to £291 million.
The company distributable reserves
support over ten 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 basis
for UUG dividend distributions in AMP7
comprises expected returns from UUW
based on AMP7 performance, including the
base dividend return of 4 per cent (nominal)
on the equity portion of the shadow RCV,
together with accumulated outperformance
in prior periods that has been retained by
the group after sharing with customers.
The UUW board has determined that there
should be no dividend payments made
by UUW during the financial year 2020/21
and that any eventual dividend that may
ultimately be earned relating to the 2020/21
financial year will be deferred into the
future when prevailing uncertainties have
been resolved and the financial position has
become more clear. This does not impact
the UUG board’s decision in relation to the
payment of dividends for 2020/21 and the
UUG board will continue to monitor UUW’s
AMP7 performance in order 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
regulated level of return. 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 ten years, always within our target range
of 55 to 65 per cent, supporting a stable A3
credit rating for UUW with Moody’s. RCV
gearing at 31 March 2020 was 62 per cent
and the movement in net debt is outlined in
the cash flow section on the following page.
Given the level of uncertainty associated
with the economic impact of COVID-19, and
specifically the future outlook for inflation, it
is probable that our RCV gearing will increase
above its current level and we will therefore
continue to monitor the position as greater
clarity emerges.
Annual dividend approval process – the
group places significant emphasis on
strong corporate governance, and before
declaring interim and proposing final
dividends the UUG board undertakes a
comprehensive assessment of the group’s
key financial metrics.
Policy sustainability – at the time of
approving the policy in January 2020, the
board was satisfied that on average across
AMP7 as a whole the projected dividend
would be covered by underlying profit after
tax and that the policy would be sufficient
to withstand reasonable changes in
assumptions, such as inflation, opex, capex
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United Utilities Group PLC unitedutilities.com/corporate A3
stable credit rating
with Moody’s
£2.1bn
expected financing
for AMP7
and interest rates. Extreme economic, regulatory,
political or operational events, which could lead to
a significant deterioration in the group’s financial
metrics during the policy period, may present risks
to policy sustainability. In particular, the longer-term
economic impacts resulting from COVID-19 could
impact the group’s financial metrics, and these could
include sustained levels of high unemployment,
corporate failures and lower inflation affecting
revenues, financing costs and RCV.
Cash fow
Net cash generated from continuing operating
activities for the year ended 31 March 2019 was
£810 million, and therefore broadly consistent with
£832 million in the previous year. The group’s net
capital expenditure was £645 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 2020 was
£7,361 million, compared with £7,067 million at
31 March 2019. This increase largely reflects
regulatory capital expenditure, payments of
dividends, interest and tax, the inflationary uplift
on index-linked debt, fair value movements and the
impact of IFRS16 resulting in a non-cash increase in
lease liabilities, partly offset by operating cash flows
and a repayment of loans owed from joint ventures.
Fair value of debt
The group’s gross borrowings at 31 March 2020 had
a carrying value of £8,363 million. The fair value
of these borrowings was £8,834 million. This £471
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
£1,089 million at 31 March 2019 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 62 per cent at 31 March 2020. This
is slightly higher than the 61 per cent as at 31 March
2019 and remains within our target range of 55 to 65
per cent.
UUW’s senior unsecured debt obligations are rated
A3 with Moody’s Investors Service (Moody’s), A- with
Fitch Ratings (Fitch) and BBB+ with Standard & Poor’s
Ratings Services (S&P) and all on stable outlook.
United Utilities PLC’s (UU PLC) senior unsecured
debt obligations are rated Baa1 with Moody’s, A- with
Fitch and BBB- with S&P, 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.
Gross debt – total carrying value
£8,363 million
Yankee bonds (USD)
Euro bonds (EUR)
HKD bonds (HKD)
£397.5m
£193.4m
£279.8m
GBP bonds
£2,339.8m
GBP RPI-linked bonds
£1988.7m
GBP CPI-linked bonds
GBP CPI-linked loans
GBP fixed rate and RPI-linked
bonds swapped to CPI linked
£174.0m
£101.3m
£275.3m
EIB and other RPI-linked bonds
£1,543.0m
Other EIB loans
Lease obligations
Other borrowings
£572.0m
£57.6m
£440.7m
Cash and short-term deposits at 31 March 2020
amounted to £528 million. Over 2015–20, we had a
financing requirement totalling around £2.5 billion.
This was fully funded before the end of the AMP
with subsequent finance raised prefunding our
AMP7 requirement. In total over 2020–25, we expect
to raise around £2.1 billion to cover refinancing
and incremental debt, supporting our five-year
investment programme.
We remain one of the sector leaders in the issuance of
CPI-linked debt having previously achieved CPI-linkage
on £465 million of our debt portfolio, in response to
Ofwat’s decision to transition away from RPI inflation
linkage. In November 2019, we increased the CPI-
linkage in our debt portfolio by a further £50 million
(to £515 million) by increasing the amount outstanding
on UUW’s financing subsidiary, United Utilities Water
Finance PLC’s (UUWF) £250 million public bond with a
maturity date in July 2033, by an additional £50 million
and simultaneously swapping to CPI.
In February 2020, UUWF raised £250 million 1.75 per
cent fixed rate notes in the public bond market with
an 18-year maturity.
Since September 2019, the group has extended a £50
million committed bank facility by one year out to
2024, and £100 million of facilities by one year out to
2025. In addition, since March 2020, the group has
renewed £50 million of committed bank facilities for
a five-year term, and extended a £100 million facility
for approximately a further three years to April 2026.
Long-term borrowings are structured or hedged
to match assets and earnings, which are largely in
sterling, indexed to UK price inflation and subject to
regulatory price reviews every five years.
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12-Jun-20 3:47:32 PM
Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our performance in 2019/20
Financial performance
Term debt maturity per regulatory period
£1.2bn
available
liquidity
3,000
2,000
m
£
1,000
£754m
0
To 31 Mar
2025
2025–30
2030–35
2035 –40
2040–45
2045–50
2050–55
2055–60
Years
IAS19 pension
surplus
Long-term sterling inflation index-linked debt
provides a natural hedge to assets and earnings. At
31 March 2020, approximately 48 per cent of the
group’s net debt was in RPI-linked form, representing
around 30 per cent of UUW’s regulatory capital
value, with an average real interest rate of 1.4 per
cent. A further 7 per cent of the group’s net debt was
in CPI-linked from, representing around 4 per cent
of UUW’s RCV, with an average real rate of 0.2 per
cent. The long-term nature of this funding provides a
good match to the company’s long-life infrastructure
assets and is a key contributor to the group’s average
term debt maturity profile, which is around 18 years.
Our inflation hedging policy is to target around 50
per cent of net debt to be maintained in index-linked
form. This reflects a balanced assessment across a
range of factors.
Where nominal debt is raised in a currency other
than sterling and/or with a fixed interest rate, the
debt is generally swapped to create a floating rate
sterling liability for the term of the debt. To manage
exposure to medium-term interest rates, the group
fixes underlying interest costs on nominal debt out to
ten years on a reducing balance basis.
Historically, this has been supplemented by fixing
substantially all remaining floating rate exposure
across a forthcoming regulatory period around the
time of the price control determination. Recognising
Ofwat’s intention to apply debt indexation for new
debt raised during the 2020–25 regulatory period,
we have retained the hedge to fix underlying interest
costs on nominal debt out to ten years on a reducing
balance basis, but have not supplemented this with
the additional ‘top up’ fixing at the start of the 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.
At 31 March 2020, the group had around £1.2 billion
of available liquidity, comprising cash and short-term
deposits (enhanced by new finance raised in the
period), plus committed undrawn revolving credit
facilities. Of this, £722 million covers short-term debt
and debt maturities which fall due across the next
12 months. After taking this into account, the group
has headroom of £436 million, providing flexibility
in terms of when and how further debt finance is
raised to help refinance maturing debt and support
the delivery of our regulatory capital investment
programme. The group plans to raise between £500
million and £800 million of term funding in 2020/21
and the group has recently re-established a Euro
Commercial Paper Programme, which would facilitate
access to the Bank of England’s Covid Corporate
Financing Facility (CCFF), should the group need to do
so. The Bank of England has confirmed our eligibility
to participate in the CCFF. Whilst we do not expect
to use this facility, we see it as prudent contingency
planning to have it available to the group.
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.
Pensions
As at 31 March 2020, the group had an IAS 19 net
pension surplus of £754 million, compared with a net
pension surplus of £484 million at 31 March 2019. This
£270 million increase is as a result of the acceleration
of £103 million deficit repair contributions to the
group’s defined benefit schemes made in April 2019,
and a spike in credit spreads at 31 March 2020 due to
COVID-19 that resulted in a temporary decrease in the
valuation of liabilities. The scheme specific funding
basis does not suffer volatility due to credit spread
movements to the same extent as it uses a prudent,
fixed credit spread assumption and is hedged for
inflation and interest rates. Any inflation and credit
spread movements are therefore not expected to have
a material impact on the pension liabilities calculated
on a scheme specific funding basis.
Further detail on pensions is provided in note 19
(Retirement benefit surplus) of our consolidated
financial statements.
88
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United Utilities Group PLC unitedutilities.com/corporate WHAT MATTERS
Maintaining a
secure pension
position for employees
Our pension schemes have low-
dependency on the company,
giving significant protection to
employees and shareholders.
As a responsible employer, we are committed to ensuring
that the pension promises we have made are kept and
that we help our employees to plan for retirement.
We have £4 billion of pension assets under management.
Around 14,000 former employees and more than 99 per
cent of our current employees are members of one of our
two pension schemes.
Working closely with the trustees of our pension schemes
we have taken a responsible approach to pension risk
management for many years. This has provided us with
the most robust and resilient defined benefit pension
schemes in the water industry, and two of the strongest
in the UK.
With our schemes invested in low risk assets, and interest
rates, inflation and growth asset risk all effectively
hedged, we have significantly reduced the financial
volatility experienced by the pension schemes and further
improved resilience for the future.
Combined with the acceleration of payment of our
remaining deficit repair contributions (totalling around
£126 million) in 2019, this means the pension scheme has
minimal reliance on the company in order to meet all
of its liabilities – in other words, we have achieved ‘low
dependency’ in line with the recommendations of The
Pensions Regulator published in March 2020. This means
that customers and shareholders are protected from
significant exposures to pension scheme deficits.
We provide financial awareness seminars to all of our
employees in the early, mid and late stages of their careers
that cover a broad range of money management topics
including financial planning, managing debt and pensions.
We offer highly competitive pensions to our employees,
with an employer contribution of up to 14 per cent of
salary to our defined contribution arrangement. Our
defined contribution arrangement has been awarded the
Pensions Quality Mark plus accreditation.
Following on from the closure of our defined benefit
schemes to new members over a decade ago, in 2018 we
made significant amendments for existing members with
the introduction of hybrid benefits.
This put the scheme on a more sustainable cost basis for
the future and further reduced the risk of future scheme
deficits.
Generating value for:
Employees
Shareholders
Environment
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Stock Code: UU.
Annual Report and Financial Statements for the year ended 31 March 2020
89
STRATEGIC REPORT Our performance in 2019/20
Financial performance
Guide to Alternative Performance Measures (APMs)
The underlying profit measures in the following table represent alternative performance measures (APMs) as defined by the European
Securities and Markets Authority (ESMA). These measures are linked to the group’s financial performance as reported 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 201. As such, they represent non-GAAP measures.
These APMs have been presented in order to provide a more representative view of business performance. The group determines adjusted
items in the calculation of its underlying measures against a framework which considers significance by reference to profit before tax, in
addition to other qualitative factors such as whether the item is deemed to be within the normal course of business, its assessed frequency
of reoccurrence and its volatility which is either outside the control of management and/or not representative of current year performance.
Adjustments in arriving at underlying profit measures
Dry weather
event
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.
GMP equalisation
The group has recognised an additional past 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 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.
Bioresources
asset write-down
Following a strategic review of the group’s bioresources activities, the likelihood of future economic benefit being
derived from certain assets is now considered remote in light of improvements in alternative lower-cost and more
environmentally friendly processes. This has resulted in a material asset write-down resulting from a strategic review
coming out of the PR19 process and that considers the group’s zero-carbon commitments. As such, it is not considered
to be part of the normal course of business, with similarly material write-downs not expected to reoccur in future years.
COVID-19
The group has incurred significant costs resulting from the COVID-19 pandemic, including incremental expected
credit losses on household and non-household customer receivables caused by the economic impact of business
closures and expected increases in unemployment, and operating expenses relating to the response to the
pandemic. The group’s joint venture, Water Plus, has also been significantly impacted by the pandemic, resulting
in the business recognising an impairment of certain assets and a higher allowance for expected credit losses,
which feeds through to the group’s share of losses from joint ventures. This has also caused the group to recognise
an allowance for expected credit losses in relation to loans extended to Water Plus. Due to the unprecedented
nature of the pandemic and the associated economic shock in the current year, these costs are not deemed to be
representative of normal business performance when compared against prior periods.
Restructuring
costs
The group has incurred restructuring costs in the past in relation to a number of discrete 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.
Net fair value
losses/(gains)
on debt and
derivative
instruments
Interest on
derivatives and
debt under fair
value option
Net pension
interest income
Fair value movements on debt and derivatives can be both very significant and volatile from one period to the next.
These movements are determined by macro economic factors which are outside the control of management and these
instruments are purely held for funding and hedging purposes (not for trading purposes). Taking these factors into
account, management believes it is useful to adjust for this to provide a more representative view of performance.
Net fair value 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.
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.
Deferred tax
adjustment
Management adjusts to exclude the impact of deferred tax in order to provide a more representative view of the
group’s profit after tax and tax charge for the year given that the regulatory model allows for cash tax to be recovered
through revenues, with future revenues allowing for cash tax including the unwinding of any deferred tax balance as
it becomes current. By making this adjustment, the group’s underlying tax charge does not include tax that will be
recovered through revenues in future periods, thus reducing the impact of timing differences. This adjustment has been
made for the first time in the current year, with prior year comparatives re-presented to take account of this adjustment.
Agreement of
prior years’ tax
matters
The agreement of prior years’ tax matters can be significant, volatile and often related to final settlement of
numerous prior year periods. Management adjusts for this to provide a more representative view of the tax
charge/credit in relation to current year performance.
Management adjusts for the tax impacts of the above adjusted items to provide a more representative view of
current year performance.
Tax in respect of
adjustments to
underlying profit
before tax
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United Utilities Group PLC unitedutilities.com/corporate Underlying profit
Operating profit
Reported operating profit
Dry weather event
GMP equalisation
Bioresources asset write-down
COVID-19 – expected credit loss on non-household receivables
COVID-19 – expected credit loss on household receivables
COVID-19 – operating expenses
Restructuring costs
Underlying operating profit
Net finance expense
Finance expense
Investment income
Reported net finance expense
COVID-19 – expected credit losses on loans to JVs
Net fair value losses/(gains) on debt and derivative instruments
Interest on swaps and debt under fair value option
Net pension interest income
Adjustment for capitalised borrowing costs
Underlying net finance expense
Share of (losses)/profits of joint ventures
COVID-19 – Water Plus impairment losses and expected credit losses
Underlying share of (losses)/profits of joint ventures
Reported profit before tax
Adjustments in respect of operating profit
Adjustments in respect of net finance expense
Adjustments in respect of share of (losses)/profits of joint ventures
Underlying profit before tax
Reported profit after tax
Adjustments in respect of profit before tax
Deferred tax adjustment*
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 2020
£m
630.3
Year ended
31 March 2019
£m
634.9
–
–
82.6
1.4
16.7
1.1
11.8
743.9
£m
(313.0)
24.0
(289.0)
5.0
76.3
16.5
(14.0)
(40.6)
(245.8)
£m
(38.1)
32.0
(6.1)
303.2
113.6
43.2
32.0
492.0
£m
106.8
188.8
157.5
(12.2)
(11.3)
429.6
£m
106.8
429.6
681.9m
15.7
63.0
42.60p
36.1
6.6
–
–
–
–
7.2
684.8
£m
(222.5)
17.1
(205.4)
–
(9.5)
30.6
(9.5)
(37.4)
(231.2)
£m
6.7
–
6.7
436.2
49.9
(25.8)
–
460.3
£m
363.4
24.1
34.0
(2.8)
(10.8)
407.9
£m
363.4
407.9
681.9m
53.3
59.8
41.28p
* Approach used to derive underlying profit after tax has been changed to exclude the impact of deferred tax to better reflect the regulatory revenue
allowances, with prior year numbers restated for comparability.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our risk management
Principal risks and uncertainties
Successful management of risks and uncertainties enables us
to deliver on our purpose to provide great water and more for
the North West.
Our approach to risk management
A key objective of our approach is to support the
sustainable achievement of the strategic themes
that underpin our vision to be the best UK water
and wastewater company delivering:
›
›
›
The best service to customers;
At the lowest sustainable cost;
In a responsible manner.
From this starting point our emphasis is on our
capacity and capability to manage risk and
uncertainty, and to build and maintain long-term
resilience across the corporate, financial and
operational structures of the group.
Our risk management framework provides the
foundation for the business to anticipate threats
to delivering an effective service. In addition, our
approach enables us to understand the new and
emerging circumstances that present themselves in
unstable and challenging times. Key components of
the framework include:
›
›
›
›
An embedded group-wide risk management
process that is aligned to ISO 31000:2018;
A board-led approach to risk appetite, based
on strategic goals;
A strong and well established governance
structure giving the board oversight of the nature
and extent of risks the group faces, as well as the
effectiveness of risk management processes; and
A portfolio of policies, procedures, guidance
and training to enable consistent, group-wide
participation by our people.
Figure 1: Assessment and management
process
Identify &
assess
Monitor &
review
Consult &
communicate
Control &
mitigate
Record &
update
How we identify and assess risk
The risk profile is commensurate with the issues
and opportunities inherent to our operations as a
listed water and wastewater business, and takes into
92
account our statutory and regulatory obligations as
well as the expectations of our stakeholders. In this
way the profile illustrates risks that represent key
elements of major end-to-end processes or systems,
in line with our Systems Thinking approach.
The assessment of individual risks considers both
the internal and external business environment as
well as the effectiveness of cross-business controls.
Each risk is sponsored by a senior manager who is
responsible for the assessment of the risk, and for
implementing preventative and responsive controls,
although accountability for different aspects of
the controls may lie across various departments.
Although operational and project level risk
assessment occurs continuously throughout the year,
the activity culminates in the biannual Business Unit
Risk Assessment (BURA), which reviews the strategic
and tactical level business risks that underpin our
principal risks (as illustrated on pages 96 to 99). Each
business risk is event based, with the assessment
considering first the likelihood of the event occurring
based on multiple causal factors, and secondly the
full range of potential impacts and their severity
should the event occur, from a minimum (best case)
to a maximum (worst case) scenario.
All business areas are accountable for undertaking
the BURA process, which is aligned to the full
and half-year reporting cycle. The process
involves group level evaluation, benchmarking
and calibration to enable a consistent approach,
an appreciation of the most significant risks
from a financial and reputational context, and an
assessment of how these relate to our risk appetite.
Oversight and governance process
The board ensures that its oversight of risk remains
effective through a number of established reporting
routes.
Twice yearly the board receives a full update on the
risk profile as part of the full and half-year reporting
cycle. This provides an overview of the nature and
extent of risk exposure in the context of the group’s
principal risks, and emphasises the most significant
risks in both their current state relative to the risk
appetite, and target state of acceptable exposure.
This practice is in compliance with the UK Corporate
Governance Code, and enables reports to be provided
to the board for each full and half-year statutory
accounting period. The board is therefore able to:
› Make decisions on the level of risk it is prepared
to manage in order to deliver on the group’s
strategy;
›
›
Engage with the business to put appropriate
controls in place, and to ask questions and test
the appropriateness of plans;
Report externally on the long-term viability of
the company in an informed manner; and
› Monitor and review the effectiveness of
procedures, systems and risk management thinking.
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United Utilities Group PLC unitedutilities.com/corporate The most significant risks reflect three categories:
the ten highest business risk exposures (likelihood
and impact) from across the group (see also pages
100 to 101); the ten highest risk exposures with an
operational context; and risks that have a remote
likelihood of occurrence but a significant impact
should they occur. The board is advised of significant
new or emerging risks pending assessment, risks
which carry serious reputational impact, and those
which would not otherwise be reported under the
criteria described above, but because of associated
uncertainty are kept under a watching brief.
Risk-specific governance and steering groups
provide a picture of ongoing individual risks, and
these feed into the executive-led Group Audit and
Risk Board (GARB), which focuses on governance,
risk and compliance.
The audit committee is a fundamental component
of the governance structure. Supported by company
secretariat and the corporate audit teams, the
audit committee reviews the effectiveness of risk
management and internal controls before these are
considered by the board.
Key developments
Continuous improvement is a key feature of our
business risk management framework. In recent
years we have matured fundamental aspects of our
enterprise-wide risk management approach. This has
been delivered through focusing on inherent risk,
cross-business assessment of control, response and
recovery, as well as prevention and consideration of
extreme impacts in addition to more routine impacts.
These fully align to our business-wide initiatives for
Systems Thinking and resilience, and going forward
we will continue to support the maturity of these
through the further embedment of the Business Risk
Management Framework.
Aligned to this approach is the introduction of a
separate New and Emerging Risk forum over the last
12 months. This takes place in addition to the BURA
process to ensure that changing circumstances from
both the external and internal business environments
are taken into account, and we continue to consult
with external bodies to keep up to date with
potential threats to the sector. In January 2020 we
undertook a cross-business assessment of insider
risk with the Centre for the Protection of National
Infrastructure (CPNI). We have recently set up a
dedicated anti-fraud forum to understand potential
threats and impacts, and to develop mitigation
strategies.
We have carried out a review of the National Risk
Register for Climate Change to cross reference our
own risk profile and use the assessment parameters
to reassess our existing risks in the longer term.
This has better enabled us to understand potential
Figure 2: Governance and reporting process
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.
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
Operational risk and
Operational risk and
resilience board
resilience board
Monitors status of risk,
Monitors status of risk,
controls and actions
controls and actions
associated with water,
associated with water,
wastewater and bioresources
wastewater and bioresources
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
Operational and
Operational and
project risk
project risk
First line identification,
First line identification,
analysis, evaluation and
analysis, evaluation and
management of operational
management of operational
and project risk
and project risk
Group strategic
and tactical risk
First line identification,
analysis, evaluation and
management of
strategic/tactical risk
Board/board commi�ee
Management commi�ee/ac�vity
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12-Jun-20 3:47:39 PM
Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our risk management
Principal risks and uncertainties
impacts and determine future strategies and
associated funding requirements.
As a utility company we take part in multi-agency
partnerships via Local Resilience Forums (LRFs) and
in November 2018 we developed a specific pandemic
plan to provide support to our well-established
incident management process. This plan has been
the basis for our COVID-19 incident management
team, which was established in January 2020 to
maintain our key operations during the incident,
and to promote and support government advice on
containment, delay and social distancing.
Profile features
Our business risk profile, underpinning the principal
risks, consists of approximately 100 risks. Although
the profile (as reported to the board) remains
relatively static in terms of its headline inherent risk
factors, the detail reflects the changing nature of the
political and regulatory environment, the transition
between the regulatory Asset Management Periods
(AMPs), and emerging circumstances including
those associated with COVID-19.
From a political and regulatory perspective the
final determination in December 2019 saw the
crystallisation of tougher targets and penalty/
outperformance payment structures for operational
risks. While we accepted the final determination,
four companies have made a referral to the
Competition and Markets Authority (CMA) which
has potential implications for the sector as we start
to look at the next price review (PR24). The General
Election, which took place in December 2019, ended
the immediate threat of nationalisation for the water
sector and better informed some uncertainties
around Brexit. Despite this, uncertainty remains
in respect of perceptions of sector legitimacy and
Brexit, including the potential for no suitable trade
deal with the EU and the potential implications for
our supply chain, particularly chemicals.
Looking more closely at operational and programme
delivery risk, the transition between AMPs is
particularly relevant for our capital programme.
This involves AMP6 closedown work and related
AMP7 early start, working with new partners and
contractors, and delivering novel approaches.
This will include the new Direct Procurement for
Customers (DPC) methodology and model, which
we are utilising for our scheme to replace sections
of the Haweswater Aqueduct. While DPC is Ofwat’s
favoured approach for certain types of qualifying
large projects of significant spend, it brings a
number of uncertainties, risks and challenges,
including achieving value for money, contract terms
and risks, and the effect on the remainder of our
operations and financial structures (including our
capital structure). Another key change for AMP7
is the introduction of a new customer measure of
experience (C-MeX), which looks beyond direct
customer experience of operational activity to a
broader perception of the company and brand
orientation. Climate change remains a key focus
area, especially because of its impact on our water
resources, asset base and operations, and on the
environment that we strive to protect and enhance.
Our commitment to the principles set by the
Financial Stability Board’s Task Force on Climate-
related Disclosures is described in detail on pages
66 to 75.
The COVID-19 pandemic has radically changed
global economies, compounding a number of the risk
exposures already captured within this business risk
profile. These include risks in relation to financing
performance, revenue and cash collection, and
supply chain and operational delivery risks for water
and wastewater. As well as considering our existing
risks, we work with our trade body (Water UK) to
understand additional potential scenarios, their
associated implications and to plan mitigation.
94
United Utilities Group PLC
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Figure 3: Risk map
High
10
3
6
Impact
Low
(1) Political and regulatory risk
(2) Conduct and compliance risk
(3) Water service risk
(4) Wastewater service risk
(5) Retail and commercial risk
(6) Financial risk
(7) Supply chain and
programme delivery risk
(8) Resources risk
(9) Security risk
(10) Health, safety and environmental
risk
9
4
5
1
2
8
7
Risk increased
Risk decreased
Risk stable
Low
Likelihood
High
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.
Principal risks
We have set out over the following pages the principal risks in tabular form that could have a material impact
on the group’s business model, future performance, solvency or liquidity and reputation. These principal risks
are a combination of event-based risks and a description is provided as to how they might cause losses or
gains to arise. Areas of potential exposure are illustrated and mitigating controls described. The tables set out
individual matters that are currently significant risks, issues or areas of uncertainty, and which could affect our
overall risk exposure.
Key stat or
fact lorem
Key stat or
fact lorem
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Stock Code: UU.
Annual Report and Financial Statements for the year ended 31 March 2020
95
STRATEGIC REPORT Our risk management
Principal risks and uncertainties
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
1
2
Political and regulatory risk
Conduct and compliance risk
Developments connected with the political
and regulatory environment, including
changes to legislation.
The failure to adopt or apply ethical
standards, or to comply with legal and
regulatory obligations and responsibilities.
Main strategic theme
Main strategic theme
Principal/significant impacts
›
In view of the current global impact
of COVID-19 and the government’s
response to it, there is the potential for
the costs of administration to increase,
for sources of income and funding to be
impacted and for greater uncertainty of
returns as well as increased uncertainty
within the debt and equity markets
causing blockages to the raising of
finance and the refinancing of debt in
the medium to long term;
› Continuing challenges in relation to
perceptions of legitimacy of the water
industry leading to increased scrutiny
from parliament, regulators and
customers; and
›
The beginning of AMP7 from April
2020 and the delivery of our new
business plan in a period of great
uncertainty.
Management and mitigation
We continue to take part in government
and regulatory consultations, despite
the uncertain conditions associated with
COVID-19, in order to influence outcomes
in respect of policy and legislation. Our
communications with customers continue
so that their needs and expectations can be
factored into our thinking.
Current key risks, issues and
uncertainties
›
The global COVID-19 pandemic and its
impact on the stability and certainty of
regulation;
› Challenges to the legitimacy of the
water industry;
› Ofwat’s final determination and the
commencement of AMP7;
› Greater regulatory scrutiny of
competitive markets; and
› Ongoing and new impacts of Brexit,
including the effects on regulatory and
legislative regimes.
Principal/significant impacts
Failure to comply with legal obligations
could lead to financial penalties, reputational
harm and loss of customer and investor
confidence. Fines up to 10 per cent of group
turnover could be imposed, particularly
in the areas of environmental, health and
safety, competition and information and data
security. Ultimately sanctions could include
revocation of the instrument of appointment
(licence) and the imposition of a special
administration regime.
Management and mitigation
Despite the influence of COVID-19 on
all our activities, we continue to place
high importance and focus on corporate
responsibility. Our well established internal
forums and our work with communities,
landowners, environmental groups and
other stakeholders allow us to remain
engaged with and be aware of issues
and concerns including ethical supply
chains, modern slavery risks, the needs
of vulnerable customers and diversity
and equality within our own employee
population. We monitor closely all
legislative and regulatory developments,
including, in particular, the ongoing
passage of the Environment Bill and the
frameworks regulating water quality,
sludge and industrial emissions. The revised
requirements introduced by such changes
are incorporated into our operations and
approach by means of policy, training
and working practices. We work with
our regulators but challenge them in a
constructive and cost-effective manner
where appropriate, and we defend litigation
involving third parties and seek recoveries of
outlay and losses.
Current key risks, issues and
uncertainties
› Developing competitive markets;
› Material litigation;
›
Tighter regulation of personal data
(including GDPR); and
›
Significant fines for non-compliance.
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Regulatory and legal United Utilities Group PLC unitedutilities.com/corporate 3
4
5
Water service risk
Wastewater service risk
Retail and commercial 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
› Danger to public health caused by poor
water quality;
›
The impact on communities caused by
interruptions to water supply; and
› COVID-19 restrictions affecting
construction activity.
Management and mitigation
As a critical supplier we have continued
to deliver on our essential water supply
duties during the COVID-19 pandemic. Our
centralised planning capabilities, use of
Systems Thinking, risk assessment, quality
assurance and testing processes enable us
to maintain a resilient service. Our business
plan for AMP7 contains necessary capital
programmes to enhance and maintain our
service to customers.
We embrace innovation and are working
on projects to ensure security of supplies
in the long term. The continuation of our
25-year Water Resources Management
Plan enables the delivery of sustainable and
secure water supplies, taking into account
risk factors including climate change,
scarcity of supplies and population growth.
Current key risks, issues and
uncertainties
›
Failure of supply and distribution
system;
Scarcity of supplies;
›
› Drought;
›
›
›
Population growth;
Adverse weather events;
Stricter regulation of abstraction
activities;
›
Uncertainty of global supply chain in
the light of Brexit; and
› COVID-19 and its effect on the supply
chain and our construction activities.
A failure to remove and treat wastewater.
Main strategic theme
Principal/significant impacts
Pollution incidents, interruptions to
drainage services and sewer flooding could
lead to damage to the natural environment,
disruption to businesses and domestic
customers and could result in significant
fines and reputational harm. The evolving
markets of bioresources and sludge
treatment introduce uncertainty. COVID-19
restrictions have affected construction
activity.
Management and mitigation
Our innovative and efficient business
processes, including Systems Thinking,
centralised planning and control, quality
assurance, risk management, sampling and
monitoring of discharge consents enable
a proactive and predictive approach to
controlling and minimising incidents. Our
business plan for AMP7 contains necessary
capital programmes to maintain and
enhance our service to customers.
Current key risks, issues and
uncertainties
›
›
›
Failure to treat wastewater;
Failure of networks;
Adverse weather events and their
effect on the capacity of the sewer
network;
Pollution events;
›
› Odour nuisance;
›
Population growth and its impact on
existing infrastructure;
Significant environmental fines;
›
› COVID-19 and its effect on the supply
chain and our construction activities;
› Changes to the regulatory regime; and
Effects of Brexit on the chemicals
›
supply chain.
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
Particularly in the context of the economic
downturn caused by the measures taken to
control the COVID-19 pandemic, there is
a risk of financial losses and an impact on
profitability. This is associated with poor
cash flow, an increase in bad debt, potential
regulatory penalties and reputational harm,
including as a result of decreased customer
satisfaction.
Management and mitigation
Our customer-focused initiatives aim to
drive excellent service and enhance the
experience of all our customers. We have
an award-winning Priority Services scheme
for vulnerable customers and those needing
help to pay, which has driven up our success
in recovering charges in a personalised
and sympathetic way. 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 where
appropriate to better understand customers’
circumstances to determine the most effective
and collaborative collection and support
activities. The 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
›
Competition in the bioresources, water
and wastewater markets;
Socio-economic deprivation in the North
West;
Effects of COVID-19 on customers’ ability
to pay;
Economic downturn and the effect on
domestic bad debt;
C-MeX and D-MeX;
Non-household retail competition and the
ability to treat other participants equally;
›
›
›
›
›
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› Wholesale revenue collection;
›
The challenges associated with being
involved in a joint venture water retail
business (Water Plus) operating in a
competitive environment; and
Business retail customer payments, debt
and bad debt during the period and
aftermath of COVID-19.
›
Core operations and service provision Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our risk management
Principal risks and uncertainties
8
Resources risk
Failing to provide appropriate resources
(human, technological or physical) 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 non-resilient business
activity; and
› COVID-19 could lead to significant staff
absences, both through illness and
covering of other essential roles.
Management and mitigation
Developing our people with the right
skills and knowledge, combined with
delivering effective technology to support
the business meeting 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. Resources
are closely monitored because of
COVID-19, with homeworking and safe site
working practices being adopted. People
with multiple skill sets are able to add
resilience across the business.
Current key risks, issues and
uncertainties
›
Risks to health and safety of the
workforce caused by COVID-19;
› Delivering required employee
engagement;
›
Personal development, talent
management and succession planning;
and
› Optimising technology and innovation.
7
Supply chain and
programme delivery risk
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,
including DPC, resulting in an impact at
future price reviews, negative reputational
impact with customers and regulators.
COVID-19 restrictions have challenged
financial resilience in supply chains and
created an impact on cash flow.
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
programme 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 structures and
arrangements in AMP7;
› DPC, including early exit;
›
›
Technical quality and innovation;
Brexit and increased uncertainty of
availability of materials sourced from
Europe; and
›
Effects of COVID-19.
6
Financial risk
Potential inability to finance the business
appropriately.
Main strategic theme
Principal/significant impacts
The COVID-19 pandemic has
›
introduced significant uncertainty into
global financial markets, exacerbating
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); and
›
Tax inefficiencies, under or over
payment of tax, deflation, 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
Significant liquidity and refinancing which
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 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
›
Failure to achieve AMP7 financing
outperformance;
Low inflation;
› COVID-19;
›
›
›
Financial market conditions;
Interest rates and funding costs due to
economic uncertainty associated with
COVID-19 and Brexit; and
›
Paying an appropriate amount of tax.
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Functional service and support United Utilities Group PLC unitedutilities.com/corporate 9
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; and
›
The potential for catastrophic damage
to our 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
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
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 maintain insurance cover
for loss and liability, and the instrument
of appointment (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
› Cybercrime, particularly during the
COVID-19 pandemic;
Terrorism;
Fraud; and
›
›
› Ownership of Critical National
Infrastructure and National
Infrastructure.
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
10
Health, safety and
environmental risk
Potential harm to people (employees,
contractors or the public) and the
environment.
Main strategic theme
Principal/significant impacts
›
The effects of COVID-19 on employees,
contractors and customers;
›
›
›
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; and
The potential for serious impact
on wildlife, fish or natural habitats
resulting in significant fines and
reputational damage.
Management and mitigation
We have developed a strong health and
safety culture where ‘nothing we do at United
Utilities is worth getting hurt for’ is supported
by strong governance and management
systems certified to OHSAS 18001. 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 footprint by designing out waste from
our operations, generating our own energy
and looking at ways to reduce our use of
raw materials. We 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
› COVID-19;
›
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; and
›
Fluvial and coastal flooding associated
with climate change.
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Hazard-based Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Our risk management
The group’s top ten event-based risks
As described previously, the board regularly considers the group’s most significant risks in our business risk
profile and which underpin the principal risks set out on the previous pages. The following are summaries of
the ten highest business risk exposures in an operational context (likelihood and impact) from across
the group.
1
2
3
4
Failure of significant water supply systems
with the current lowest resilience due to
asset deterioration, leading to water quality
issues and/or supply interruptions to a large
proportion of the United Utilities customer
base. Potential impacts include penalties,
additional cost, customer compensation and
reputational damage. Mitigation includes
capital projects for asset replacement as
well as extensive programmes of asset
monitoring, surveys and maintenance.
Risk stable
Partial failure of the wastewater network
owing to hydraulic capacity, operational
capacity or equipment failure relative
to changing and extreme weather
conditions. Impacts include sewer flooding
and consequent penalties, additional
cost, customer compensation and
reputational damage. Mitigation includes
the combination of the Drainage and
Wastewater Management Plans (DWMPs)
and embedment of the Wastewater Network
Operating Model. These include preventative
maintenance, inspection regimes, asset
condition surveys, sewer rehabilitation
projects, customer campaigns and sewer
cleaning programmes.
Risk stable
Data and technology assets could be
significantly compromised due to malicious or
accidental activity, leading to a major impact
to key business processes and operations.
Potential consequences include penalties,
additional costs, customer compensation
and reputational damage, as well as impacts
to business services, regulatory compliance,
financial and operational performance.
Mitigation includes multiple layers of control
with an approach that covers people, process
and technology. This includes a secure
perimeter with segmented internal network
zones and a core data network supported by
infrastructure and system access controls,
with constant monitoring and 24/7 incident
and forensic response capability.
Risk stable
Failure to adequately treat wastewater due
to operational capacity and capability of
wastewater treatment works, leading to
environmental permit breaches, with potential
impacts including penalties, additional cost,
customer compensation and reputational
damage. Mitigation includes an improved
effective operations and maintenance
programme and operating procedures
including proactive maintenance, operative
training and compliance audits.
Risk stable
5
6
7
8
The unintended introduction of sewage
and other pollutants into the environment
due the capacity and/or capability of
wastewater treatment or network assets,
leading to extensive environmental impact
and pollution with potential ODI penalties,
prosecution fines, additional opex, capex and
reputational damage. Mitigation includes our
proactive strategy of identifying defects and
collapses through the use of extensive field
CCTV surveys, staff training and incident
analysis. In addition we are developing a
Pollution Incident Reduction Plan and are
improving our capabilities further through
the development of Integrated Drainage
Area Studies and Wastewater Network
Management.
Risk stable
Competition in the bioresources market
following the reforms set out in the Water
Act 2014, Water2020 and PR19 process,
leading to a loss of business and reduced
operational efficiency. Mitigation includes
delivering operational efficiency, continued
engagement with Ofwat and a strategic
review of the bioresources business.
Risk stable
Failure to achieve AMP7 financing
outperformance because of falling CPIH
inflation impacting the effective real rate on
embedded fixed rate nominal debt, resulting
in a lower level of financing outperformance
than expected. Mitigation includes board
approval of our interest rates and inflation
management strategies, ongoing monitoring
of markets and regulatory developments
against financial outperformance projections.
Risk stable
Delay to the Haweswater Aqueduct Resilience
Programme, triggered by exit from the Direct
Procurement for Customers process. Causes
could include the market’s failure to present a
better value proposition than in-house delivery,
lack of market appetite/capability to deliver
the scheme, or unacceptable business impacts
caused by financing. Impacts include increased
risks of failure due to project delays, additional/
unrecoverable cost and the requirement for
significant finance to be raised for in-house
procurement. Mitigation includes adoption of
HM Treasury’s Green Book process, regular
liaison with Ofwat, market engagement and
financial modelling. We are progressing direct
United Utilities activity including ecological
surveys and ground investigations, which are
both key activities to progressing the planning
applications, and developing the commercial
aspects of the DPC.
Risk increasing
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United Utilities Group PLC unitedutilities.com/corporate ›
Biosolids recycling to agriculture: The practice
of disposing of biosolids to agriculture could be
banned (partially or in full) in the UK based on
similar actions within Europe.
› Water scarcity and water trading: Water
scarcity is an emerging issue within the UK,
which has knock on implications to UU in relation
to the proposed strategic transfer of water from
the North West to the South East of England
and the associated service, commercial and
reputational impacts.
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.
9
10
Partial failure of the water distribution system
caused by network characteristics, asset
condition, operational strategies, extreme
weather or third party damage leading to
the loss of treated water and failure of the
leakage target. Impacts include incurring ODI
penalties, extra opex to recover the leakage
target and reputational damage. Mitigation
includes leakage detection engineers,
sounding valves and fittings within the
network, monitoring and managing pressure
and flow, and analysing and interrogating
system data to assess and allocate leak
detection and repairs to the right area.
Risk decreasing
Failure to treat sludge due to a combination
of treatment capacity and quality of sludge
produced at wastewater treatment works,
leading to higher operating costs, loss of
revenue from renewable energy and the
potential for sludge to be inadequately
disposed of. Mitigation is by a bioresource
production planning process which
incorporates regular testing and analysis, a
digester and tank cleaning programme and a
focused maintenance programme.
Risk stable
New and emerging risks and issues
We continue to review and monitor external and
internal risk factors to understand and assess new
and emerging risks, as well as the evolution of
existing risks. This enables us to plan our strategy
and operations to minimise threats of this nature.
Notable new and emerging risks and some possible
impacts are set out below.
› No suitable trade deal with the EU: Additional
cost of products sourced directly or indirectly
from the EU. The most critical product category
is chemicals for the treatment of water and
sludge production.
› COVID-19: In the short term, there is a risk of
reduced recovery of household debtors, non-
household charges to retailers and the additional
impact flowing from the risk of reduced recovery
of business customer receivables within Water
Plus. In addition, reduction in resource because
of illness or self-isolation and the impacts of
social distancing have potential impacts on
service delivery, capital project delivery, ODIs
and C-MeX. In the longer term, economic
impacts resulting from COVID-19 could include
sustained levels of high unemployment and
corporate failures affecting debt collection and
lower inflation affecting revenues, financing
costs and RCV.
› Customer Measure of Experience (C-MeX):
A new regulatory customer service measure
is being introduced for the new AMP which
introduces a much broader set of customer
factors and measures than the previous service
element, opening up a new group of customers
and experiences which could affect our
performance ratings.
›
Plastics: Implications associated with the current
attention on single use plastics and microplastic
pollution in water, wastewater effluent discharge
and sludge disposal (see biosolids recycling).
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Promoting the success of the company
for the benefit of all
S172(1) Statement
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. The board appreciates the
importance of effective stakeholder engagement and that stakeholders' views should be considered in its
decision-making. More details on stakeholder engagement can be found on pages 24 to 26.
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 and having regard (amongst other
matters) to factors (a) to (f) S172 Companies
Act 2006, in the decisions taken during the
year ended 31 March 2020 including:
Acceptance of the final
determination
A key decision taken during the year was
the acceptance by the UUW Board of
Ofwat’s final determination (FD) of the
2020–2025 business plan. Whilst some
concessions were made in our decision to
accept the FD, the directors believe that in
doing so:
›
There will be a long-term beneficial
impact on the group and all of its
stakeholders, giving the company
the certainty needed to deliver 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 regulatory
targets providing particular benefits to
customers in relation to affordability,
and recognising those more vulnerable
customers. In accepting the FD, we
recognised the extensive engagement
undertaken 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 24). We are
working to enhance our operational
resilience through both investment and
innovation (see page 40);
› Closely related to the acceptance of
the FD was the board’s approach to
setting the company’s dividend policy
for the same period (see page 10). 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. As
part of the group’s dividend policy, we
have committed to continue to share
the gains of outperformance with
customers and shareholders.
COVID-19
The business implications of the COVID-19
pandemic have been fast moving and
uncertain but the directors consider that
the decisions made will be in the best
long-term interests all the company’s
stakeholders:
›
› We have committed to helping those
customers who have been affected
by COVID-19 and are having difficulty
paying their bills at this time. We are
giving those customers the option
to request a three-month payment
holiday and we have widened the
eligibility for our ‘Back on Track’ social
tariff for an initial interim period to
2020/21 and 2021/22. To support local
communities, £3.5 million has been
donated to our Trust Fund to make sure
that financial support is available to as
many customers as possible who are
struggling to pay their bills due to a
change in their income (see page 83).
Money is also given to debt advice
charities;
› We aim to act responsibly and fairly
with our stakeholders and engage
with them to gain an understanding of
their needs. We have been engaging
with our supply chain to get a better
understanding of the financial
difficulties that many are experiencing,
and have committed to temporarily
altering payment terms with suppliers
in the short term, paying them within
seven days where possible to assist
with their cash flow. In some cases, we
have agreed to a number of temporary
concessions to contractual terms to
address changes to working practices,
to ensure suppliers can recover
additional costs they have incurred
where appropriate (see page 83);
› We took the decision that we would
not use the government’s furlough
scheme and that we would continue to
support all our workforce throughout
the situation, as we believe this
is the responsible approach of an
organisation like ours. We have
established a Staff Outreach Scheme
under which employees facing financial
hardship because of COVID-19
(perhaps due to a family member
losing their job or having their earnings
reduced) can apply for financial
assistance from the company;
Recognising the difficulty being
experienced by many customers in
our region, all members of the board
volunteered a 20 per cent reduction to
their salary/fees for three months, with
the money instead being shared with
organisations supporting those in the
front line helping communities cope
with COVID-19;
› We believe these actions are in
line with our culture and the high
standards of business conduct and
good governance we set ourselves (see
pages 17 and 46).
Employees
› We continue to be a responsible
employer in our approach to
employees, ensuring we communicate
and engage with them regularly in
a variety of ways and that the voice
of the workforce is heard and taken
into account when making decisions.
We recognise our employees are
fundamental to the long-term success
of our business. Their health, safety
and wellbeing is one of our primary
considerations in the way we operate
and the support we provide to them
(see page 46);
› We provide rates of pay that exceed
the voluntary Living Wage that applies
to our region, along with a range of
benefits including company-funded
healthcare for employees at all levels;
› More than 99 per cent of our current
employees are members of one of
our two pension schemes, along with
around 14,000 former employees.
We have £4 billion of pension assets
under management. The board
approved the decision to accelerate
the payment of the remaining deficit
repair contributions (totalling around
£126 million) in 2019, meaning that the
pension scheme has minimal reliance
on the company in order to meet all
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›
of its liabilities. As a result, customers
and shareholders are protected from
significant exposures to future potential
pension scheme deficits (see page 89);
Employees throughout the business
participate in the annual bonus
scheme, ensuring a shared focus on
the performance of the business plan.
The directors’ remuneration policy
provides that: the executive directors
will normally receive a salary increase
broadly in line with the increase
awarded to the general workforce; the
performance measures for the annual
bonus align with the company’s key
strategic goals for the year, reflecting
predominately financial and operational
objectives; and for the long-term plan,
the measures are 50 per cent on the
Return on Regulated Equity (RoRE) and
50 per cent on a basket of customer
measures.
Carbon commitment
›
By its very nature, the long-term
success of our business is reliant
on long-term planning, particularly
in relation to the environment and
climate change. In line with the UK’s
commitment in the 2008 Climate
Change Act, we have committed to
achieving science-based targets to
reduce our emissions. As part of our
climate change mitigation strategy
we have made a series of pledges to
deliver these targets and to setting
further targets across our full value
chain, including transitioning to using
100 per cent renewable energy by 2021
and a 100 per cent green fleet by 2028
(see page 72).
Non-financial information statement
The table below constitutes the company’s non-financial information statement,
produced to comply with sections 414CA(1) and 414CB(1) of the Companies Act 2006.
Our business principles set out how we behave as a business and are applicable to
the areas of disclosure required by s414CB(1). The stakeholder metrics table (see page
60) also includes data in relation 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/
Reporting
requirement
Environmental
matters
Employees
Information necessary to
understand our business
and its impact, policy, due
diligence and outcomes
Policies, guidance and
standards which govern our
approach (some of which are
only published internally)
Reflecting the needs of the
environment:
› Waste and resource use
policy
› Natural resources – see
page 32
› Natural environment –
see page 34
›
Reducing our carbon
footprint – see pages 66
to 77
›
Environmental policy – see
the responsibility pages on
our website
› Water Resources
Management Plan –
see page 37
›
Emissions target – see pages
66 to 77
Reflecting the needs of our
employees:
› Competitive base
› Health and safety policy
Equality, diversity and
›
inclusion policy
salaries and benefits –
see page 171
›
Flexible working
arrangements
› Health and safety – see
page 60
› Mental wellbeing – see
pages 9 and 46
Agency worker policy
›
› Mental wellbeing policy
› Human rights policy – see
page 52
› Gender pay report 2019 –
see pages 60 and 154
›
Board diversity policy – see
page 129
›
›
Engagement – see pages
24 and 189
Board diversity – see
page 129
Reflecting the needs of our
stakeholders:
Suppliers – see page 25
›
› Diversity within our
workforce – see pages
20, 53, 129, 132 to 135
Reflecting the needs of our
stakeholders:
› Customers – see page 24
› Community – see page
24
›
Environment – see pages
25 and 66
Respect for
human rights
Social matters
Regulators – see page 26
Suppliers – see page 25
›
›
Reflecting the needs of
employees and suppliers:
›
›
Employee data protection
policy
Slavery and human trafficking
statement
› Human rights policy – see
page 52
YourVoice – see page 22
›
› Charitable matched funding
guidance
›
›
Volunteering policy
Sustainable supply chain
charter – see page 52
› Commercial procurement
policy
›
›
Anti-bribery policy
Fraud investigation and
reporting processes
› Whistleblowing policy
›
Internal financial control
processes
› Commercial procurement
policy
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Stock Code: UU.
Anti-corruption
and anti-bribery
›
›
Employees – see pages
46 and 151
Suppliers – see page 47
Annual Report and Financial Statements for the year ended 31 March 2020 STRATEGIC REPORT Glossary
AMP: Asset Management Plan period – the five-year
regulatory price control periods since privatisation.
AMP6 was the sixth AMP since privatisation and
ran from 1 April 2015 to 31 March 2020. AMP7 is the
seventh AMP since privatisation and will run from 1
April 2020 to 31 March 2025.
C-MeX: Customer measure of experience. This
measure of customer satisfaction for AMP7 replaces
SIM as a measure of the service customers receive
from their water company.
CDP: Formerly the Carbon Disclosure Project,
CDP through its environmental disclosure system
supports companies to measure and manage their
risks and opportunities on climate change, water
security and deforestation.
CPI/CPIH: Consumer Price Index/Consumer
Price Index including Housing. CPIH is the UK
government’s preferred measure of inflation, and
will be used by Ofwat as its primary inflation index
in AMP7. CPI is the closest proxy for CPIH for which
debt and derivatives are available in the financial
markets.
CCW: Consumer Council for Water, an independent
body that represents customers’ interests relating
to price, service and value for money as well as
conducting independent research and investigating
customers’ complaints relating to water quality.
D-MeX: Developer measure of experience – new
measure of developer satisfaction for AMP7.
Defra: Department for Environment, Food & Rural
Affairs, a UK government department responsible for
setting policies and regulations on environmental,
food and rural issues. Defra sets the overall water
and sewerage policy framework in England,
including setting standards and drafting legislation.
DWI: Drinking Water Inspectorate. The DWI
regulates the quality of the drinking water that we
supply and ensures its safety and compliance with
Water Quality Regulations.
EA: Environment Agency. The EA is the principal
adviser to the UK Government and main body
set up to protect and improve the environment in
England and Wales. They work in collaboration with
other organisations to reduce flood risk, promote
sustainable development, and secure environmental
and social benefits.
ESG: Environmental, social and governance –
describes areas that characterise a sustainable,
responsible or ethical investment in a business or
company.
Fast-track category: Our business plan was graded
in Ofwat’s Initial Assessment of Plans, leading to a
faster timeline during the price review and rewarded
with an additional 0.11 per cent allowed return above
the base allowance for non-fast track companies.
FD: Final determination – the regulatory settlement
Ofwat gives each company to deliver for each five-
year regulatory price control period.
104
K factor: Percentage annual increase or decrease in
allowed regulatory revenue before inflation.
KPIs: Key performance indicators. We measure our
performance against a range of operational and
financial KPIs plus a variety of other metrics.
ODIs: Outcome delivery incentives – the
outperformance payments and penalties associated
with operational performance against agreed
regulatory targets.
Ofwat: Independent economic regulator for the
water and wastewater sector in England and Wales,
responsible for protecting customers’ interests while
ensuring water companies finance and conduct their
functions effectively.
PR19: The Price Review process for AMP7, concluded
in December 2019.
Price Review: The process through which each
water and wastewater company submits a business
plan for the next five-year period, and Ofwat sets the
price and service package it must deliver.
Priority Services: A scheme aimed at customers who
may need additional support with their water and
wastewater services due to age, disability, illness, or
other vulnerable circumstances.
RPI: Retail Price Index – until recently (see CPIH)
this was the UK Government’s preferred measure of
inflation, and prior to AMP7 RPI was used by Ofwat
as its primary inflation index to calculate inflation of
revenue and RCV.
SIM: Service Incentive Mechanism, Ofwat’s measure
of the service customers experience from their water
company, which will be replaced by C-MeX in AMP7.
STEM: Science, Technology, Engineering and
Mathematics – technical fields in which we need to
avoid a shortage of skills in the long term.
Systems Thinking: Our industry-leading approach to
the way we operate our network and assets, which
is one of our competitive advantages and a key value
driver.
TCFD: Task Force on Climate-related Financial
Disclosures – set up to develop voluntary, consistent
climate-related financial risk disclosures for use by
companies in providing information to investors,
lenders, insurers, and other stakeholders.
Totex: Total expenditure – this comprises operating
costs (opex), infrastructure renewals expenditure
(IRE) and capital expenditure (capex).
UUG: United Utilities Group PLC, the listed group
company.
UUW: United Utilities Water Limited, the regulated
entity.
YourVoice: The independent customer challenge
group whose aim is to ensure customers are at the
heart of our business planning.
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United Utilities Group PLC unitedutilities.com/corporate Time for a tea break
As a bit of fun, we’ve included a little test with the puzzle 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, and once you complete the puzzle the letters in orange
running vertically will spell out one of our competitive advantages
(which you can read more about on page 7).
1
2
3
8
6
4
7
11
5
9
10
13
12
14
15
Questions
1. We have committed to six pledges
to reduce our greenhouse gas _ (9)
Read more on pages 66 to 77
2. We held our third _ this year in
Liverpool (13,6)
Read more on page 79
3. Training and development, and
our graduate and apprentice
programmes, help us build _ (6, 10)
Read more on page 41
4. Scheme we created to help
our employees who may face
challenging financial issues
within their families as a result of
COVID-19 (5,8)
Read more on page 83
5. Acronym for the new methodology
we are using to engage with
markets and our supply chain (3)
Read more on page 81
6. We are improving _ in our region
to help the economy and offer a
diverse workforce (6,8)
Read more on page 20
7. Region of England in which we
operate (5,4)
Read more on page 21
8. AMP7 performance commitment
to ensure the environment is
protected and improved in the way
we deliver our services (7,7)
Read more on page 43
9. Major new pipeline allows us to
supply West Cumbria from _ (9)
Read more on page 23
10. Acronym for the mobile sensors
that allow remote monitoring in
leak detection (4)
Read more on page 7
11. We have achieved _ in our
pension schemes in line with the
recommendations of The Pensions
Regulator (3,10)
Read more on page 89
12. We aim to reduce _ by 15% by 2025
and over 40% by 2045 (7)
Read more on pages 37 and 43
13. Name of the storm that damaged
a pipeline this year causing
emergency repairs (5)
Read more on page 49
14. New pipeline that was needed to
allow us to inspect the Haweswater
Aqueduct (4,4,4,4)
Read more on page 39
15. £100 million investment of AMP6
outperformance is giving us a _ to
our AMP7 targets (6,5)
Read more on page 45
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Stock Code: UU.
Annual Report and Financial Statements for the year ended 31 March 2020
105
STRATEGIC REPORT WHAT MATTERS
Trust, transparency
and legitimacy
We adhere to the highest levels of
corporate governance. Fairness and
transparency is key to the way we report,
the way we operate, and the way we
interact with all our stakeholders.
Ofwat has awarded us
Self-
assured
status for the last three years the only
company in our sector to achieve this
reflecting the highest level of trust and
confidence in our transparency
and reporting.
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Progress this year
Our future plans
Fair tax
mark
Purpose-
led
achieved recognising that we are paying
the right amount of corporation tax in the
right place, at the right time.
We will continue demonstrating how we
are delivering on our purpose to provide
great water and more for the North West.
E
C
N
A
N
R
E
V
O
G
Corporate governance report
– Board of directors
– Letter from the Chairman
– Nomination committee
– Audit committee
– Corporate responsibility
committee
– Remuneration committee
report
– Tax policies and objectives
Directors’ report
Statement of directors’
responsibilities
108
112
126
140
152
156
186
188
191
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Corporate governance report
Board of directors
Sir David Higgins
Chairman
Steve Mogford
Chief Executive Officer (CEO)
Russ Houlden
Chief Finance Officer (CFO)
N
C
T
Responsibilities: Responsible for the
leadership of the board, setting its agenda
and ensuring its effectiveness on all
aspects of its role.
Qualifications: BEng Civil Engineering,
Diploma Securities Institute of Australia,
Fellow of the Institute of Civil Engineers
and the Royal Academy of Engineering.
Appointment to the board: 13 May 2019;
assumed role of Chairman with effect from
1 January 2020.
Committee membership: Nomination (chair).
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.
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. In December 2019 he
stepped down as non-executive director
and chair of the remuneration committee
at Commonwealth Bank of Australia.
Current directorships/business interests:
Chairman of Gatwick Airport Limited. He
is also Chairman of United Utilities Water
Limited.
Independence: Sir David met the 2018
UK Corporate Governance Code’s
independence criteria (provision 10) on his
appointment as a non-executive director
and chairman designate.
Specific contribution to the company’s
long-term success: Sir David’s experience
of major infrastructure projects and his
knowledge and understanding of the role
of regulators will be invaluable in meeting
the challenges of the next regulatory
period and beyond. As chairman of the
nomination committee he is responsible for
ensuring the succession plans for the board
and senior management identify the right
skillsets to face the challenges of the next
asset management period.
108
Responsibilities: To manage the group’s
business and to implement the strategy
and policies approved by the board.
Qualifications: BSc (Hons) Astrophysics/
Maths/Physics.
Appointment to the board: January 2011.
Committee membership: Corporate
responsibility.
Skills and experience: Steve’s experience
of the highly competitive defence market
and complex design, manufacturing
and support programmes has driven
forwards the board’s strategy of improving
customer service and operational
performance at United Utilities. His
perspective of the construction and
infrastructure sector provides valuable
experience and insight to support United
Utilities’ capital investment programme.
Career experience: Previously chief
executive of SELEX Galileo, the defence
electronics company owned by Italian
aerospace and defence organisation
Finmeccanica, 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
director G4S PLC and chair of the risk
committee. 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,
which led to fast-track status in the PR19
price review process and a resulting
efficient transition into the 2020–25 asset
management period.
Responsibilities: To manage the group’s
financial affairs and to contribute to the
management of the group’s business and
to the implementation of the strategy
and policies approved by the board.
Qualifications: BSc (Hons) Management
Sciences, Fellow of the Chartered
Institute of Management Accountants,
Chartered Global Management
Accountant and a Fellow of the
Association of Corporate Treasurers.
Appointment to the board: October 2010.
Committee membership: Treasury.
Skills and experience: Russ’s skills
and experience in accounting 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. Former chairman of the
financial reporting committee of the 100
Group until March 2020.
Current directorships/business
interests: Member of the supervisory
board and chairman of the audit
committee Orange Polska SA. He was
appointed a non-executive director of
Babcock International Group PLC on
1 April 2020 with a view to becoming
chairman of its audit and risk committee
in July 2020. He is also Chief Financial
Officer of United Utilities Water Limited.
Specific contribution to the company’s
long-term success: Russ has helped
drive the transformation of the
operational performance of the business
and delivered the group’s competitive
advantage in financial risk management
and excellence in corporate reporting.
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United Utilities Group PLC unitedutilities.com/corporate Board role
Chairman
Executive director
Senior independent non-executive director
Independent non-executive director
Committee membership
N
C
T
R
A
Nomination committee
Corporate responsibility committee
Treasury committee
Remuneration committee
Audit committee
Chair of the committee
Mark Clare
Senior independent non-executive director
Sara Weller
Independent non-executive director
N
R
N
R
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.
Qualifications: 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 led the
selection process culminating in the
appointment of Sir David Higgins,
succeeding Dr John McAdam, as
Chairman. He applies his own considerable
board experience gained during his career
to United Utilities and provides a sounding
board to the executive in certain areas.
Responsibilities: To challenge
constructively the executive directors and
monitor the delivery of the strategy within
the risk and control framework set by the
board and to lead the board’s activities
concerning directors’ remuneration.
Qualifications: MA Chemistry.
Appointment to the board: March 2012.
Committee membership: Nomination and
remuneration (chair).
Skills and experience: Sara’s experience
of customer-facing businesses, together
with her knowledge of operating within a
regulated environment, 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; the Planning
Inspectorate; and she stepped down as a
council member at Cambridge University
with effect from 31 December 2019. In
April 2020, she stepped down from her
non-executive role at the Department of
Work and Pensions.
Current directorships/business interests:
Non-executive director Lloyds Banking
Group plc; and will be appointed as a
non-executive director of BT Group plc
in July 2020. 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 guiding and reviewing
directors’ remuneration policy and
ensuring engagement with shareholders
prior to any proposals for change made.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Board of directors
Brian May
Independent non-executive director
Stephen Carter CBE
Independent non-executive director
Alison Goligher
Independent non-executive director
N
A
T
R
N
A
C
N
R
C
Responsibilities: To challenge
constructively the executive directors and
monitor the delivery of the strategy within
the risk and control framework set by the
board and to lead the audit committee.
Qualifications: BSc (Hons) Actuarial
Science, Chartered Accountant FCA.
Appointment to the board: September 2012.
Committee membership: Nomination,
audit (chair), treasury (chair) and
remuneration.
Skills and experience: Brian was
appointed group finance director of Bunzl
plc in January 2006 and he retired from
the board of Bunzl plc on 31 December
2019. Brian’s background and the various
finance roles that he has held are major
assets to the board.
Career experience: Brian has been chair of
the audit committee since September 2013
and has considerable knowledge of the
company and the specifics of the utilities
sector.
Current directorships/business interests:
Brian was appointed as non-executive
director of ConvaTec Group Plc and a
member of its audit and risk committee
and its remuneration committee on
2 March 2020. 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 roles as chair of both the audit
committee and the treasury committee,
which are important in overseeing the risk
management of the group. The industry
knowledge he has gained over the seven
years he has been a board member enabled
him to focus on, and contribute to, key risk
areas during the regulatory price review
process for the 2020–25 regulatory period.
110
Responsibilities: To challenge
constructively the executive directors and
monitor the delivery of the strategy within
the risk and control framework set by the
board and to lead the board’s agenda on
acting responsibly as a business.
Qualifications: Bachelor of 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
previous 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.
Qualifications: 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. Alison stepped down as a
board member of Edinburgh Business
School in October 2019.
Current directorships/business interests:
Non-executive director Meggitt PLC and
a part-time executive chair Silixa Ltd. 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 the operational
challenges of large capital projects and
the benefits of deploying technology
provides valuable insight into addressing
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 better understanding of the views of
employees and greater clarity on the
culture of the company.
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United Utilities Group PLC unitedutilities.com/corporate Board role
Chairman
Executive director
Senior independent non-executive director
Independent non-executive director
Committee membership
N
C
T
R
A
Nomination committee
Corporate responsibility committee
Treasury committee
Remuneration committee
Audit committee
Chair of the committee
Changes to board
directors:
Dr John McAdam stepped down as Chairman
with effect from 31 December 2019;
Steve Fraser resigned as Chief Operating
Officer with effect from 31 August 2019;
Russ Houlden's retirement as CFO was
announced on 5 February 2020, he will not be
seeking reappointment at the company’s AGM
in July 2020. On leaving the group, Russ will
also cease to be a director of United Utilities
Water Limited; and
Sara Weller is not seeking reappointment at
the AGM in July 2020, she will also cease to
be a director of United Utilities Water Limited.
Paulette Rowe
Independent non-executive director
N
A
Responsibilities: To challenge
constructively the executive directors and
monitor the delivery of the strategy within
the risk and control framework set by the
board.
Qualifications: MEng + Man (Hons), 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 senior
executive roles in banking and technology
at Facebook, Barclays and the Royal Bank
of Scotland/NatWest. Former trustee and
chair of children’s charity The Mayor’s Fund
for London.
Current directorships/business interests:
CEO of Integrated and Ecommerce
Solutions and member of the Paysafe
Group executive since January 2019.
Paysafe, a former FTSE 250 company, is
now privately owned by PE firms CVC and
Blackstone. She is also an independent
non-executive director of United Utilities
Water Limited.
Specific contribution to the company’s
long-term success: Paulette’s wide-
ranging experience in regulated sectors,
profit and loss management, technology
and innovation enables her to provide a
first-hand contribution to many board
topics of discussion. In her current
executive role she often faces many of the
same issues, and has been able to provide
support to senior management at United
Utilities.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Letter from the Chairman
We have reconsidered our
purpose as a company. As
a provider of an essential
service in our region our
purpose is to provide great
water and more for the
North West. Our culture of
behaving responsibly has
been part of the United
Utilities ethos for many years,
and aligns with our purpose.
Sir David Higgins
Chairman
Dear Shareholder
What matters…
I write to you for the first time as Chairman, having
assumed the role on 1 January 2020. I can tell you,
unequivocally, that what matters to the board during
this difficult time is ensuring we do whatever we
can to keep our employees safe, supporting our
customers and communities and playing our part in
dealing with the tragedy of the COVID-19 pandemic.
We provide a vital service to our customers and,
in doing so, our front line operational employees,
indeed defined as ‘key workers’ by the Government,
have continued to work to ensure our customers can
rely on our services in a time that is anything but
‘business as usual’. Yet again, as I know they have
done on many previous difficult occasions, United
Utilities’ employees have risen to the challenge. As
a business, the impact on our financial performance
will not fully be known for some months but we
are very well aware of that many customers and
suppliers have been put under severe financial
difficulty, and we are reminded of the enduring
position the company has in the communities it
serves in the North West. Measures have been put in
place to help customers struggling to pay their water
bills and those who may need extra support through
our Priority Services offering. We are supporting our
supply chain partners by altering payment terms
to pay, on a temporary basis, within seven days
wherever possible, rather than 14 to assist with their
cash flow. Furthermore, we intend to support all of
our workforce and have no intention of using the
government’s furlough scheme.
The board has been kept fully informed of the
implementation of changes to normal ways of
working. Wherever possible employees have worked
from home and social distancing has been facilitated
for those unable to work from home and among our
operational employees.
As a business we were challenged again during the
year by the weather, most notably Storm Ciara,
when a supply pipe burst resulting in a loss of water
to customers in the Eden Valley in Cumbria. We
Quick facts
> Sir David Higgins met the independence
criteria as set out in provision 10 of the 2018 UK
Corporate Governance Code (the Code) when he
was appointed.
> The Code requires that at least half of the board,
excluding the chair, should be non-executive
directors whom the board considers to be
independent. At United Utilities, six out of the
remaining eight 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 108 to 111)
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. It was concluded, from both the analysis
of the results of the individual evaluation of
board members and the evaluation of the board
holistically, each director continues to contribute
effectively to board meetings and engaged fully
with the evaluation process. 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
Schedule of matters reserved for the board
unitedutilities.com/corporate-governance
A copy of the Financial Reporting Council’s
2018 UK Corporate Governance Code can
be found at frc.org.uk
112
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United Utilities Group PLC unitedutilities.com/corporate Compliance
against the 2018
UK Corporate
Governance
Code
1
Board
leadership
and company
purpose
See page 114
2
Division of
responsibilities
See page 125
3
Composition,
succession and
evaluation
See page 128
4
Audit, risk and
internal control
See page 136
5
Remuneration
See page 156
process. As the board of directors, we recognise
our responsibilities to our different but mainly
interrelated stakeholder groups and our wider
societal responsibilities. As required by S414CZA of
the Act, our S172(1) Statement is set out on page 102.
People
The board has reached the stage in its life cycle,
consistent with the beginning of the new asset
management period, when there are a number
of board changes to report. After over 11 years
as Chairman, Dr John McAdam stepped down
on 31 December 2019. Both Russ Houlden, our
chief financial officer and Sara Weller, chair of
the remuneration committee will be leaving the
board following the AGM. Steve Fraser also left the
company during the year. On behalf of the board
I would like to express our thanks to these board
colleagues for the contributions they have made
to the business. Details of the board’s succession
planning and efforts concerning diversity can be
found in the report of the nomination committee on
pages 129 and 132.
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.
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. I have
also offered meetings to major shareholders this year
which I will progress as soon as restrictions allow.
The programme is supported by the activities of our
investor relations team who are readily available
to address investors’ queries. Feedback is regularly
shared with board colleagues.
Sir David Higgins
Chairman
were able to put quickly contingency plans in place
delivering supplies to customers that had registered
for our Priority Services, and to around 100 livestock
farmers impacted by the incident. Our employees
worked relentlessly throughout the dreadful weather
conditions to minimise disruption to customers.
Governance
The board has conducted its meetings, and those
of its committees, remotely through audio or
video calls since March 2020 and, while perhaps
not as efficient or as satisfactory as face-to-face
meetings, it has enabled the board to continue to
function. We are comfortable that the integrity of
our governance structure will be maintained during
this period, notwithstanding the practical changes
that have been made. A diagram showing the
interrelationships of the various board committees
can be found on page 116. Reports from each of the
committee chairs about their work can be found on
the following pages. The diagram also includes the
group’s principal management committees.
In the following pages of this corporate governance
report we have set out how we have applied the
principles and reported against the provisions of the
2018 UK Corporate Governance Code.
Purpose and culture
During the year we have reconsidered our purpose
as a company. As a provider of an essential service in
our region our purpose is to provide great water and
more for the North West. Our culture of behaving
responsibly has been part of the United Utilities
ethos for many years, and aligns with our purpose.
The board has a number of opportunities to consider
cultural metrics, particularly in relation to its
business as usual reporting on employees, customers
and risk, but has also undertaken a more holistic
review of the company’s culture, developing a
dashboard as the basis to assess and monitor culture
in future years (see page 121).
Strategy
The strategic themes of the group have remained
unchanged as the board believes that its approach
will promote the group’s long-term sustainable
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
resilient 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
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
1
Board leadership and company purpose
Code Principle
Principle A:
A successful company is led by an effective
and entrepreneurial board, whose role is to
promote the long-term sustainable success of
the company, generating value for shareholders
and contributing to wider society.
Principle B:
The board should establish the company’s
purpose, values and strategy, and satisfy
itself that these and its culture are aligned.
All directors must act with integrity, lead by
example and promote the desired culture.
Principle C:
The board should ensure that the necessary
resources are in place for the company to
meet its objectives and measure performance
against them. The board should also establish
a framework of prudent and effective controls,
which enable risk to be assessed and managed.
Principle D:
In order for the company to meet its
responsibilities to shareholders and
stakeholders, the board should ensure effective
engagement with, and encourage participation
from, these parties.
Principle E:
The board should ensure that workforce
policies and practices are consistent with the
company’s values and support its long-term
sustainable success. The workforce should be
able to raise any matters of concern.
Evidence and outcomes
See pages 114 to 120 for our
reporting against provision 1
and the S172(1) Statement on
page 102.
See pages 121 to 123 for our
reporting against provisions
2 and 5.
See page 132 regarding
succession pipeline,
and page 136 for the
board’s approach to risk
management and internal
control.
See pages 122 to 124 in
relation to our engagement
with shareholders and
stakeholders for our
reporting against provision 3.
See page 121 to 122 in
relation to engagement with
employees for our reporting
against provisions 5 and 6.
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;
> 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 pages 136 to 139);
> 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;
> Approves appointments to and removal from the board and membership of
the committees;
> Applies the principles of the Code and reports against the provisions; and
> Has oversight of major capital expenditure projects within UUW that 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
114
Providing great water and
more for the North West
Understanding what matters
Board members, individually and collectively, are
cognisant of their statutory duties as set out in the
Companies Act 2006 (the Act). In accordance with
section 172 of the Act, directors are individually
required to act in the way they consider, in good
faith would most likely be to promote the success
of the company for the benefit of its members as a
whole. In doing so, the directors must have regard to
the likely consequences of any decision in the long
term and the interests of employees, customers,
suppliers, the community and the environment, and
on the company’s reputation.
Incorporating sustainability
in our stewardship
Historically, a board’s success criteria has primarily
been judged on the company’s financial performance
and while this is still fundamental, boards of
companies are now encouraged to adopt a more
holistic approach to their stewardship. It is the
responsibility of the directors to exercise their
judgement, balancing the use of the company’s
resources to ensure its sustainable long-term success
and at times, the requirements and criteria for
assessing our success by our different stakeholders
groups will be in competition. Sustainability is a
key component of the way in which we manage our
business. We set out on pages 46 to 48 how we create
value for our shareholders and other stakeholders.
Our board governance ethos, our culture and the way
we operate as a business is to behave responsibly
towards all our stakeholders.
Investing in a high quality and
resilient future
When we formulated our business plan for the 2020–25
asset management period and which was submitted
to Ofwat in September 2018, our engagement with
customers indicated that they wanted high-quality,
sustainable and resilient water and wastewater
services at a price they could afford. We recognise that
customers place their faith in us to deliver a responsible
approach to managing risk. We consulted widely with
our customers and other stakeholders and applied the
insight from this engagement to our long-term plans
for the next asset management period and beyond.
Understanding the implications of extreme weather
events and the return frequency of such events is an
ever emerging risk for us.
Being a guardian for future generations
On behalf of the board, the corporate responsibility
committee has taken the lead in overseeing
management’s development of a climate change
mitigation strategy as part of the transition to a
low carbon future. Notwithstanding this, the board
is fully versed on the impacts of climate change
from an operational perspective. There have been
a number of extreme weather events impacting
our region and our operations in recent years, most
recently Storm Ciara. When such incidents occur,
the CEO keeps board members fully apprised of
the impact on operations and our response via
conference call and other forms of communication.
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Delivering against our regulatory contract
Under the current regulatory model, we are a
monopoly supplier of water and wastewater
services to our domestic customers. Simplistically,
the opportunities for improving our financial
performance are based on outperforming our
five-year contract. Underlying this is a complex
set of regulatory key performance indicators,
including total expenditure outperformance (totex),
the outcome delivery incentive mechanism (ODI),
customer measure of experience (C-MeX) and
financing expenditure (see pages 56 to 59) which are
managed and monitored by the business.
Risk management and internal control
The principal risks and uncertainties to the success of
the business, which are agreed by the board, and the
ways in which these risks are managed, monitored
and mitigated are set out on pages 92 to 101.
Working with our regulators – our final
determination
We were asked, when Ofwat published its initial
assessment of our business plan in January 2019, to
commit to more stretching targets further enhancing
our offering to a number of stakeholders groups.
We worked with Ofwat towards this objective,
culminating in the final determination published in
December 2019 and accepted by the UUW board on
28 January 2020. Further information on the final
determination can be found on page 42.
The financial implications of the final determination
were taken into account when deciding on the
company’s dividend policy for 2020–25 (see page 10)
and is included in the statement by the directors in
performance of their statutory duties in accordance
with S172(1) of the Act set out on page 102.
Long-term planning for AMP7 and beyond
We create value by delivering or outperforming our
five-year regulatory contract that has been agreed
with Ofwat, and doing so in accordance with our
strategic themes of providing the best service to
customers, at the lowest sustainable cost and in a
responsible manner. Planning is vital to ensure our
long-term sustainable success and for effective
management of the business and allocation of our
resources – the details of our planning horizons are
set out on pages 36 to 38.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Governance structure for our
board and our committees
The board has responsibility for establishing
the strategy, which is broken down into the
three strategic themes. The governance
structure encompassing the board, its
principal committees and the principal
management committees (and set out in the
diagram below) contributes to ensuring that
the group focuses on its strategic themes.
The committees have specific roles and
responsibilities, which are directly linked to
implementing the three strategic themes
which are represented by the coloured icons
on the diagram.
In line with the Code, the board delegates
certain roles and responsibilities to
its principal board committees. 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.
The diagram below shows the principal
management committees and a brief
description of their roles. These committees
are vital to the implementation of the group's
strategic themes. These committees enable
senior management to meet to understand,
delegate the implementation of appropriate
actions, and monitor progress and provide
challenge as needs be. The board received
reports from the CEO and CFO at every
scheduled board meeting, providing the
board with an updated overview of the
business, its financial and operational
performance.
Governance structure of the board and its principal committees and the principal management committees
Key to strategic themes:
The best service to customers
At the lowest sustainable cost
In a responsible manner
Principal board committees
Audit committee
Chair: Brian May
Read more on
pages 140 to 151
Remuneration committee
Chair: Sara Weller
Read more on
pages 156 to 185
Nomination committee
Chair: Sir David Higgins
Read more on
pages 126 to 135
Corporate responsibility committee
Chair: Stephen Carter
Read more on
pages 152 to 155
Treasury committee
Chair: Brian May
The committee considers and approves borrowing, leasing,
bonding and other banking facilities within limits set by the
board. The CFO and treasurer are also members. Some powers
are sub-delegated, within certain limits, to the CFO and treasurer.
116
Group board
Chair: Sir David Higgins
Chief Executive Officer
Steve Mogford
Principal management committees
Executive team
Chair: Steve Mogford, CEO
This forum is responsible for implementing the board’s strategy
and the day-to-day operation of running the business and the
CEO will cascade decisions made by the board to the business
via this forum.
Group audit and risk board
Chair: Steve Mogford, CEO
Read more on
pages 92 to 95
Quarterly business review
Chair: Steve Mogford, CEO
This forum is responsible for the quarterly review of
operational and financial performance.
Political and regulatory group
Chair: Gaynor Kenyon, corporate affairs director
This forum is responsible for discussing political and
regulatory issues affecting the company, where any ‘horizon
scanning’ issues are raised and business responses to
consultations are agreed.
Capital investment committee
Chair: Steve Mogford, CEO
The committee is responsible for authorising expenditure
relating to the capital investment programme.
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Summary of board activity in 2019/20
Actions
Outcomes
Cross
reference
Link to strategic
themes
Leadership and employees
Review of health, safety and wellbeing activities
and consideration of health and safety incidents
of employees and contractors and implementing
an improved health and safety culture within the
business branded as ‘home safe and well’.
Review of board succession plan.
Reviewed ongoing development of our employer
brand and our aspiration for a multi-generational
and diverse workforce.
Reviewed the structure and composition of the
executive management team to address business
challenges of the 2020–25 asset management
period and beyond.
Reviewed and discussed the results of the
annual employee engagement survey and
received updates on employee voice workforce
engagement mechanisms including the Employee
Voice panel chaired by Alison Goligher, the non-
executive director designated for engagement
with the workforce.
Reviewed the company's dashboard of cultural
metrics and associated analysis.
Ongoing roll-out of ‘home safe and well’ training
programme and development and implementation
of wellbeing policies and activities.
See pages 46
and 82
Succession plans for the roles of Chairman and
CFO implemented during the year.
See page 128
Board kept apprised of potential succession
pipeline and progress in improving diversity.
See pages 132
to 135
Endorsed the restructuring of the executive
management team and associated reporting lines.
See page 127
Awaiting the findings from a number of working
groups proposed by Employee Voice panel
including: encouraging greater collaboration
among employee network groups; and gaining
a better understanding of what culture means
for employees.
Monitored and assessed culture and agreed it
was aligned with the company's purpose, values
and strategy.
See page 121
See page 121
See page 129
Reviewed and amended the board diversity
policy to better reflect diversity criteria, thereby
including ‘social and ethnic backgrounds,
cognitive and personal strengths’.
The board diversity policy was amended to include
a measurable ethnicity objective expressed in our
policy as the board should include ‘one director of
non-white ethnicity’ by 2021.
Strategy
Discussed and reviewed the price review
submissions and outputs throughout the process
and implications for the group, and Ofwat’s
final determination for the 2020–25 asset
management period.
Considered the financial implications of the final
determination for the company’s dividend policy
for the 2020–25 asset management period.
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 group’s preparations in relation
to Brexit.
Discussed the impact of proposed
renationalisation of the water sector.
Endorsed the acceptance of the final
determination in January 2020.
See page 42
Approved the company’s dividend policy for the
2020–25 asset management period.
See page 86
Facilitated more informed board discussion and
planning.
-
Agreed action plan to mitigate and make
preparations in relation to Brexit, with ongoing
monitoring of the Government proposals for
terms of exit.
See pages 94,
96 and 155
External legal and financial advice sought.
See page 94
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Summary of board activity in 2019/20
Actions
Governance
Outcomes
Cross
reference
Link to strategic
themes
Reviewed and debated the risk profile of the
group, and in particular the principal risks,
emerging risks and risk appetite, including a
review of the most significant operational risks.
Endorsed management's view that the risk
appetite approach remained fit for purpose and
should continue to be applied for the foreseeable
future.
See page 92
Reviewed the risk management systems,
including financial, operational and compliance
controls and reviewed the effectiveness of the
internal control systems.
The risk management and internal control systems
were considered to be effective.
See page 136
Reviewed and discussed developments in cyber
crime.
Approved the activities undertaken to enhance
the effectiveness of the group’s security controls.
See page 99
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.
Reviewed and discussed the external evaluation
of the board, its committees and individual
directors and conflicts of interest.
Reviewed the performance of the statutory
auditor and recommendation for reappointment
both at the 2020 AGM and for a further term
following the completion of the statutory auditor
tender process.
Reviewed the approach and progress of work to
identify areas where there is any risk of modern
slavery occurring in our supply chain.
United Utilities Water Limited (UUW) regulated
business and its stakeholders
Regular review and monitoring of the business
plan submission for the 2020–25 regulatory
period as it progressed to the announcement
of acceptance of Ofwat's final determination in
January 2020.
Reviewed customer service performance
measures.
Approved amendments to the terms of reference
of the company’s committees as recommended
particularly relating to the 2018 Code.
–
Matters implemented as considered appropriate.
–
Identified action points and any ongoing training
needs.
See page 131
Accepted the recommendation from the audit
committee that KPMG be reappointed at the 2020
AGM and as the preferred candidate following the
tender process for the statutory auditor.
See page 146
Approved the 2020/21 slavery and human
trafficking statement.
See page 190
The board was kept fully informed throughout the
price review process.
See page 42
In year customer performance measures monitored
along with preparations for monitoring customer
service in AMP7.
See page 55
Key to strategic themes:
The best service to customers
At the lowest sustainable cost
In a responsible manner
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United Utilities Group PLC unitedutilities.com/corporate Actions
Other group business
Considered exercise of the put option to dispose
of the group’s interest in the Muharraq sewerage
treatment plant and associated statutory entities
both in Bahrain and in the Jebel Ali Free Zone, Dubai.
Regular review of progress of Water Plus, the
group’s joint venture with Severn Trent serving
commercial customers.
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.
Regularly received and discussed feedback
from roadshows, presentations and face-to-face
meetings between investors and the CEO and/
or the CFO and other communications received
from large investors.
Financial
Outcomes
Cross
reference
Link to strategic
themes
Disposed of the group’s interests in Muharraq in
accordance with the arrangements agreed in 2011.
–
Approved the renewal of working capital
arrangements.
See page 148
Provide the board with indirect view of investor
perceptions.
See page 122
Provide the board with direct view of investor
perceptions and provide point of comparison with
indirect approach.
See page 122
Reviewed the 2020–25 business plan and the
2020/21 budget.
Approved the 2020–25 business plan and the
2020/21 budget.
Reviewed and approved the half and full-year
results and associated announcements.
Approved the half and full-year results and
associated announcements.
–
–
Reviewed management's proposed going concern
and long-term viability statement.
Approved the going concern and long-term
viability statement.
See page 137
Reviewed tax policies and objectives proposed by
management for 2019/20.
Approved tax policies and objectives for
2019/20.
See page 186
Reviewed the annual pensions update.
Pensions strategy affirmed.
See page 88
Reviewed the annual treasury update.
Approved the 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 exposure.
See page 87
Reviewed the annual insurance arrangements for
2020/21.
Approved the annual insurance arrangements for
2020/21.
–
Reviewed progress with material litigation
involving the group.
Strategy to defend claims robustly affirmed.
See page 101
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Attendance at board and committee meetings
Nine scheduled board meetings were planned and held during the year (2019: eight). A number of other board
meetings and telephone conferences were held during the year, as the need arose. The table below shows the
number of scheduled meetings attended and the maximum number of scheduled meetings that 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 has raised concerns over
the time commitment required of them to fulfil their duties. Scheduled meetings are normally held face- to-
face, but due to the COVID-19 restrictions, meetings were held remotely via audio or video conference.
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.
Board
meetings1
Audit
committee
Remuneration
committee
Nomination
committee
Corporate
responsibility
committee
Treasury
committee
Sir David Higgins
Dr John McAdam
Steve Mogford
Russ Houlden
Steve Fraser
Mark Clare
Sara Weller
Brian May
Stephen Carter
Alison Goligher
8(2)
5(3)
8
7
9 9
9 9
4(4) 4
9 9
9 9
9 9
9 9
9 9
6 6
6 6
6 6
6 6
5 5
5 5
Paulette Rowe
9 9
5 5
Meetings attended
Possible meetings
5 5
2(3)
3
5 5
5 5
5 5
5 5
5 5
5 5
3 3
3 3
4 4
4 4
4 4
Actual number of meetings attended/maximum number of scheduled meetings which the directors could have
attended during the financial year ended 31 March 2020.
(1) Nine board meetings were scheduled this year, with the additional meeting relating to the endorsement of the final
determination as accepted by the UUW board.
(2) Sir David Higgins was appointed to the board on 13 May 2019.
(3) Dr John McAdam was unable to attend two meetings of the board and a nomination committee meeting due to
unforeseen circumstances. He resigned on 31 December 2019.
(4) Steve Fraser resigned on 31 August 2019.
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United Utilities Group PLC unitedutilities.com/corporate Purpose, values and strategy
As established by the board, our company’s purpose, values and strategy, were revised during the year, following
initial work by the corporate responsibility committee. We engaged the services of Corporate Citizenship
and Edmonds Elder to help us provide a clearer articulation of why we exist and to recommend how we can
communicate this more effectively to all our stakeholders. A diagram of this can be found on page 16.
Our purpose is to provide great water and more for the North West. Our vision is to be the best UK water and
wastewater company through providing the best service to customers, at the lowest sustainable cost and
in a responsible manner. In reviewing the company’s purpose, the board took into account information and
views from stakeholders, utilising much of the research and engagement that contributed to our business plan
submission and the feedback obtained from customers as part of the company’s brand refresh undertaken
during the year. For the year ended 31 March 2020, the board is satisfied that the formulation of our aspirations
in terms of our purpose, values and culture have been informed by our stakeholders and we operate our
business in such a way that will create long-term value for all.
Our values demonstrate how we behave individually and collectively as the board and how we ask our
employees to behave. Our employees are fundamental to delivering our strategy and achieving our purpose.
Our values of being customer focused, trustworthy and innovative underpin our culture of behaving as
a responsible business in the way we interact with all the stakeholders we serve. We must continually
reinforce these values so that the right behaviours cascade throughout the organisation, ensuring our culture
of behaving responsibly drives what we do. Key to this is taking action to address any issues where there
is misalignment with the company’s culture. As well as our engagement survey we run regular employee
barometers to ask employees what they are seeing, hearing and feeling. This approach allows us to act
quickly if there are any areas of misalignment and take immediate action.
We have been accredited with the Fair Tax Mark which recognises organisations that ‘demonstrate that they
are paying the right amount of corporation tax in the right place at the right time’ (see page 187).
Culture and employee engagement
Our employees are at the heart of the culture of our business and further insight and evidence, as part of
the board’s assessment and monitoring of culture, has been gathered, and fed back to the board by Alison
Goligher, the current designated non-executive director for engagement with the workforce. During the year
Alison has met with employees and visited a number of the company's sites. Furthermore, Alison chairs the
newly formed Employee Voice panel (the panel) formed from representatives of a number of employee groups
and employee networks already in existence within the business and with representatives drawn from across
the geographical region. Alison is keen to ensure, through these interactions, that there is a two-way flow of
communication and information between the board and the workforce.
1
2
3
Dashboard of cultural metrics
In addition to the existing reporting, management has developed a dashboard of cultural
metrics in order to provide a comprehensive overview to support the board in fulfilling its role
in monitoring and assessing culture. The dashboard comprises relevant metrics derived from:
the annual employee engagement survey; human resources policies in relation to diversity
and associated training; whistleblowing reporting; health, safety and wellbeing policies and
practices; and business principles measures and other key performance indicators.
Corporate responsibility committee review of dashboard
Prior to its review by the board, the dashboard was presented to the corporate responsibility
committee. In future years, the committee will review the dashboard biannually.
Annual board review of dashboard
The board was satisfied that policy, practices and behaviours within the business were
aligned with the company’s purpose, values and strategic themes, although there was more
work to do to encourage colleagues to look out for each other’s health and safety.
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Employee voice
Employee groups, as set out in the table below from within the business, were approached and employees
from within these groups volunteered to join the panel.
Outcomes from the
work to bring our
employees' voices
to the board include
the transfer of the
governance of the
annual employee
survey to the
Employee Voice
panel. Changes
made by the panel
included: enhancing
the underlying
anonymity of the
survey and providing
more opportunity for
employees to provide
greater insight into
their views.
The board
Employee Voice panel
Chair: Alison Goligher (non-executive director)
Employee networks
groups:
Employee champion
groups:
Early careers and
managers:
Union partners:
> Multicultural
> GENEq
> Armed Forces
> LGBT Identity+
> Ability
> Health, safety and
> The Early Careers
wellbeing
> Engagement
champions
> Colleague
engagement group
> Career development
forums
Board
> Aspiring managers
> Apprentices
> Graduates
> Bands 3 and 4
managers
> Unite
> GMB
> Unison
> Prospect
It is expected that the members of the panel will
be rotated every two years. There is an open
invitation to all board members to attend meetings
of the panel, which will be rotated around the
company’s sites. It is the intention, going forward,
that a member of staff based at the location where
the meeting is being held will be also be invited to
attend. The panel has met three times during the
year. The initial pilot meeting established terms
of reference discussed ways of working and the
structure of the panel. Working sub-groups, made up
of panel members, were formed to focus on specific
aspects of the business including cross networks,
culture and the employee engagement survey. Each
sub-group provided an update on progress made
at the second meeting, next steps and identified
metrics to track progress against. Updates will be
provided by Alison twice a year on the activities and
findings of the panel to the corporate responsibility
committee and reported annually to the board.
Listening to our employees
Employees’ views are measured annually through the
employee engagement survey with the objective of
taking any required action to improve how employees
feel about the company and understand its direction.
Employees are provided with information through
briefings and access to online materials, to enable
them to understand the financial and economic
factors affecting the group’s performance. Along
with our employee relations team, our CEO holds
regular face-to-face meetings with senior trade
union representatives to facilitate a two-way flow
of information and engagement with the views of
employees’ representatives.
Set out on page 22 is the company’s approach to our
engagement with and creating value for employees,
with health, safety and wellbeing being a priority.
Furthermore, an explanation of the company’s
approach to rewarding the workforce can be found in
the report of the remuneration committee on page 171.
Whistleblowing policy
The following sets out the company’s compliance
with Code provision 6.
As part of our two-way flow of communication the
board has responsibility for reviewing the group’s
arrangements for individuals to raise matters of
concern and the arrangements for the investigation of
such matters. The group’s whistleblowing policy (the
policy) supports the culture within the group where
genuine concerns may be reported and investigated
without reprisals for whistleblowers. We operate a
confidential telephone helpline and a web portal to
enable employees (including agency workers and
contractors) to raise matters or concerns for possible
incidents of 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 that have
caused or may cause damage to the environment,
such as pollution or other contamination. Both the
helpline and web portal are operated by a third party
enabling any concerns to be reported anonymously.
The policy states that no employee will be victimised
for raising a matter in accordance with the policy.
Matters raised with the helpline/portal are in the
first instance raised with the relevant director and
investigated by senior managers independent of any
involvement of the issues being considered. Details of
the findings of the investigation and proposed solution
are considered by the whistleblowing committee
(whose membership comprises the company
secretary, customer services and people director,
head of internal audit and commercial director) and
which meets quarterly. The board routinely reviews
matters considered by the whistleblowing committee,
the outcome of the investigation and the ways in
which the matters were brought to a conclusion thus
ensuring that the core value of integrity is upheld and
fostering an environment where employees feel it is
‘safe to speak up’ and to do so without fear of reprisal.
Board engagement with shareholders and
other stakeholders
Shareholders
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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United Utilities Group PLC unitedutilities.com/corporate
financing requirements; and dividends. 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.
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 that 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 by which we
communicate with our retail shareholders. Our
company secretariat and investor relations teams,
along with our registrar, Equiniti, are 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.
Other stakeholders
The board has direct contact with other stakeholder
representatives including: Ofwat and YourVoice (the
independent customer challenge group). Indeed,
the chair of YourVoice regularly attends parts of
UUW board meetings to provide an opportunity
for discussion, in-depth customer insight and the
sharing of views.
Prior to the AGM in 2019, Sara Weller, as chair
of the remuneration committee, consulted with
shareholders in relation to the revised directors'
remuneration policy, which was proposed to
shareholders for approval at the 2019 AGM, which
was approved by 99.41 per cent of the votes cast.
Engagement with representatives of all our
stakeholder groups occurs widely across many
aspects of the business, and more information can
be found on pages 22 to 27.
Further information on stakeholder engagement can
be found in the report of the corporate responsibility
committee on page 152 and on the responsibility
pages of our website. The stakeholder metrics
table (see page 60) provides data on a number of
stakeholder and cultural indicators.
> 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.
When revising the directors’ remuneration policy,
the chair of the remuneration committee has
invited engagement from the company’s major
shareholders. Feedback from any such engagement
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:
> An invitation to major shareholders to meet with
the Chairman;
> 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 2019/20, through our investor relations
programme, we met or offered to meet with 82 per
cent (2018/19: 78 per cent), by value, of the active
targetable institutional shareholder base (after
adjusting for shareholders who do not typically meet
with companies, such as indexed funds).
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
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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
Rating agency services continue to be provided to
the group by Moody’s Investors Service Limited,
Fitch Ratings Ltd and S&P Ratings Europe Limited
under contracts signed at the beginning of 2020 for
an initial three-year term. Existing and future debt
capital markets issuance by the group will therefore
continue to benefit from solicited ratings with all
three rating agencies.
Chairman of the board
The role and behaviour of the Chairman is
fundamental to the effective operation and decision-
making of the board and in creating an atmosphere
where open and frank discussion is facilitated and
encouraged. The roles and responsibilities of the
Chairman are set out as part of the company’s
governance framework. Sir David Higgins took over
the role as Chairman after Dr John McAdam stepped
down with effect from 31 December 2019. Sir David
was appointed to the board in May 2019, as chairman
designate; he was independent on appointment
when assessed against the circumstances set out
in provision 10 of the Code. United Utilities Group
PLC is Sir David’s first chairmanship of a UK-based
FTSE 100 company, and as such the nomination
committee felt that a handover period between John
and Sir David would be of particular benefit, and
at a particularly critical time for the company in its
five-year regulatory cycle. The 2019/20 annual board
and committee evaluation process was conducted
in December/January prior to Sir David assuming
chairmanship of the board, and reflected John’s
tenure as chairman.
It is the role of the Chairman, supported by the
company secretary, to drive forward the business
agenda of board meetings to ensure that the board
is kept abreast of the regulatory drivers and strategic
needs of the business.
It is also the role of the Chairman, supported by
the company secretary, to ensure that the directors
receive accurate, timely and clear information.
The Chairman and company secretary hold regular
meetings to discuss agenda items and board
materials. Board packs are distributed electronically
five days before the meeting. Ensuring board
materials are of an appropriate length, on what can
be particularly complex and technical issues, is a
constant challenge.
Outcome of 2019 AGM
At the 2019 AGM, votes were cast in relation to
approximately 67 per cent of the issued share
capital. All 23 resolutions proposed by the board
were passed by the required majority; there
were no significant votes cast against the board’s
recommendations.
Votes cast in favour of the reappointment of the
board directors were as follows:
Dr John McAdam 99.15% Alison Goligher 99.26%
Steve Mogford
99.66% Russ Houlden
99.43%
Stephen Carter
99.18% Brian May
99.12%
Mark Clare
99.18% Paulette Rowe 99.34%
Steve Fraser
99.52% Sara Weller
99.03%
Sir David Higgins was elected with 99.77% of the
votes cast in favour.
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
raising 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), remains
our single biggest lender, currently providing around
£1.8 billion of loan funding supporting past capital
investment programmes.
Given that the UK left the EU on 31 January 2020,
we are unlikely to obtain future funding from the EIB
under its existing mandate, with our existing loan
portfolio with the EIB entering into ‘run-off’ in line
with the scheduled maturities of each loan. A greater
proportion of the group’s term finance is therefore
likely to come from the debt capital markets, and
during the year the group raised a total of £650
million of term funding in the sterling bond market.
The group currently has gross borrowings of circa
£8,363 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.
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United Utilities Group PLC unitedutilities.com/corporate 2 Division of responsibilities
Code Principle
Evidence and outcomes
Principle F:
The chair leads the board and is responsible for its overall
effectiveness in directing the company. They should
demonstrate objective judgement throughout their
tenure and promote a culture of openness and debate. In
addition, the chair facilities constructive board relations
and the effective contribution of all non-executive
directors, and ensure that directors receive accurate,
timely and clear information.
Principle G:
The board should include an appropriate combination
of executive and non-executive (and, in particular,
independent non-executive) directors, such that no one
individual or small group of individuals dominates the
board’s decision-making. There should be a clear division
of responsibilities between the leadership of the board
and the executive leadership of the company’s business.
Principle H:
Non-executive directors should have sufficient time to
meet their board responsibilities. They should provide
constructive challenge, strategic guidance, offer
specialist advice and hold management to account.
See page 124. Sir David Higgins was
independent on appointment when
assessed against the circumstances set out
in provision 10, his biography is on page
108.
See pages 108 to 111 for our reporting
against code provision 10; and the
governance structure of the board and its
principal committees on page 116.
See page 125.
Principle I:
The board, supported by the company secretary, should
ensure that it has the policies, processes, information,
time and resources it needs in order to function
effectively and efficiently.
The board evaluation seeks the view of
board members on the whether it receives
the necessary support and information, see
page 130.
executive director at ConvaTec Plc with effect from
2 March 2020; Brian sought permission from the
board prior to accepting the appointment, which
the board endorsed taking into account that Brian
had retired from his executive director’s role at Bunzl
Plc on 31 December 2019. The board approved the
appointment of Sara Weller, as a non-executive
director of BT Group Plc with effect from July 2020.
Executive directors are not normally allowed to take
on more than one non-executive position. During
the year, Russ Houlden, whose retirement was
announced on 5 February 2020, was appointed as
a non-executive director of Babcock International
Group PLC (Babcock) with effect from 1 April 2020,
in addition to his membership of the supervisory
board and his role as chairman of the audit
committee at Orange Polska SA. The board regarded
Russ’s request in relation to the non-executive
position at Babcock to be an acceptable exception
to the normal rules, given his impending retirement
from United Utilities.
Conflicts of interest and time
commitment
The following section sets out the company’s
compliance with Code provision 7.
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 that 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.
During the year, Brian May was appointed as a non-
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Nomination committee
Board members and senior
managers need to be in
tune with the culture of the
company, particularly as we
start our new five-year asset
management period.
Sir David Higgins
Chair of the nomination
committee
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 lead the process
for appointments to the board and ensure plans
are in place for orderly succession to both the
board and senior management positions and
oversee a diverse pipeline for succession.
> The company secretary attends all meetings of
the committee.
> The customer services and people director has
responsibility for human resources, regularly
attends meetings and is responsible for
engaging with executive search recruitment
advisers.
> The CEO is not a member of the committee, but
from time to time is invited to attend. Neither
the Chairman nor the CEO would participate in
the recruitment of their own successor.
Quick link
Terms of reference –
unitedutilities.com/corporate-governance
Nomination committee members
Sir David
Higgins (chair)
Stephen Carter
Brian May
Mark Clare
Paulette Rowe
Alison Goligher
Sara Weller
Dear Shareholder
On joining the board, all independent non-executive
directors become members of the nomination
committee. I assumed the role as chairman of the
committee with effect from 1 January 2020, after
Dr John McAdam stepped down from the board on
31 December 2019.
We announced on 5 February 2020 that Russ
Houlden, after over nine years as CFO, would
be retiring from the board and not seeking
reappointment at the AGM in July 2020. On 28
February 2020, it was further announced that
Phil Aspin, group controller, would succeed Russ
as CFO. The nomination committee instigated a
thorough benchmarking exercise notwithstanding
the knowledge that Phil was a particularly strong
internal candidate and has been part of our
succession plans for a number of years. Phil has
shown his deep understanding of all aspects of the
business and its needs, along with his independent
mindset and strong technical and commercial skills.
He has been a core part of the team in the group’s
transformational journey over the last ten years and
it is particularly satisfying to promote an internal
candidate to this important role.
On 16 March 2020 it was announced that Sara
Weller, after eight years on the board and chair
of the remuneration committee, was not seeking
reappointment and would be standing down from
the board on the conclusion of the AGM in July
2020. Steve Fraser, our former Chief Operating
Officer, left the business with effect from 31 August
2019, to join Cadent Gas Limited.
Suffice to say, the nomination committee has been
kept busy putting into practice our succession plans,
which 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. The committee’s
role is to ensure and that the board and senior
management have the appropriate balance of skills
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United Utilities Group PLC unitedutilities.com/corporate and experience to support the group’s strategic
objectives and that any developmental needs are
met. Board members and senior managers need
to be in tune with the culture of the company,
particularly as we start our new five-year asset
management period.
When Steve Fraser left the business on 31 August
2019, reporting lines were changed with certain
members of the senior management team, each
of whom had previously reported to Steve Fraser,
reporting directly to Steve Mogford, CEO, resulting
in a larger executive team of 15. Short biographies
can be found on our website at unitedutilities.com/
executiveteam. Excluding the CFO and CEO, there
are 13 senior managers in the executive team, of
which 30 per cent are women.
Historically, independent non-executive directors
at United Utilities have served a term of between
seven and nine years; a pattern that 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 have been driven by their own
personal circumstances. Serving beyond a nine-year
term is identified in the Code as being one of the
reasons that could affect a non-executive director’s
independence. Currently two-thirds of board
members are independent non-executive directors,
fulfilling provisions 10 and 11 of the Code. Biographies
of board directors can be found on pages 108 to 111.
Our board diversity policy (see page 129) 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.
Sir David Higgins
Chair of the nomination committee
Main responsibilities of the committee
> Lead the process for board appointments and make recommendations
to the board about filling vacancies on the board, including the company
secretary;
> Consider the 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 election to the boards
of other companies; this role has been delegated to the Chairman (other
than in respect of his own requests).
Directors’ tenure as at 31 March 2020
Sir David Higgins
Steve Mogford
Russ Houlden
Mark Clare
Sara Weller
Brian May
Stephen Carter
Alison Goligher
Paulette Rowe
10m
9yrs 3m
9yrs 6m
6yrs 5m
8yrs 1m
7yrs 7m
5yrs 7m
3yrs 8m
2yr 9m
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Corporate governance report
Nomination committee
3
Composition, succession and evaluation
Code Principle
Principle J:
Appointments to the board should be
subject to a formal, rigorous and transparent
procedure, and an effective succession
plan should be maintained for board and
senior management. Both appointments
and succession plans should be based on
merit and objective criteria and, within this
context, should promote diversity of gender,
social and ethnic backgrounds, cognitive and
personal strengths.
Principle K:
The board and its committees should have
a combination of skills, experience and
knowledge. Consideration should be given to
the length of service of the board as a whole
and membership regularly refreshed.
Principle L:
Annual evaluation of the board should
consider its composition, diversity and
how effectively members work together to
achieve objectives. Individual evaluation
should demonstrate whether each director
continues to contribute effectively.
Evidence and outcomes
An explanation of the
board appointments
and succession planning
activities can be found
on page 128 and forms
our disclosure as part of
provision 23. Our disclosure
against provision 20 is on
page 128. In relation to
provision 23, our policy
on board diversity is on
page 129 and details of the
gender balance of senior
management on page
132. Information on the
company’s approach to
diversity and inclusion is set
out on pages 132 to 135.
Biographies of the board can
be found on pages 108 to
111. An overview of directors’
areas of expertise is set
out in the skills matrix on
page 129 and the length of
service of board members on
page 127. Board biographies
include our reporting against
provision 18.
Details of the board
evaluation and disclosure
against provision 23 can be
found on pages 130 to 131.
Age and gender profile
50–54
12%
55–60
44%
61–65
44%
Chairman
Senior independent non-executive director
Executive director
Independent non-executive director
128
What has been on the committee’s
agenda during the year?
Board succession
In line with the board succession plan, and the
approximate timescales therein, the process
of the appointment of the successor to Russ
Houlden as CFO was undertaken resulting in the
announcement in February 2020 that Phil Aspin,
group controller, would be appointed as CFO at the
conclusion of the AGM on 24 July 2020 following
Russ Houlden’s retirement from the board. The
committee is supported during any recruitment
process by the customer services and people
director, Louise Beardmore, as part of her human
resources responsibilities. The executive search
firm Lygon Group were engaged as part of the
recruitment process and, against the brief for the
role, undertook the benchmarking exercise against
a number of external candidates. As a member
of the senior management team, and part of the
board succession plans, Phil has been very visible
to the board for a number of years. Phil joined the
business in 1994 having qualified as a chartered
accountant with KPMG, and has held various senior
roles within the group’s finance function. In his role
as group controller he has responsibility for financial
and regulatory accounting; prior to this role he was
group treasurer and is a member of the Association
of Corporate Treasurers.
The succession planning matrix tool and skills matrix
(see opposite) for board directors is used to support
the planning process for board appointments. The
succession planning matrix highlights the Code
governance requirements; existing directors’ terms
of appointment and a forecast/anticipated 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.
Other than providing executive search services
on previous occasions Lygon Group have no other
connection with the company.
Membership of the principal board
committees
Sir David Higgins became a member of the
nomination committee on appointment and took
over as chair with effect from 1 January 2020. On
Sara Weller leaving the board at the conclusion of
the AGM in July, Alison Goligher will become chair
of the remuneration committee.
The board is satisfied that the membership of
the audit committee is in accordance with Code
provision 24, and that the membership of the
remuneration committee is in accordance with
provision 32.
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United Utilities Group PLC unitedutilities.com/corporate Board diversity
The board diversity policy 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. We recognise the benefits of
diversity, and its contribution to the effectiveness
of the board decision-making process and have met
our measurable targets with 33 per cent female
representation on the board and one director of
non-white ethnicity. Furthermore, we recognise
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 and aligns with our strategic theme of
operating our business in a responsible manner (see
page 53).
Summary of board diversity policy
> 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.
Skills matrix of board directors
> 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.
Finance/
accounting
Utilities
Regulation
Government Construction/
Industrial
engineering
Customer-
facing
FTSE
companies
Sir David Higgins
Steve Mogford
Russ Houlden
Mark Clare
Sara Weller
Brian May
Stephen Carter
Alison Goligher
Paulette Rowe
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Sir David’s induction programme
During the year the Chairman undertook two extended visits to
the company’s main offices in Warrington where he met with all
members of the executive team:
> Met with the digital services director to gain an understanding
of the digital monitoring and control of the group’s water and
wastewater network and assets and the work of the innovation
team;
> Met with the company secretary to gain an understanding of
the group’s corporate structure, governance arrangements
and associated processes and met with Slaughter and May
the group’s legal adviser to receive an external perspective on
governance and best practice;
> Met with the corporate affairs director and head of the press
office;
> Met 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 and the director of
health, safety and wellbeing;
> Met with the director of wastewater and the water process
and scientific services director to gain an understanding of the
company’s operations and about the company’s bioprocessing
facilities from the bioresources director;
> Met with the strategy and regulation director and the
environment and asset strategy director to discuss the
requirements of the economic and quality regulators; and
> Met with the CFO and members of the finance function and
gained external perspective from the group’s statutory auditor,
KPMG;
> Met with the engineering director and the network and capital
delivery director and visited the West Cumbria pipeline project
and the Haweswater aqueduct resilience project.
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. For more information, see page 131.
A summary of the internal analysis of the 2019/20 evaluation is as follows:
2019/20 areas of assessment
Commentary and actions
Board composition
and expertise
Board agenda
Board dynamics
Board support
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.
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, and with the introduction of
the Employee Voice panel, the board would gain a more in-depth insight into the views of employees
and the culture of the group.
The relationship between the board members was appropriate. Board meetings were conducted in an
atmosphere of open communication, meaningful and equal participation from all board members 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. Moving forwards, more focus was needed on longer term business
priorities such as climate change, technology and innovation, resilience and people development.
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.
Succession planning and human
resource management
Succession plans for the board were in place with outline timescales, with both the Chairman and the
CFO’s succession being addressed during the year.
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:
> Nomination committee: continuing the focus on succession planning for executive and non-
executive board positions;
> Remuneration committee: ensuring the remuneration package for any new executive director was
in line with market practice; the different perspectives of the remuneration consultants were fully
explored and that the committee was kept abreast of relevant governance best practice;
> Audit committee: the authors of committee papers to focus on the key issues to be brought to the
attention of the committee particularly in relation to the risk management systems and controls; and
> Corporate responsibility committee: the priorities for discussion over the next 18 months should be
identified.
Committees
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United Utilities Group PLC unitedutilities.com/corporate 2019/20 areas of assessment
Commentary and actions
Individual directors
The individual performance of all the directors was assessed: all the non-executive directors were
considered to be contributing effectively to the board, and all directors demonstrated the expected
level of commitment to their roles. Individual directors were asked to identify how they could improve
their overall contribution to the board and its committees and if they had any skill or knowledge
gaps that could be addressed. The following were identified: gaining a more in-depth knowledge of
the company and its customers; arranging more opportunities for interaction with members of the
executive team together with field and operational site visits to specific areas of the business outside
of board meetings.
The review of the Chairman’s performance (led by the senior independent director) concluded that
Dr McAdam had continued to demonstrate an effective and unbiased perspective, notwithstanding that
he had served for over 11 years as a board director by 31 December 2019, when he stood down from the
board. It was agreed that, during the year, Dr McAdam had fulfilled the expected commitment to the
role and was an effective leader of the board. The directors offering themselves for reappointment at the
2020 AGM are set out in the biographies of the board directors on pages 108 to 111.
2018/19 evaluation recommendations
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.
Actions taken during 2019/20
Board paper templates were reissued to the executive team and authors of
board/committee papers, encouraging greater focus on key issues, and where
appropriate, S172 duties.
Nomination committee: more regular meetings
would be required over the next year within agreed
timescales.
The workload of the nomination committee, primarily in addressing the succession
of the Chairman and the CFO necessitated a significant increase in the number of
meetings held during the year.
Audit committee: the balance between detail and
simplification in audit papers should continue to be
reviewed.
Audit committee papers have focused on key issues, with greater use of appendices
for the explanation of detail.
Corporate responsibility committee: the implications
of the outcome for the business plan submission for
the committee’s agenda should be kept under review.
Following acceptance of the final determination in January 2020, the committee
has included a number of discussion points to its agenda such as natural capital,
surface water management and air quality.
Ongoing board development and
training
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 director's
element of the board evaluation exercise, directors
are asked to identify any skills or knowledge gaps
they would like to address. Directors made a number
of suggestions, as set out above.
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 117 to
119). The board’s approach to these matters is
reflected in our strategic themes, 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, whose role is predicated on protecting
customer interest in how the group goes about its
business, the board is kept informed of customer, in-
region environmental affairs and social matters.
Internal board evaluation
1
Questionnaires
> The evaluation 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 2018/19 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 participate in the evaluation process.
2
3
4
Appraisal
> The results were reviewed by the company secretary.
Consultation
> 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.
Evaluation
> The Chairman reviewed the performance of the individual directors.
Mark Clare, as the senior independent non-executive director led the
review of Dr John McAdam’s performance as Chairman, which was
shared with board colleagues.
5
Outcomes
> The Chairman followed up on the evaluation findings with
appropriate actions.
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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. A number of
board members also attended a number of events
organised by Ofwat for non-executive directors.
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, as
part of the ongoing work to ensure the board has
a direct link to understand the views of employees
(see page 122), Alison has spent time meeting
employees in different areas of the business to gain
an understanding of everyday life and the culture
of the business. Alison attended the North West
affordability summit organised by the company
bringing together agencies and support groups from
across the region. The Chairman, Alison Goligher and
Paulette Rowe attended the management conference
in February 2020.
Induction of new non-executive directors
An induction programme is designed 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 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
includes outline timescales. The 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.
30 per cent of our executive team (excluding the
CEO and CFO) is made up of women. The gender
balance of the direct reports of the executive team
are 61 per cent male and 39 per cent female. 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 135. Historically, our industry
has been male dominated, but we have measures in
place to increase diversity in broad terms, including
gender among our employees.
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.
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United Utilities Group PLC unitedutilities.com/corporate What we have done to improve diversity
and inclusion in 2019/20
Our commitment to providing a diverse and
inclusive workforce, now and for the future, is more
relevant than ever before. We need fantastic people
to enable us to deliver a great public service. We
want to make sure we are reaching and recruiting
from every community and then supporting
employees to achieve their full potential.
Our diversity and inclusion steering group is tasked
with driving the inclusion strategy and has five key
focus areas and uses data and metrics to monitor
progress:
> Removing barriers by working with target
communities to attract a more diverse workforce;
> Taking positive action by evolving how we recruit
employees;
> Providing support for all employees to ensure
they feel valued and included regardless of their
gender, age, race, disability, sexual orientation or
social background;
> Developing our leaders, managers and
employees to raise the importance of inclusion
within our workplace; and
> Providing flexible working opportunities so
that current and future can balance home and
working life.
Gender
Throughout 2019/20, 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.
Any meaningful and significant change in our
gender balance will also require a shift in wider
society and in the education system. Research
indicates that there continues to be significantly
fewer females than males studying STEM subjects
in secondary schools and universities, which means
that females continue to be under-represented in
jobs requiring such skills. Indeed, females made
up only circa 15 per cent of the UK workforce
employed in core STEM-related jobs in 2018 (WISE
campaign summary of Office for National Statistics
Labour Force Survey data).
The United Utilities Aspiring Manager Programme
has 44 per cent female participants. The overall
number of female graduates is 41 per cent; this
number has been growing year on year for the
past five years. As we offer predominantly STEM-
based programmes, we are encouraged to see a
more gender balanced pool of future talent. The
apprentice population is 18 per cent female, an
increase from 9 per cent since 2014/15, and
this compares favourably with other companies
in the sector.
We continue to:
> Celebrate the success of those of our senior
and emerging female leaders included in the
Northern Women Future List;
> Look for targeted development for our future
female leaders with cross company mentoring
schemes and targeted personal development to
support future progression;
> Actively encourage employees to join the gender
equality network within the business;
> Be 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
> Inspire future generations through our education-
based STEM programmes actively promoting
STEM-related educational paths, careers and
opportunities specifically to females across the
North West.
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 1 per cent of our
employees have declared disabilities or long-term
health conditions. Our ability network aims to
support employees with, or those who support,
people with a disability or long-term health
conditions. Having gained Disability Confident
status, we have continued to offer guaranteed
interviews and make reasonable adjustments for
people who are registered with a disability. We will
continue to promote this to attract candidates from
the widest talent pool.
Throughout 2019/20, we have delivered disability
awareness training to over 150 managers, with
92 per cent of participants rating the training as
excellent.
Louise Beardmore, customer services and people
director, sponsors and raises awareness of dyslexia
across the business. We continue to participate in
national events such as National Dyslexia week to
educate, create awareness and provide support for
employees with various conditions.
Ethnicity
The black, Asian and minority ethnic (BAME)
representation of our workforce is 2 per cent (15
per cent of our workforce choose not to disclose
ethnicity). Attracting a future pipeline of employees
from multi-cultural backgrounds remains a priority.
In 2019 we launched a multicultural employee
network that aims to support colleagues and
educate the wider workforce by providing insight
and stories from a range of cultural backgrounds.
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We have strategic partnerships with schools,
colleges and universities, with higher levels of
BAME presence among their student population,
in order to improve the ethnicity of our workforce
profile. We have recruited a number of university
ambassadors from our partnered universities
to actively promote our opportunities to BAME
networks across their universities.
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
In 2018, 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.
Social Mobility Commission research revealed that
41 per cent of people living in the North West believe
that opportunities to progress in their region are
poor; while 78 per cent of people in London think
their progression opportunities are good.
Therefore we provide employment, enrichment and
educational opportunities to targeted communities
who experience low social mobility. For the past
six years, we have continued to lead our youth
programme in collaboration with our supply chain
partners. This programme supports young people
from across our region who are not in education,
employment or training (NEET) to become work
ready. This collaboration has supported over 120
young people, with 74 per cent of participants in
paid employment after the programme. The Prince’s
Trust measure the social value of the programme at
£150,000 per person.
United Utilities are in their second year of
supporting Salford University's Care Leaver
Mentoring programme, where senior leaders
mentor a second year student who has come
through the care system. We have also lead
mentoring circle sessions with five separate DWPs
across the North West, which support 18 to 24
year-olds who are either BAME or have disabilities
or long-term health conditions.
Flexible working
Based on employee feedback, we have refocused our
approach on flexible working, as well as complying
with, often exceeding our statutory obligations to
provide flexible and part-time working patterns that
reflect all stages of the employee life-cycle. We
have introduced a 'happy to talk flexibly' approach
to recruitment, changed our policies to remove
barriers to flexible working and remain committed to
considering modifying working practices.
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United Utilities Group PLC unitedutilities.com/corporate Our gender pay gap figures are shown below.
Further details can be found in the full report at
unitedutilities.com/corporate/responsibility/
employees/diversity/
Median and mean gender pay gap
National median (1)
17.3%
Our median (2)
Our mean (3)
13.8%
11.3%
Median and mean bonus gender pay gap(3)
Our mean bonus
pay gap
Our median bonus
pay gap
15.7%
38.0%
90.5 per cent of males and 95.9 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 2019.
(2) Source: company payroll data for the month of April
2019.
(3) Source: company payroll data, bonus paid in the
12 months period preceding 30 April 2019.
LGBT+
Our Identity+ network, which supports lesbian, gay,
bisexual and transgender communities, has over
500 members. Throughout 2019/20, our network
has continued to have an active presence across
our communities ensuring they attend or sponsor
as many north west pride events as possible. This
year, we have introduced a new training course for
managers delivered by The Proud Trust. The focus of
the session is to equip our colleagues, managers and
senior leaders with the right tools and information
to help them support our LGBT colleagues and
contribute to our ethos of an inclusive workplace
for all.
Gender pay
The utilities industry is traditionally male-
dominated, with the vast majority of jobs requiring
STEM skills.
The main driver of our gender pay gap is the shape
of our workforce and the challenges faced within
our industry when trying to attract and recruit
employees.
Overall, 35 per cent of our workforce is female.
We have a higher proportion of men in more senior
roles within our organisation and more males in
STEM skilled trades and higher-paid roles, which
contributes to our current gender pay gap. In line
with our overall aim to have a workforce that is
representative of our region and our customer base,
this is an imbalance we are striving to overcome.
We have relatively long-serving employees which,
when combined with low employee turnover rates,
means the overall composition of our workforce is
broadly unchanged from last year. So adjusting our
gender balance will take time. We are continuing to
undertake initiatives to address our imbalance and
make improvements over the next couple of years.
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> is satisfied that it has carried out a robust
assessment of the emerging and 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.
In the review of the effectiveness of risk management
and internal controls systems, the board also took into
account the:
> biannual review of significant risks (see page 95) and
emerging risks (see page 101);
> outcome of the biannual business unit risk
assessment process (see page 150);
> activities and review of the effectiveness of the
internal audit function (see page 150);
> 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 151);
> review of reports from the group audit and risk board
(see page 150);
> oversight of treasury matters in particular debt
financing and interest rate management (see page
87); and
> review of the business risk management framework
and management’s approach and tolerance towards
risk (see page 92).
Corporate governance report
4
Audit, risk and internal control
Code Principle
Principle M:
The board should establish formal and
transparent policies and procedures to
ensure the independence and effectiveness
of internal and external audit functions and
satisfy itself on the integrity of financial and
narrative statements.
Principle N:
The board should present a fair, balanced
and understandable assessment of the
company’s position and prospects.
Evidence and outcomes
In accordance with provision
25, an explanation of
how the independence
and effectiveness of the
external audit process can
be found on page 144, and
the reappointment of the
statutory auditor on page 147.
Our disclosure against
provision 27 can be found on
page 144.
Principle O:
The board should establish procedures to
manage risk, oversee the internal control
framework, and determine the nature and
extent of the principal risks the company is
willing to take in order to achieve its long-
term strategic objectives.
Our risk management
framework and principal
risks are on pages 92 to 101.
Further information on the
company’s internal audit
function and controls can be
found on pages 150 to 151.
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 92 to 101, 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 150 and 151), the board:
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United Utilities Group PLC unitedutilities.com/corporate Going concern and long-term viability
The following section sets out the company’s
compliance with part of Code provision 30 and 31.
The board, following the review by the audit
committee, concluded that it was appropriate to adopt
the going concern basis of accounting (see page 207).
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 92 to 101, 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 116) including such
matters as liquidity policy, the group’s capital funding
requirements and interest rate management. The board
believes, because of the nature of the regulatory regime
of the water sector and the contribution to the longer-
term planning horizon for the sector of Ofwat’s business
plan assessment process, under the current regulatory
and statutory framework a period of seven years to
assess the group’s long-term viability is appropriate.
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 2027.
Basis of assessment
This viability statement is based on the fundamental
assumption that the current regulatory and statutory
framework does not substantively change. The long-
term planning detailed on page 37 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
price and in a responsible manner over the longer term,
underpinning our business model set out on pages 28
to 31.
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. Specifically, risks associated
with the possible ongoing impact of the COVID-19
pandemic have been considered and factored into
the various scenarios modelled as part of the group’s
assessment. 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 92 to 101.
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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:
> The group’s current liquidity position – with
£1.2 billion of available liquidity at March 2020
providing 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 62 per cent, a robust pension
position and current credit ratings of A3/BBB+/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; 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 group no longer having
access to future EIB funding following the UK’s exit
from the EU.
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 92 to 101. The baseline
plan against which the viability assessment has
been performed reflects the estimated impact of a
‘long peak’ COVID-19 scenario on the group. This
assumes restrictions and social distancing extend
through the summer of 2020 resulting in a one-year
GDP reduction of 8 per cent which takes 10 quarters
to recover; unemployment peaking at 9 per cent;
CPIH inflation reducing to zero in the year to March
2021 and averaging 1.0 per cent over the period to
March 2025 before increasing back to 2.0 per cent;
and non-household business revenues reduced
by around 30 per cent in the year to March 2021.
This baseline plan is then subject to further stress
scenarios and reverse stress testing that takes into
account the potential impact of the group’s principal
risks. Such risks include: environmental risks such
as the occurrence of extreme weather events and
other impacts of climate change, further details of
which are included in the group’s TCFD disclosures
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United Utilities Group PLC unitedutilities.com/corporate 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.
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 note to the accounts.
on pages 66 to 77; political and regulatory risks;
the risk of critical asset failure; significant cyber
security breaches; longer term, economic impacts
resulting from COVID-19, including unemployment
and corporate failures affecting debt collection and
lower inflation affecting revenues, financing costs
and RCV; and the potential for a restriction to the
availability of financing resulting from a capital
markets crisis. While a scenario in which no trade
deal is reached ahead of the conclusion of the
transition period following the UK’s withdrawal from
the EU may have adverse operational and financial
impacts on the group, this is not considered to
represent a significant risk to the group’s ongoing
viability.
The scenarios considered are underpinned by the
group’s established risk management processes,
taking into account those risks with a greater than 10
per cent (1 in 10) cumulative likelihood of occurrence.
In addressing the risks associated with COVID-19 the
further downside scenario considered is one in which
the pandemic gives rise to a potential depression
with persisting levels of high unemployment and
short-term deflation, followed by medium term low
inflation. This is assumed to result in elevated levels
of bad debt, increased totex costs, outcome delivery
incentive penalties and lower CPIH inflation, in each
case, across the whole viability period.
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 tests of
extreme theoretical scenarios have been performed
to understand the headroom in the group’s ability to
absorb all severe but reasonable scenarios.
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Audit committee
During the year, the audit
committee conducted
a competitive tender
process for the role of
statutory auditor and made
a recommendation to the
board in January 2020 that
the incumbent auditor KPMG
should be appointed for a
further term.
Brian May
Chair of the audit committee
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 annual report and
financial statements for the year ended 31 March
2020, coupled with insight into the outcome of the
audit tender conducted during the year. 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.
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
2019/20 annual report and financial statements can be
found on page 191.
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 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-
Quick facts
> Brian May has chaired the committee since July
2013. He is a chartered accountant and is considered
by the board to have recent and relevant financial
experience, having served as finance director of
a FTSE 100 company, from which he retired in
February 2020.
> 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. Attendance at audit committee meetings
is set out on page 120, and the relevant directors’
biographies can be found on pages 108 to 111.
> Other regular attendees at meetings at the invitation
of the committee include the CEO, the CFO, the
company secretary, the head of audit and risk,
the group controller, and representatives from the
statutory auditor, KPMG LLP (KPMG). None of these
attendees are members of the committee.
> The representatives from KPMG and the head of audit
and risk each have 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
A copy of the Financial Reporting Council’s 2018
UK Corporate Governance Code can be found at frc.org.uk
Audit committee members
Brian May
(chair)
Stephen Carter
Paulette Rowe
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United Utilities Group PLC unitedutilities.com/corporate present the information. The committee reports its
findings and makes recommendations to the board
accordingly. The committee is supported in this
role by using the expertise of the statutory auditor,
who in the course of the audit, considers whether
accounts have been prepared in accordance with
IFRS and whether adequate accounting records have
been kept. Furthermore, the company’s own internal
audit team also contributes to the assurance process
by reviewing compliance with internal processes.
The statutory auditor presents its findings to the
shareholders as the owners of the business, and its
report can be found on pages 194 to 200.
During the year, the audit committee conducted a
competitive tender process for the role of statutory
auditor. KPMG were first appointed by shareholders
on 22 July 2011; the 2019/20 audit has been their ninth
consecutive year in office as auditor to the group.
Last year’s audit committee report indicated that we
expected to conduct the tender process during 2020,
with a view to the successful bidder providing statutory
audit services for the year ending 31 March 2022.
In light of the FRC’s Revised Ethical Standard (2019)
relating to auditor independence rules, applicable
from March 2020, whereby a new statutory auditor
cannot have provided internal audit services to public
interest entities for 12 months prior to the start of the
first period for which they are statutory auditor, the
committee accelerated the timing of the tender process
in order not to preclude any bidder on this basis. Three
bids were received and ‘challenger’ firms were invited
to participate. The committee concluded the tender
process and made a recommendation to the board in
January 2020, that the incumbent auditor KPMG should
be appointed for a further term. There are no contractual
obligations that restrict the committee’s choice of
auditor; the recommendation is free from third-party
influence and no auditor liability agreement has been
entered into. Further detail on the tender process can be
found on page 145. The primary factor for the committee
in making this recommendation was that KPMG offered
a more compelling case for the provision of a high-
quality audit.
As reported last year, KPMG implemented an audit
quality transformation plan, following criticism by
the FRC in their 2017/18 audit quality inspection
report on the firm and other enhancements to
improve audit quality as identified in their 2019 audit
plan for the company (see page 144). Furthermore,
in KPMG’s audit plan for the year ended 31 March
2020, they set out their proposals to address areas
identified by the FRC for improvement in its 2018/19
audit quality inspection report.
Auditor independence is a key principle, and
was an important factor considered during the
tender process. As a general point, the auditor
must be independent of the company and it is the
committee’s responsibility to ensure that the three-
way relationship between the committee, the auditor
and the company’s management is appropriate and
there is no undue influence by any of the parties on
the other thereby ensuring the integrity of the audit
Main responsibilities of the committee
> Make a recommendation to the board for the appointment or
reappointment of the auditor, and to be responsible for the tender of the
audit from time to time and to agree the fees paid to the auditor.
> Establish policies for the provision of any non-audit services by the
auditor.
> Review the scope and the results of the annual audit and report to
the board on the effectiveness of the audit process and how the
independence and objectivity of the auditor has been safeguarded.
> 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 reporting fraud and other
inappropriate behaviour and to receive reports relating thereto.
> Report to the board on how it has discharged its responsibilities.
> Apply the principles of the Code and report against the provisions.
process and the annual report and financial statements. Independence is a key
focus for the 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 (2019). Information on how the committee assesses the independence of
the auditor can be found on page 144.
The committee revised the group’s policy on non-audit services to reflect the
FRC’s Revised Ethical Standard (2019) whereby the only non-audit services that
a statutory auditor is permitted to provide to a public interest entity are those
required by law or regulation, loan covenant reporting, other assurance services
closely linked to the audit and/or reporting accountant services.
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, particularly in the area of audit reform following the recent reviews
by Sir John Kingman, The Competition and Markets Authority, and Sir Donald
Brydon, and we await further guidance from the FRC and BEIS in relation to the
implementation of changes proposed in these reviews. The details of the annual
evaluation process of the committee’s performance can be found on page 130.
I would like to extend my thanks to committee colleagues for their work and
support during the year, particularly in relation to the audit tender process and
extra focus at the year end to consider the matters in the financial statements
impacted by COVID-19. As non-executive directors, my colleagues and I have no
hesitation in seeking a full explanation from management or the auditor on any
matter we feel necessary.
This report was approved by the committee at its meeting held on 19 May 2020.
Brian May
Chairman of the audit committee
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Audit committee
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 five scheduled meetings of the committee during the year, one
of which was held specifically to consider the outcome of the audit tender process. Subsequent to the year
end, the committee met on two further occasions to address matters in the financial statements impacted by
COVID-19. Items of business considered by the committee during the year are set out in the table below.
Actions
Reviewed and discussed the reports from the
financial reporting team on the financial statements,
considered management’s significant accounting
judgements, and the policies being applied both at
the full and half year and how the statutory audit
contributed to the integrity of the year end 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.
Reviewed the company’s approach to the adoption
of International Financial Reporting Standards (IFRS)
IFRS 16 Leases, first impacting the 31 March 2020
financial statements.
Reviewed the proposed audit strategy for the 2019/20
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 2019/20 audit, and tasked management to
resolve any issues relating to internal controls and risk
management systems.
Reviewed the basis of preparation of the financial
statements as a going concern as set out in the
accounting policies.
Reviewed the long-term viability statement proposed
by management.
Reviewed the impact of COVID-19 on the financial
statements.
Reviewed the results of the committee’s assessment of
the effectiveness of the 2018/19 audit.
Reviewed whether the company’s position and
prospects as presented in the 31 March 2020 annual
report and financial statements were considered to be
a fair, balanced and understandable assessment of the
company’s position and prospects.
Reviewed the non-audit services and related fees
provided by the auditor for 2019/20 and the policy on
non-audit services provided by the auditor for 2020/21.
Outcomes
Recommendations were made
to the board, supporting the
approval of the half and full-
year accounts and financial
statements.
Cross reference
See page 147
Contribution to the assurance of
the regulatory reporting to the
UUW board.
–
Adoption of approach to new
reporting standard IFRS 16.
See page 207
Monitoring progress made by
statutory audit team against the
agreed plan, and consideration of
issues as they arise.
See page 194
Recommendation made to the
board to support the going
concern statement.
Recommendation made to the
board to support the long-term
viability statement.
Approved accounting treatments
and the impact of COVID-19 on
the financial statements and
in particular expected credit
losses and carrying values in joint
ventures.
The committee concluded that
the audit was effective and a
recommendation was made to
the board on the reappointment
of KPMG as the auditor for the
year ending 31 March 2021 at
the forthcoming annual general
meeting.
Recommendation made to the
board that the 31 March 2020
annual report and financial
statements was a fair, balanced
and understandable assessment
of the company’s position and
prospects.
Approved the non-audit services
and related fees provided by
KPMG for 2019/20 and approved
an updated policy for non-audit
services provided by the auditor.
See page 207
See page 137
See pages 147
to 149
See page 146
See page 143
See page 145
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Outcomes
Negotiated and agreed the statutory audit fee for the
year ended 31 March 2020.
Statutory audit fee paid as
agreed by the committee.
Conducted a competitive tender process for the role
of statutory auditor.
Reviewed the effectiveness of the risk management
and internal control systems.
Review of the committee’s terms of reference.
Monitored fraud reporting.
Biannual oversight and monitoring of the group’s
compliance with the Bribery Act.
Approved the strategic internal audit planning
approach and reviewed reports on the work of the
internal audit function from the head of audit and risk.
Considered the issues and findings brought to the
committee’s attention by the internal audit team.
Reviewed the quality and effectiveness of internal
audit and the effectiveness of the current co-source
arrangements.
Reviewed the internal audit plan for 2020/21.
Reviewed the conclusions of the committee’s annual
evaluation. The internally facilitated evaluation was
undertaken 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.
Recommendation made to
the board to retain KPMG as
statutory auditor for the year
ending 31 March 2022.
Recommendation made to the
board that the risk management
and internal control systems
were effective.
Terms of reference were
considered to be 2018 Code
compliant.
Reviewed the company’s anti-
fraud policies and processes and
alleged incidents of fraud and the
outcome of their investigation.
Reviewed compliance with the
company’s ongoing anti-bribery
programme.
Monitored the implementation
of the 2019/20 internal audit
plan. Reviewed findings of
specific internal audit and
implementation of any resulting
actions by management.
The committee was satisfied that
management had resolved or was
in the process of resolving any
outstanding issues or concerns in
relation to matters scrutinised by
the internal audit team.
Concluded that the internal audit
team, supported by the PwC co-
source resource was effective.
Approved the internal audit plan
for 2020/21.
The board reviewed the results of
evaluation of the committee and
concluded that the committee
continued to be effective.
Cross reference
See page 145
See page 145
See page 150
See page 140
See page 151
See page 151
See page 150
See page 149
See page 150
See page 149
See page 130
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 following section sets out the company’s
compliance with part of Code provision 27.
The directors’ responsibility for preparing the annual
report and financial statements is set out on page 191.
The board delegates to the committee the review
of the annual report and financial statements with
the intention of providing advice to the board on
whether, as required by the Code, “the annual report
and accounts, taken as a whole, is fair, balanced
and understandable and provides the information
necessary for shareholders to assess the company’s
position and performance, business model and
strategy”.
To make this assessment, the committee received
copies of the annual report and financial statements
to review during the drafting process to ensure
that the key messages being followed in the annual
report were aligned with the company’s position,
performance and strategy being pursued and that
the narrative sections of the annual report were
consistent with the financial statements. The
significant issues considered by the committee in
relation to the financial statements include those
identified by the auditor in their report on pages 194
to 200.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Audit committee
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 90. 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.
The key performance indicators included in the
strategic report (see pages 56 to 59) 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 asset management 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
statutory audit process
The committee, on behalf of the board, is
responsible for the relationship with the auditor, and
part of that role is to examine the effectiveness of
the statutory audit process. Audit quality is regarded
by the committee as the principal requirement of the
annual audit process.
KPMG present the strategy and scope of the 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 auditor without
management being present in order to encourage
open and transparent feedback by both parties.
KPMG also meet with management at regular
intervals during the annual audit process.
As reported in the 2019 audit committee
report, KPMG had implemented an Audit
Quality Transformation Plan (AQTP) addressing
improvements identified by the FRC in its 2017/18
audit quality inspection report relating to the firm.
KPMG’s 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.
Furthermore, KPMG identified further audit quality
improvements in the 2018/19 audit plan, presented
in September 2018, including: delivering both a
more standardised and structured audit programme;
ensuring the KPMG audit team had an understanding
of emerging issues; enhanced project management;
greater use of technology as an ‘enabler’ to the audit
process; more visibility of senior KPMG support
to the audit team on site; greater challenge to
management in general and increased scrutiny of
pension scheme assets and liabilities.
On completion of the annual audit process, all
members of the committee, as well as key members
of the senior management team and those who
regularly provide input into the audit committee or
have regular contact with the auditor, completed a
feedback questionnaire seeking their views on how
well KPMG performed the audit. The questionnaire
was issued in July 2019. Views were sought from
respondents, and it was confirmed in the responses,
that KPMG had delivered the audit quality
improvements as identified in its 2018/19 audit plan.
Views of the respondents were sought in terms of:
> 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;
> The quality of the delivery of the audit and
whether planned quality improvements had been
delivered;
> The expertise of the audit team conducting the
audit;
> That the degree of professional scepticism applied
by the auditor was appropriate;
> The appropriateness of the communication
between the committee and the auditor in terms
of technical issues;
> The quality of the service provided by the auditor;
> Their views on the quality of the interaction
between the audit engagement 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 September 2019, at
which the conclusions were discussed and any
opportunities for improvement brought to the
attention of the auditor. As part of a process of
continual improvement the committee requested
that management and KPMG collaborate to enhance
performance in certain limited areas.
In summary, the committee noted KPMG’s delivery
of improvements to its policies and processes most
importantly impacting audit quality, and in relation
to the additional oversight provided by senior
KPMG personnel during the 2018/19 audit, it was
agreed that the statutory audit process and services
provided by KPMG were satisfactory and effective.
How we assessed the independence of
our statutory auditor
The following section sets out the company’s
compliance with part of Code provision 26.
There are two aspects to auditor independence that
the committee monitors to ensure that the auditor
remains independent of the company.
First, in assessing the independence of the auditor
from the company, the committee takes into
account the information and assurances provided
by the 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
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United Utilities Group PLC unitedutilities.com/corporate 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,
an independence confirmation letter, at the planning
stage of the audit disclosing matters relating to
KPMG’s independence and objectivity, including
any relationships that may reasonably be thought to
have an impact on its independence and the integrity
and objectivity of the audit engagement partner and
the audit staff. The audit engagement 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.
In accordance with the FRC’s Revised Ethical
Standard (2019), an auditor is only permitted to
provide certain non-audit services to public interest
entities (i.e. United Utilities Group PLC) that are
closely linked to the audit itself or that are required
by law or regulation, as such services could impede
their independence. Permitted non-audit services
fees paid to the statutory auditor are subject to a
fee cap of no more than 70 per cent of the average
annual statutory audit fee for the three consecutive
financial periods preceding the financial period in
which the cap will apply.
The cap will first apply for the group in the year
ending 31 March 2021 and, as such, our year ended
31 March 2020 will be the third 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. During the
year, the company’s policy was amended to reflect
the FRC’s Revised Ethical Standard (2019), so that
permitted services (which remain subject to the
70 per cent cap, apart from the regulatory audit)
can be approved by the CFO subject to a cap of
£10,000 applied for individual items. Individual
items in excess of £10,000 require the approval of
the committee. Auditor provided permitted services
include the non-audit fees paid to the statutory
auditor for: the interim review; the regulatory audit;
agreed upon procedures for regulatory reporting and
the Euro Medium Term Note Programme and Law
Debenture Trust compliance work.
Fees for non-audit services are shown in the bar
chart below (2020: £77,000) and represent 16.4 per
cent of the total audit fees (2019: £65,000; 2018:
£80,000). Fees paid to KPMG 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 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.
Statutory audit tender process
During the year, the committee led and supervised
a formal tender process for external audit services.
Prior to this, a formal tender was last undertaken in
2011 when KPMG were appointed, commencing their
appointment as auditor and presented their first report
to shareholders for the year ended 31 March 2012.
As previously reported, the committee undertook
an audit tender review in September 2015, which
concluded that KPMG as incumbent, would remain
in office and the committee would next undertake a
competitive tender for external audit services for the
year ended 31 March 2022, most probably during 2020.
The company, as a public interest entity, is required to
conduct a competitive tender process every 10 years,
and rotate auditors after 20 years at most.
400
350
300
250
200
150
100
50
0
0
0
0
£
’
5
9
2
0
4
3
5
5
3
4
8
0
8
7
9
6
4
2018
5
6
7
4
9
1
1
7
7
2
6
2019
2020
Statutory audit – group and company
Regulatory audit services provided by the statutory auditor
Statutory audit – subsidiaries
Other non-audit services
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Audit committee
The FRC’s Revised Ethical Standard (2019) introduced
the requirement that an auditor must not have
provided certain non-audit services in the financial year
immediately preceding the first year on which they
will perform a statutory audit. It was therefore decided
to conduct the audit tender process prior to the end
of the 2019/20 financial year so that any selected firm
would be in a position to take on the statutory audit for
2021/22.
Summary of the statutory
audit tender process
The committee’s primary objective throughout the
tender process, and in making its recommendation
to the board, was to review the audit approach and
ensure best practice in the delivery of the group’s audit.
Maximising value to the group and its stakeholders
in terms of: audit quality; reliability of assurance; the
identification of potential improvements to business
and accounting processes and the reporting thereof.
A timeline of the process is set out opposite. In
conducting the tender and making an appointment
ahead of 1 April 2020 for the audit for the year ending
31 March 2022, sufficient time would be available for
a firm to cease to provide non-audit services, as set
out in the FRC’s Revised Ethical Standard (2019) prior
to commencing their tenure, including those services
for which a ‘cooling in’ period may apply and to allow
a new auditor to shadow the incumbent during the
audit for the year ending 31 March 2021, if applicable.
A selection panel was established consisting of: the
chairman of the audit committee; a member of the
committee; the Chairman; the CFO and the group
controller, thereby ensuring a wide range of views
were taken into account and a considerable amount
of financial expertise supported the committee in
the decision-making process. The audit committee
as a whole was kept fully appraised of the progress
of the tender by the chairman of the committee. The
group controller and his team were responsible for
leading on the logistics of the tender process. Ahead
of the request for proposal (RFP) being issued, two
‘challenger’ firms confirmed that they did not wish
to participate in the tender and a third ‘Big 4’ firm
was conflicted from participating. Industry sector
expertise was an important factor in the selection
of the firms invited to tender, given the regulatory
complexities of the business. All three of the firms
that participated demonstrated considerable
experience of the utility sector and/or water sector
and the industry experience of the key members of
the audit teams demonstrated the same.
Each firms’ proposal consisted of a written tender
document and face-to-face presentations. Their
responses were evaluated by the selection panel
against the following criteria and weightings, as had
been set out in the RFP:
> Quality assurance and independence 35 per cent;
> Audit team and credentials 25 per cent;
> Service approach 25 per cent; and
> Pricing 15 per cent.
Outcome of statutory
audit tender process
Following the selection panel process, the audit
committee met on 28 January 2020 to review and
discuss the bidders’ proposals and how these proposals
met the assessment criteria, following which the
committee made its recommendation that KPMG (the
incumbent) was its preferred candidate, with Deloitte
being identified as the committee’s second choice
candidate. The recommendation was made to the
board at its meeting held later in the day on
28 January 2020. The board accepted the committee’s
recommendation that KPMG would be reappointed as
statutory auditor for the year ending 31 March 2022.
There are no contractual obligations that restrict the
committee’s choice of auditor; the recommendation is
free from third-party influence and no auditor liability
agreement has been entered into.
KPMG were identified as the preferred candidate
due to: the strength and experience of its team in
relation to regulation; KPMG’s quality transformation
journey in recent years provided a bedrock for
further quality enhancements going forward; the
proposed audit engagement partner demonstrated
a genuine enthusiasm for driving further audit
quality; and its targeted approach to the use of data
analytics. Furthermore, in reaching the assessment,
the committee considered the ranking of the firms
both including and excluding the pricing criteria.
In both scenarios KPMG proved to be preferred
candidate. Ian Griffiths will be appointed as KPMG’s
audit engagement partner for the year ending
31 March 2021, having shadowed Bill Meredith
during the 2019/20 audit process.
Statutory auditor reappointment for the
year ending 31 March 2021
The following section sets out the company’s
compliance with part of Code provision 26.
The 2019/20 year-end audit has been KPMG’s
ninth consecutive year in office as auditor. Bill
Meredith, audit engagement partner, who has
considerable audit experience of other FTSE 100
utility companies, is in his fourth year in the role. The
audit engagement partner changes at least every
five years. 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 2020.
At its meeting on 19 May 2020, the committee
recommended to the board that KPMG be proposed
for reappointment, for the year ending 31 March 2021
at the forthcoming AGM in July 2020. There are no
contractual obligations that restrict the committee’s
choice of auditor; the recommendation is free
from third-party influence and no auditor liability
agreement has been entered into.
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, and
its ability to withstand a number of severe but
reasonable scenarios including the impact of a
potential ‘long peak’ COVID-19 scenario (see page
138). Having considered management’s assessment
the committee approved the long-term viability
statement set out on page 137.
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United Utilities Group PLC unitedutilities.com/corporate Significant issues considered by the
committee in relation to the financial
statements and how these were
addressed
The following section sets out the company’s
compliance with part of Code provision 26.
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):
Impact of COVID-19
The impact of the COVID-19 pandemic has
resulted in higher levels of estimation uncertainty
and considerably more judgements having been
required than in most years. The impacts of the
pandemic on the issues considered are outlined
below, where applicable.
Capitalisation of fixed assets
Fixed assets (see page 217) represents a subjective
area, particularly in relation to costs permitted for
capitalisation and depreciation policy.
> In considering the work performed by KPMG
during the year in this area, the committee
assessed the reasonableness of the group’s
capitalisation policy and the basis on which
expenditure is determined to relate to the
enhancement or maintenance of assets. These
were both 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.
Audit tender timeline
23 September 2019
Meeting of the audit
committee to confirm
the acceleration of the
timescale of tender
process and providing
an update on firms
who had expressed an
interest in bidding.
October 2019
Individual meetings
were held between the
representatives of the
interested firms and the
chairman of the audit
committee and the CFO.
28 January 2020
Board meeting which
considered and approved
the audit committee’s
recommendation to
appoint its preferred
candidate, KPMG, as
auditor in respect of the
year ending 31 March
2022.
28 January 2020
Meeting of the audit
committee to consider
and discuss the findings of
the selection panel and to
make a recommendation
to the board on the
preferred and second
choice candidates.
Write down of bioresources assets
During the year the group undertook a strategic
review of its bioresources operations, considering
a range of alternative processes to some of those
that have been employed historically.
> The committee considered the outcome of
this review and the implications this had for
the future use of certain assets, including
those involving incineration. On the basis that
lower cost and more environmentally friendly
routes are considered more likely to be used,
the committee concurred with the directors’
judgment that the likelihood of future economic
benefit being derived from the identified assets
is now considered to be remote. Accordingly,
the committee agreed that it was appropriate to
accelerate the depreciation of these assets in the
current year, bringing their net book value down
to nil. (See page 213 for more detail).
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. This
is particularly the case in the current year, where
the economic impacts of COVID-19 are highly
uncertain but are expected to have an adverse
effect on the ability of certain customer groups to
pay their bills.
1 November 2019
Issue of RFP to firms and
provision of information
via a data portal.
13 November 2019
Meeting of the audit
committee to discuss
progress with the
tender process.
7 November 2019
Meetings held for
bidding firms to
meet United Utilities
personnel including
members of the
financial control team
and the regulatory
reporting team.
9 January 2020
Presentations by
bidding firms to the
selection panel.
20 December 2019
RFP submissions and
summary briefing
papers circulated to the
selection panel.
29 November 2019
Deadline for receipt
of bids.
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Audit committee
> The committee reviewed the current underlying
levels of doubtful debt and credit note
provisioning (see page 220 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;
> The committee also reviewed the COVID-19
overlay and considered the assumptions applied
to the various segments of the customer base in
arriving at an expected credit loss assessment.
The committee was satisfied that while highly
judgemental and uncertain, the assumptions
used and the methodology applied were
appropriate in light of the COVID-19 pandemic.
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, as a result
of high levels of market volatility resulting from
the COVID-19 pandemic, the valuation of certain
defined benefit pension scheme assets required
significant levels of judgment compared with more
stable economic circumstances.
> The committee sought from management an
understanding as to the factors which led to
the increase in the IAS19 net retirement benefit
surplus during the period and noted that the
scheme specific funding basis had not been
impacted by this volatility. In line with previous
years, management presented an explanatory
note (see page 241) 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 approved their
inclusion in the financial statements;
> The committee reviewed the methodology and
assumptions used in calculating the defined
benefit scheme surplus (see page 242 for more
details). The group employs the services of an
external actuary to perform these calculations
and determine the appropriate assumptions
to make. 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 assumptions
underlying management’s valuation of ‘level
3’ defined benefit pension scheme assets,
which requires considerable judgement. These
assumptions include the market proxies used
as a reference in deriving a view of the assets’
fair values and adjustments required to take
account of movements in these resulting from
the COVID-19 pandemic. Having considered
these together with the audit work KPMG
performed in relation to the asset valuations,
the committee concluded that the approach
taken was appropriate and in accordance
with the requirements of IFRS 13 ‘Fair Value
Measurement’.
Carrying value of loans to and
investments in the Water Plus joint
venture
The group has interests relating to its Water Plus
joint venture in the form of an investment in the
company’s ordinary share capital (see page 218) and
loans receivable (see page 245), the recoverability
of which are considered with reference to the
estimated future cash flows of the joint venture.
The COVID-19 pandemic has particularly impacted
businesses, forcing many to close temporarily,
which has in turn impacted Water Plus as a non-
household retailer. This has resulted in significant
losses being recognised by Water Plus, which have
caused the company to fall into a net liabilities
position at 31 March 2020. Consequently, the
group’s equity investment in Water Plus, together
with zero coupon loan notes extended to the joint
venture, have been reduced to nil.
> The committee has reviewed management’s
assessment of the nature of the group’s financial
interests in Water Plus. Having sought to
understand management’s assessment, the
committee concurred with the view that zero
coupon loan notes extended to Water Plus
represent part of the group’s long-term interest
against which losses in excess of the group’s
equity interest should be allocated.
> The committee also reviewed and challenged
the assumptions and judgements underpinning
management’s expected credit loss assessment
in respect of loans extended to Water Plus,
and concurred with the approach taken and
judgements made. Following robust discussion
on this issue, the committee confirmed that it
was satisfied that the carrying values of these
interests at the reporting date are appropriate.
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United Utilities Group PLC unitedutilities.com/corporate 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 239).
Management perform 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 90 to 91). In doing this the
committee specifically scrutinised and satisfied
itself over the appropriateness of management’s
decision to include the write down of certain
bioresources assets and costs associated with
the COVID-19 pandemic during the year as an
adjusting item when calculating underlying profit
measures. In addition the committee satisfied
itself of the appropriateness of a now adjustment
in relation to deferred tax when calculating
underlying profit measures (see page 90).
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 194 to 200.
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.
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Audit committee
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 2017/18.
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 committee
meetings.
The in-house team is expanded as and when required
with additional resource and skills co-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 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 in
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.
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United Utilities Group PLC unitedutilities.com/corporate 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.
Anti-fraud and anti-bribery
The audit committee is responsible for reviewing
the group’s procedures for detecting fraud, and the
systems and controls for preventing other inappropriate
behaviour. 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.
During the year, the audit committee was kept
fully appraised in regular updates on the progress
and findings of investigations of cases of 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 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. Our sustainable supply chain policy
also sets out that we do not tolerate corruption,
bribery and unfair anti-competitive actions by our
own behalf or that of our suppliers.
The anti-bribery policy is available at
unitedutilities.com/corporate/about-us/
governance
The sustainable supply chain charter is
available at unitedutilities.com/corporate/
responsibility/stakeholders/suppliers
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Corporate responsibility committee
Value creation lies at the
heart of the company’s
purpose-led thinking, a
topic considered by the
committee on several
occasions this past year.
Stephen Carter
Chair of the corporate
responsibility committee
Dear Shareholder
I am pleased to report on the work of the corporate
responsibility committee in 2019/20.
The COVID-19 pandemic is testing all businesses,
many of whom place responsible business at the
heart of what they do and are therefore making
decisions in the best interests of their stakeholders.
As can be seen on page 83, United Utilities’ response
to COVID-19 has been as broad as it has been deep.
Across the key stakeholders for whom the company
creates value, actions have been taken to support
vulnerable customers by, for example, offering
payment breaks, and helping suppliers by reducing
the time taken to pay them. Considerable focus has
been given to support the health and wellbeing of
employees.
This concept of value creation lies at the heart of the
company’s purpose-led thinking, a topic considered
by the committee on several occasions this past
year. The committee supported focusing on what
matters to stakeholders and better understanding
how to quantify the value the company generates.
The company already has strong credentials in this
regard and the committee agreed that the company
faces a challenge to communicate better its deep
commitment to responsibility so that stakeholders
appreciate why the company acts in the way it does,
as well as understanding what it does.
Purpose and the emergence of environmental,
social and governance (ESG) matters, especially
from an investor perspective, have become
much more prominent over the last year. The
committee recognised that this isn’t something
new for the company – for example, this is the
fourth consecutive year the committee’s report
to shareholders has been structured under ESG
headings and the Dow Jones Sustainability Index is
similarly structured that way. I am pleased to report
the company retained its world class ranking for the
12th consecutive year.
Quick facts
> The corporate responsibility committee has
existed for over twelve years.
> 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.
Quick link
Terms of reference –
unitedutilities.com/corporate-governance
Corporate responsibility committee
members
Stephen Carter
(chair)
Steve Mogford
Alison Goligher
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United Utilities Group PLC unitedutilities.com/corporate As a standing item, the committee discussed the
interaction between corporate responsibility (CR),
communications and reputation, returning on
several occasions to topics such as the debate over
public ownership and the implications of Brexit
on environmental and employment legislation.
With that in mind, the committee took much
interest in the company’s refreshed brand and
welcomed in particular the emphasis on the North
West. Demonstrating the sector’s purpose, so
that stakeholders can have full confidence that
companies are run in their interests, remains an
important task.
This can only be achieved if the company can prove
it is acting with purpose through measurement and
‘proof points’, especially where the achievement is
independently assessed by others. The committee
was pleased to see the company secure a ‘Building
Public Trust’ award for its 2019 Strategic Report.
It was noted that performance across several
other investor indices, such as Sustainalytics and
Vigeo-Eiris, is also improving. Further, an estimated
75 per cent of the stretching targets tracked by
the committee to measure the company’s CR
performance were expected to be achieved.
This year, the committee discussed over forty papers
covering ESG topics. These included governance
items, those with a mandatory driver or of regulatory
interest and stimulus from items of best practice.
Topics covered for the first time by the committee
included how the company’s emerging digital
strategy takes responsible business issues into
account. This topic, alongside climate change, was
identified by the committee in a paper on significant
CR trends for 2019 requiring closer examination.
Other first-time topics included air quality and the
company culture.
Because of heightened external interest in climate
change, the committee discussed the company’s
carbon strategy on several occasions and, most
importantly for a water company, climate change
adaptation topics too, such as surface water flooding
and sustainable urban drainage. It supported
recommendations, subsequently agreed by the
board, to adopt a science-based target for emissions
reductions.
Changes to the UK Corporate Governance Code in
2018 have resulted in some additional responsible
business topics being debated by the committee, in
particular in relation to employees. One committee
member is the designated non-executive director for
‘employee voice’ and the committee was updated on
progress in establishing the Employee Voice panel,
including greater visibility of the work of the company’s
employee networks such as disability, identity and
ethnicity. On behalf of the board, the committee
reviewed the company’s gender pay report.
The committee reviewed progress in tackling what
remains an issue of continued significance to the
North West, helping customers on lower incomes
given the ongoing social and economic challenges in
the region. The committee examined the company’s
dashboard that tracks actions to support customers
Main duties 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 revised Corporate Governance Code and the evolution of
corporate reporting with greater emphasis on integrated reporting.
The main duties are to:
> Consider and recommend to the board the broad corporate responsibility
policy taking into account the company’s desired CR positioning;
> Keep under review the group’s approach to CR and ensure it is aligned
with the group strategy;
> Review CR issues and objectives material to the group’s stakeholders
and identify and monitor the extent to which they are reflected in group
strategies, plans and policies;
> Monitor and review the status of the company’s reputation and examine
the contribution the group’s corporate responsibility activities make
towards protecting and enhancing this;
> Monitor and review compliance with the board’s CR policy and scrutinise
the effectiveness of the delivery of the CR policy requirements;
> Develop and recommend to the board CR targets and key performance
indicators and receive and review reports on progress towards the
achievement of such targets and indicators;
> 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.
in vulnerable circumstances and it was apprised of
the third affordability summit that brought together
over 100 people from the debt advice community.
2020 marks the end of one business planning period,
AMP6, and the start of the next, AMP7, and I have
been chair of the corporate responsibility committee
for most of that time. The company's long-standing
CR commitment provides a solid foundation upon
which to deal with the growing complexity of
managing responsible business issues. This helps to
build legitimacy among the opinions of customers,
regulators, Government and other stakeholders.
As a listed company, United Utilities complies with
the 2018 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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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Corporate responsibility committee
The committee’s agenda during the year:
Environmental
Climate change mitigation strategy
Agreement was sought from the committee to
an updated climate change mitigation strategy. It
endorsed the company’s intention for emissions to
reduce to 'well-below 2°C or 1.5°C' instead of 'within
2°C', bringing its ambition into line with science-
based targets. The committee was briefed on the
revised mitigation plan, comprising 21 work streams,
each owned by a specific executive director. It was
agreed that the updated strategy and accompanying
explanation should be published in the 2020
Annual Report, prepared in accordance with the
requirements of the Taskforce for Climate-related
Financial Disclosure. This can be found on pages 66
to 75.
Natural capital and integrated catchments
A paper on the delivery of natural capital through an
integrated catchment approach was presented to
the committee. It supported the company’s ambition
to act as catchment system operator with the aim
of balancing, in real-time, the operation of assets
and catchments with actions taken by third parties,
such as the agricultural sector and local and flood
risk management authorities. Such an approach has
the potential to improve both water quality and flood
risk through solutions co-developed and co-invested
through key partnerships with private and public
sectors. The committee recognised the growing
importance of catchments and an anticipated shift to
catchment scale thinking in AMP8. Read more about
catchment systems thinking on page 51.
Air quality
The topic was presented to the committee for the
first time. It noted that benchmarking across other
water and wastewater companies highlighted
that increasing renewable power capacity,
purchasing green energy and adopting clean vehicle
technologies tended to be the most commonly
referenced air quality responses. More often than
not, these were in the context of greenhouse
gas emissions rather than specific air pollutant
emissions. It was explained that the company was
intending to determine the potential risk of sources
of air pollutant emissions across its operations and
a clean air working group had been established to
develop an action plan. The committee welcomed
the fact the company has the sector’s first
performance commitment on clean air.
Surface water management and sustainable
drainage (SuDS)
Another topic presented to the committee for the
first time, the company’s surface water strategy
was reviewed by the committee and included SuDS
adoption and training, influencing sustainable
development and lobbying on the national planning
policy framework, targeted separation of surface
water, charging incentives and partnership working.
The committee acknowledged the breadth of issues
involved in managing surface water and the number
of responsible authorities involved. It was explained
that significant improvements to the natural capital
of the North West could be achieved through SuDS
and other surface water interventions and the
company was pioneering many solutions.
Social
Affordability and vulnerability – lower
income groups
At several of its meetings, the committee returned to
the topic of affordability and vulnerability, primarily
through its review of a lower income scorecard.
Twice yearly, progress against 22 measures covering
household retail cash, debt and affordability
is presented to the committee. It noted the
considerable progress assisting lower income groups
and the efforts being made where performance
was not quite at target levels. The committee was
informed the Digital Economy Act 2017 contained
new powers for data share arrangements between
the Department for Work and Pensions (DWP) and
water companies to assist people living in water
poverty and that the company was in regular contact
with the DWP to realise this opportunity.
Affordability summit
The committee welcomed the third affordability
summit held by the company, bringing together over
one hundred people from the region’s debt advice
community. It discussed the introduction of specific
customer segments where there can be a lack of
support and advice such as those aged 18–25 years
now becoming accountable for household bills and
gaining access to credit, often for the first time.
Gender pay reporting
The committee reviewed the company’s draft
gender pay report noting that, compared to the
previous year, the median and mean pay gaps had
improved slightly. It was briefed on plans to focus
on recruitment given low attrition rates at United
Utilities, to magnify the female voice across the
organisation and to focus on part-time and flexi-
working for the middle quartile.
Governance
Corporate governance
> Corporate Governance Code (culture) – the
committee discussed corporate culture and the
role of the board following changes to the 2018 UK
Corporate Governance Code and the publication
of Ofwat’s Board Leadership Transparency and
Governance Principles. The paper outlined the
approach for the board to monitor and assess
culture, ensuring that the company’s culture
and behaviour is aligned with business purpose,
strategy and values. The committee offered some
improvements to the approach and asked which
of the measures used to monitor culture are
independent and externally validated.
> Employee Voice – on behalf of the board, the
committee scrutinises the approach to Employee
Voice. It was updated on progress, including
several visits made by non-executive director
Alison Goligher to meet employee groups and
subject matter experts. It was reported to the
committee that an Employee Voice panel had
been established and had met on three occasions,
prioritising improved collaboration between
employee network groups and enhancing how
employee feedback is received throughout the
year. In addition, a 'workforce profile' dashboard
was under development to help the panel see
potential trends in key metrics.
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United Utilities Group PLC unitedutilities.com/corporate > Committee evaluation – in its annual evaluation,
the committee concluded that it was effective
in the discharge of its duties, recognising the
importance of striking the right balance between
the annual cycle of work and new and emerging
items.
> Business principles refresh – the company’s
mandate for corporate responsibility, the business
principles, was set ten years ago so the committee
discussed the future shape of the CR mandate,
especially in the context of purpose-led thinking. It
agreed that the principles should be replaced by a
purpose hierarchy and that the company’s purpose
statement be updated to be more engaging and
to convey why it exists beyond financial gain.
This can be seen on page 16. The committee
encouraged the company to focus on developing
a set of measures, or proof points, and creating
compelling communications to demonstrate to its
stakeholders that United Utilities is a purpose-led
business.
Reputation and engagement
> Engagement and reputation – this topic remained
a standing agenda item, allowing 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. The committee looked closely at
how the company manages and tracks reputation,
discussing what drives this with different
stakeholder groups, what headwinds are evident
and what actions are being taken to mitigate,
or even advance, reputation. The committee
highlighted the importance of developing
policy positions as part of the company’s overall
approach.
> Brand update – in 2019, the company refreshed its
brand, moving from 'Helping Life Flow Smoothly'
to 'Water for the North West'. The committee
supported this direction and agreed it aligned well
with the company’s CR priorities.
> Measuring and reporting CR performance –
the committee reviewed the company’s 2019/20
CR scorecard and noted that the year-end
performance was expected to be 75 per cent of
targets achieved.
Several topics discussed by the committee cut
across each element of ESG:
Cross cutting
Overview of CR trends
A paper providing a summary of key CR trends
for the coming 12 months was presented to the
committee and it agreed that six were particularly
relevant: digital and responsible business; future
work and employee wellbeing; responsible investing;
land use and carbon; innovative markets and finance;
and improved public health. The committee asked
that over the course of future meetings, each topic
be brought to the committee for further examination
and it suggested that a regional perspective be taken
into account, alongside what each means to the
company’s stakeholders.
Brexit and regulatory convergence – environmental and
employment legislation
The committee was provided with an updated assessment on the potential and
actual impact of Brexit on environmental and water regulation and employment
legislation. It was briefed that most EU law, including environmental law, will
continue to apply in the UK. From an environmental perspective, the committee
understood that what follows Brexit is being set out in the Environment Bill and
the Agriculture Bill. It was updated on key elements relevant to the company. The
committee was apprised of company efforts to support employees who are EEA
nationals to complete the settlement process.
Digital
Digital was the first of the CR trends to be brought before the committee. The
committee was apprised on how the developing digital strategy was taking
responsible business issues into account, being helped by the adoption of a
responsible digital framework to identify any potential enhancements to the
approach. It was reassured that the emerging approach was consistent with
operating as a responsible business. It asked for a further update later in 2020 to
understand the company’s priorities, ultimate ambition against the framework
and other trends such as the sourcing strategy for skills and diversity from the
perspective of age rather than gender.
In addition to papers discussed by the committee, it also receives several papers
for noting. Generally, these provide progress updates 12 months after the
committee debated the topic. In 2019/20, papers tabled for noting included:
> Social – United Utilities Trust Fund and community investment.
> Governance – human rights policy and Modern Slavery Act statement and
updates on the work of the management CR panel.
> Cross cutting – sustainable supply chain progress, including duty to report;
social media; and implementing a value framework (six capitals).
Looking to the next year, the committee will:
> Take stock of the company’s corporate responsibility journey so far, its
current status and its ambition;
> Consider new and emerging issues and opportunities which, in some
cases, will be discussed by the committee for the first time such as future
work patterns and employee wellbeing, models of new leadership, access
and recreation and green finance;
> Review new, or updated, responsible business strategies such as waste
and circular economy including plastics, a value framework and United
Supply Chain;
> Consider the responsible business themes emerging for PR24 including
topics such as natural capital;
> Return to issues previously discussed to examine progress such as what
Brexit means for environmental and employment legislation, human
rights, talent and young people, diversity and inclusion, carbon strategy,
and digital;
> Review performance, specifically the dashboard tracking the company’s
efforts to support customers on low incomes and progress against
responsible business proof points;
> On behalf of the board, review progress and issues arising from the
Employee Voice panel;
> Continue its focus on the interaction between CR, communications and
reputation;
> Oversee matters of general governance including the human rights policy
and gender pay report; and
> Consider matters of corporate responsibility committee governance such
as the committee’s terms of reference.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE
Corporate governance report
Annual statement from the remuneration committee chair
Our executive pay arrangements
are aligned to our purpose,
vision and strategy, thereby
incentivising great customer
service and the creation of
long-term value for all.
Sara Weller
Chair of the remuneration
committee
Dear Shareholder
I am pleased to introduce the directors’ remuneration
report for the year ended 31 March 2020, which includes an
‘at a glance’ summary, the annual report on remuneration
for the year ended 31 March 2020, and an abridged version
of our directors’ remuneration policy which was approved
by shareholders at our 2019 AGM.
I will step down from the board at the 2020 AGM so this
will be my last statement as Chair of the committee, a
position I have held since 2012. Much has been achieved
in those eight years, a period in which the corporate
governance environment has evolved significantly. During
that time we have always sought to fully embrace the
changing landscape and have implemented remuneration
arrangements that are transparent and well-aligned to our
purpose, vision and strategy, incentivising great customer
service and the creation of long-term value for all.
The year in focus
During this year there have been a number of changes to
the composition of the board along with announcements
of future departures and appointments. In each case
the committee carefully considered the implications
on remuneration, exercising discretion and judgement
appropriately and delivering on commitments made in
the new directors’ remuneration policy, such as aligning
the pension arrangements of future executive directors
with those of the workforce. Further details relating to the
various changes are shown on page 159.
Reflecting on performance, as is detailed elsewhere in this
Annual Report, during AMP6 we delivered well against all
principal areas of our regulatory contract. Improvements
in our customer service performance have been delivered
year-on-year, and moving to be one of the top performers
in the sector on ODIs is a significant achievement when we
look back at our position at the start of AMP6 in 2015.
In the very last weeks of the 2019/20 performance year,
we saw the emergence of the COVID-19 pandemic, to
which the company reacted rapidly and made significant
moves to respond. As described elsewhere, the committee
concluded that this period did not significantly impact the
overall performance in the year for remuneration purposes;
however the impact on considerations for future years is
considerable and I will come back to that later in this letter.
Recognising the difficulty being experienced by many
customers in our region, all members of the board
volunteered a 20 per cent reduction to their salary/fees for
three months, with the money instead being shared with
organisations supporting those in the front line helping
communities cope with COVID-19.
Quick facts
> The Code requires that “the board should
establish a remuneration committee of
at least three independent non-executive
directors”.
> The role of the committee is to set
remuneration terms for all executive
directors, other senior executives and the
Chairman.
> By invitation of the committee, meetings
are attended by the Chairman, the CEO,
the company secretary, the customer
services and people director, the head
of reward and the external adviser to the
committee.
Quick link
Terms of reference –
unitedutilities.com/corporate-governance
Remuneration committee members
Sara Weller
(chair)
Alison
Goligher
Mark Clare
Brian May
Index
Read more about how our remuneration
approach complies with the UK Corporate
Governance Code on page 158
Read more about At a glance summary:
executive directors’ remuneration on
pages 159 to 161
Read more about Annual report on
remuneration on pages 162 to 176
Read more about Directors’ remuneration
policy on pages 177 to 184
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’
unitedutilities.com/
corporate-governance
A copy of the Financial
Reporting Council’s
2018 UK Corporate
Governance Code can
be found at frc.org.uk
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United Utilities Group PLC unitedutilities.com/corporate Implementation of the directors’ remuneration
policy during 2019/20
Salary
The committee believes that executive directors’ salaries remain
appropriately positioned relative to the market. Whilst our policy
is that executive directors will normally receive a salary increase
broadly in line with the increase awarded to the general workforce,
for the second consecutive year, Steve Mogford and Russ Houlden
each received a base salary increase of 2 per cent (with effect from
1 September 2019), which was lower than the 3 per cent headline
increase applied across the wider workforce. Salaries will next be
reviewed in September 2020.
Annual bonus
To ensure shared focus on the business plan at all levels, employees
throughout the company participate in the annual bonus scheme,
alongside the executive directors. The bonus measures used during
the year reflect the importance and challenge of the targets set by
our regulators for the period 2015–20.
We have seen another very good year of customer service,
operational and financial performance in 2019/20, despite the
challenges presented by the storms during early 2020.
The customer service element of the annual bonus is based on
C-MeX and written complaints. As disclosed in our 2019 directors’
remuneration report, the outcome of the C-MeX measure was
originally intended to be based on our ranking on the customer
service survey only (a sub-component of the overall C-MeX
measure). When it became clear that relative ranking positions for
the customer service sub-component would not be available as
initially expected, the committee used its discretion to adjust this
element to instead be based on the overall combined C-MeX ranking
(which includes a perception survey sub component alongside the
customer service survey). The committee was satisfied that this was
appropriate, noting that it is ultimately the overall combined C-MeX
score that determines future incentives and penalties and so it
aligned well with shareholder interests. Continued enhancements of
the services we provide have resulted in ever-improving standards of
customer service, including being ranked in first position in the final
two customer service surveys conducted by Ofwat in the year, and in
third position overall on combined C-MeX across the whole year. Our
approach on affordability received the highest Ofwat rating possible
in their assessment of our business plan and our Priority Services
proposition continues to set the industry standard in supporting
vulnerable customers, with over 100,000 now registered.
This has been another year of strong performance against our
outcome delivery incentives (ODIs) including a significant ODI
reward payment in relation to our West Cumbria project. We are
pleased with our overall AMP6 performance and well placed to make
a strong start to AMP7.
Underlying operating profit increased in 2019/20, although the
committee used its discretion to reduce the outcome for this part
of the scorecard to account for the performance of Water Plus, of
which Steve Mogford and Russ Houlden were directors. The efficient
and effective delivery of the capital programme is reflected in our
time, cost and quality index (TCQi) score which remains high at 95.1
per cent.
When considering the personal contributions of the executive
directors, amongst other achievements during the year, the
committee was mindful of their leadership throughout the price
review process, including the acceptance of the final determination
and the steps taken since then to start AMP7 strongly. Additionally,
the fact that the departure of executive directors during the year
and in the coming months have been managed through internal
promotions is testament to the comprehensive succession and talent
processes established within the company.
Overall company results, together with the strong personal
performance of the executive directors, has resulted in annual bonus
out-turn of around 71 per cent of maximum (compared to the 2018/19
outcome of around 79 per cent of maximum) and a company-wide
bonus pool totalling around £17 million (which is
the same as 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 Long Term Plan awards which were granted in 2017, and whose
performance is measured over the three years to 31 March 2020, will
vest in the summer of 2020 at an estimated 79 per cent. 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. In December 2019 some of the uncertainty
that had affected the water sector in recent years was lifted, which
meant that the good underlying business performance was better
reflected in the share price. This resulted in the target for the relative
total shareholder return measure being partially met. As noted on
page 166, as a result of Ofwat transitioning from SIM to C-MeX, the
committee used it discretion to amend the customer service element
of the award to be based on the new C-MeX measure and written
complaints. The final outcome of this element will not be known
until the volume of written complaints received by other companies
are published later in 2020 and the overall vesting level can be
confirmed. The awards for the executive directors will vest only
after the completion of a two-year holding period, during which the
shares will remain subject to withholding provisions. The committee
believes that this approach aligns the interests of the executive
directors with those of shareholders and customers.
Agenda for 2020/21
As we look forward to the start of the new AMP, and specifically
the 2020/21 performance year, the committee is very mindful of the
challenging conditions arising from both the short and the longer-
term potential impact of the COVID-19 pandemic.
Having reviewed the annual bonus measures for the new regulatory
period the committee has concluded that they continue to support
the business strategy. The measures will continue into AMP7,
although the customer service elements will be based on Ofwat’s
new C-MeX measure, together with a goal to continue to further
reduce customer complaints. The committee has removed the
element based on personal performance for the executive directors
to focus reward on the other scorecard elements. Further details are
shown on page 168.
2020 LTP awards will be based on the structure approved at the
2019 AGM, with equal weighting given to performance on Return on
Regulated Equity (RoRE) and a basket of customer measures. Further
details can be found on page 168.
For all incentives 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.
Finally, since our new policy was approved at the 2019 AGM,
and reflecting shifts in market guidance and best practice,
the Committee agreed that post-employment shareholding
requirements will be introduced from May 2020 and that pension
arrangements for incumbent directors will be aligned to those of
the workforce as part of the next policy, expected to be presented
to shareholders at the 2022 AGM. Work will be undertaken to
ensure that those developments to our governance approach are
implemented robustly. We will also continue to enhance the way in
which we hear and take account of the voice of the wider workforce.
I am grateful for the support that our approach to remuneration
has received from shareholders during my time as Chair of the
committee. I am delighted to announce that Alison Goligher, who
has been a member of the Committee since 2016, will take over as
Chair of the committee when I leave the board in the summer. We
hope we will continue to receive your support again this year for the
resolution relating to remuneration at the forthcoming AGM.
Sara Weller
Chair of the remuneration committee
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Code principle – remuneration
5
Remuneration
Code Principle
Evidence and outcomes
Principle P:
Remuneration policies and practices should be
designed to support strategy and promote long-term
sustainable success. Executive remuneration should be
aligned to company purpose and values, and be clearly
linked to the successful delivery of the company’s
long-term strategy.
Principle Q:
A formal and transparent procedure for developing
policy on executive remuneration and determining
director and senior management remuneration should
be established. No director should be involved in
deciding their own remuneration outcome.
We describe how our remuneration philosophy aligns
with business strategy on page 162.
This is detailed in the committee’s terms of reference
which are available on the company website. The
committee consults with shareholders when changes
to policy are being considered.
Principle R:
Directors should exercise independent judgement
and discretion when authorising remuneration
outcomes, taking account of company and individual
performance, and wider circumstances.
The shareholder approved directors’ remuneration
policy outlines the ways in which the committee may
exercise discretion. An example of the use of discretion
in 2019/20 is the adjustment to the outcome of
executive directors bonuses as detailed on page 164.
The following table summarises how the remuneration policy, approved by shareholders at the 2019 AGM, fulfils the factors set out in
provision 40 of the 2018 UK Corporate Governance Code.
Clarity
Simplicity
Predictability
The committee is committed to
providing transparent disclosures
to shareholders and the workforce
about executive remuneration
arrangements and, to this end, the
directors’ remuneration report sets
out the remuneration arrangements
for the executive directors in a clear
and transparent way. Our AGM allows
shareholders to ask any questions on
the remuneration arrangements, and we
welcome any queries on remuneration
practices from shareholders throughout
the year.
Our remuneration arrangements for
executive directors, as well as those
throughout the group, are simple
in nature and understood by all
participants, having been operated
in a similar manner for a number of
years. Executive directors receive
fixed pay (salary, benefits, pension),
and participate in a single short-term
incentive (the annual bonus) and a
single long-term incentive (the Long
Term Plan).
Payouts under the annual bonus and
LTP schemes are dependent on the
performance of the company over
the short and long-term, and a
significant proportion of executive
director remuneration is performance-
linked. These schemes have strict
maximum opportunities, with the
potential value at threshold, target
and maximum performance scenarios
provided in the directors’ remuneration
report.
Risk
Proportionality
Alignment to culture
The committee has designed incentive
arrangements that explicitly do not
encourage inappropriate risk-taking.
The committee retains overarching
discretion in both the annual bonus
and LTP schemes to adjust payouts
where the formulaic outcomes are not
considered reflective of underlying
business performance and individual
contributions. Robust withholding and
recovery provisions apply to variable
incentives.
Payments from variable incentive
schemes require strong performance
against challenging conditions over the
short and longer term. Performance
conditions have been selected to
support group strategy and consist of
both financial and non-financial metrics.
The committee retains discretion
to override formulaic outcomes in
both schemes to ensure that they are
appropriate and reflective of overall
performance.
Performance measures used in our
variable incentive schemes are selected
to be consistent with the company’s
purpose, values and strategy. The
use of annual bonus deferral, LTP
holding periods and our shareholding
requirements provide a clear link to the
ongoing performance of the group and
ensure alignment with shareholders,
which continues after employment.
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United Utilities Group PLC unitedutilities.com/corporate Corporate governance report
At a glance summary: executive directors’ remuneration
Board changes
A number of changes to the composition of the board have taken place during the year. In each case the committee carefully considered the
implications on remuneration.
Departure of Steve Fraser
Steve Fraser resigned and left his role as chief operating officer on 31 August 2019. He was paid his contractual salary and benefits until his
leave date but his eligibility to receive a bonus in respect of 2019/20 was forfeited. At the point of his departure Steve had three unvested
DBP awards. The rules of the DBP do not require the committee to exercise discretion over unvested awards held by leavers, and so his
awards will remain unvested until their original vesting date i.e. three years after their respective grant date.
Steve’s 2016 LTP award vested on 10 September 2019. He remained entitled to receive the vesting award because he was still employed
at the point that the performance period ended on 31 March 2019. The award was not subject to a further holding period because it
was granted in 2016 prior to his appointment as an executive director. His 2017 and 2018 LTP awards lapsed on his termination, and
the committee exercised its discretion when determining that he should not receive a 2019 LTP award. Clawback and malus provisions
applicable to the incentive schemes continue to apply in line with the relevant scheme rules.
Chairman succession
Sir David Higgins was appointed as a non-executive director and chairman designate of the company with effect from 13 May 2019,
and as Chairman commencing on 1 January 2020 when Dr John McAdam stepped down from the board. The annual fee paid in respect
of his period as non-executive director and chairman designate was £80,000, and when his responsibilities as Chairman started on
1 January 2020, his annual fee increased to £300,000. In line with the remuneration policy, Dr McAdam ceased to receive fees following
his departure and received no other benefits or payments in relation to his stepping down from the board.
Retirement of Russ Houlden (in July 2020)
On 5 February 2020, Russ Houlden submitted notice of his intention to step down from the board the day after the AGM on 24 July 2020
and retire from executive director responsibilities. Russ will be treated in line with the remuneration policy for retirees. His outstanding
DBP awards will continue to vest on the normal vesting dates, in accordance with the rules. The committee exercised its discretion to
allow good leaver status for his outstanding LTP awards. The performance conditions and holding period requirements will continue to
apply and a pro rata reduction will be made to the 2018 and 2019 LTP awards to reflect the proportion of the performance period served.
The committee determined that he will not be granted a 2020 LTP award. His bonus for 2019/20 will be paid as normal, with 50 per cent
being deferred in to the DBP for three years. He will be eligible for a prorated bonus payment in June 2021 in relation to the bonus year
2020/21 but in line with the plan rules any bonus due then will be paid in cash in full with no element deferred into shares. Due to the
vesting and deferral requirements, he will continue to maintain an interest in shares of the company for at least two years post cessation of
employment. The committee has taken steps to ensure that the ongoing treatment of his outstanding incentives may be revisited in certain
circumstances after his departure.
Appointment of Phil Aspin (in July 2020)
On 28 February 2020 it was announced that, following a rigorous appointment process, Phil Aspin would succeed Russ Houlden as chief
financial officer after the AGM in July 2020. Phil’s remuneration package will be set in accordance with the approved remuneration policy
and will include a pension contribution aligned with the workforce rate. Full details will be included in next year’s directors’ remuneration
report.
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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)
Fixed
Base salary
Pension and
other benefits
Performance-linked
Annual bonus – cash
Annual bonus – shares
Long Term Plan (LTP)
33%
26%
7%
67%
17%
17%
33%
Short-term
Base salary
Pension and
other benefits
Annual bonus – cash
Long-term
Annual bonus – shares
Long Term Plan (LTP)
50%
26%
7%
17%
50%
17%
33%
(1) Based on maximum payout scenario for executive directors assuming the normal maximum award level of 130 per cent of salary for the Long Term Plan (LTP).
Key element
Time frame
Annual bonus –
cash
Performance
period
Period subject to recovery provisions
Pay at risk
Annual bonus –
shares
Performance
period
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 179 to 180.
Implementation of directors’ remuneration policy in 2019/20
The table below summarises the implementation of the directors’ remuneration policy for executive directors in 2019/20. For further details
see the annual report on remuneration on pages 162 to 176.
Key element
Base salary
Implementation of policy in 2019/20
> Salary increase of 2.0 per cent from 1 September 2019 (the general employee base salary increase in 2019
was 3.0 per cent).
Benefits and pension
> Market competitive benefits package.
Annual bonus
> Maximum opportunity of 130 per cent of base salary.
> Cash pension allowance of 22 per cent of base salary.
> 2019/20 annual bonus outcome of 70.7 per cent of maximum.
> 50 per cent of 2019/20 annual bonus deferred in shares for three years.
Long Term Plan
> Award of 130 per cent of base salary.
> Withholding and recovery provisions apply.
> Estimated long-term incentive vesting of 79 per cent for the performance period 1 April 2017 to 31 March 2020.
These awards will vest after an additional two-year holding period.
> Withholding and recovery provisions apply.
Shareholding guidelines
> Personal shareholdings for Steve Mogford and Russ Houlden remain above the 200 per cent of salary
minimum guideline.
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United Utilities Group PLC unitedutilities.com/corporate Single total figure of remuneration for executive directors for 2019/20
Fixed pay comprises base salary, benefits and pension. Further information on the single figure of remuneration can be seen on page 163.
3,000
2,500
2,000
1,500
1,000
0
0
0
£
’
£884
£707
500
£973
0
}
Steve Mogford
CEO
Total
£2,564
Total
£1,621
}
£558
£446
£617
Russ Houlden
CFO
£235
Total
£235
Steve Fraser
COO (until 1 Sept 2019)
Long-term incentives
Annual bonus
Fixed pay
Key performance indicators (KPIs) performance
Annual bonus –
Year ended 31 March 2020
Long Term Plan –
Three years ended 31 March 2020
Underlying
operating profit(1)
C-MeX ranking versus
the other WASCs
Written
complaints
Outcome delivery
incentive (ODI)
composite
Time, Cost and
Quality index (TCQi)
Total shareholder
return (TSR)(2)
Underlying
dividend cover(3)
Customer service
excellence(4)
£882.7m 3rd out of 11
14.63
£22.4m
95.1%
17.5%
1.32
4th out of 11
Key:
At or above stretch target
Between threshold and stretch targets
Below threshold target
(1) For the purpose of annual bonus, underlying operating profit excludes infrastructure renewals expenditure and property trading.
(2) Between threshold and stretch versus the comparator group. See page 166 for further details.
(3) Average underlying dividend cover over 2017/18, 2018/19 and 2019/20.
(4) The estimated ranking versus the other WASCs in a combined customer service measure comprising C-MeX and written complaints.
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 164 and on the LTP on page 166.
2019/20 Annual bonus outcome
Estimated 2017 Long Term Plan (LTP) outcome
Actual total:
70.7% of maximum
Actual total:
70.7% of maximum
100%
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
30.0%
30.0%
12.0%
12.0%
4.0%
4.0%
24.0%
24.0%
20%
20%
20.0%
20.0%
12.3%
12.3%
12.0%
12.0%
4.0%
4.0%
17.4%
17.4%
15.5%
15.5%
10%
10%
0%
0%
10.0%
10.0%
9.5%
9.5%
Maximum
Maximum
Actual
Actual
33.3%
33.3%
100%
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
33.3%
33.3%
Estimated total:
Estimated total:
79.0% of award vests
79.0% of award vests
20.7%
20.7%
33.3%
33.3%
40%
40%
30%
30%
20%
20%
10%
10%
33.3%
33.3%
25.0%
25.0%
0%
0%
Maximum
Maximum
Estimated
Estimated
Underlying operating profit
Underlying operating profit
C-MeX ranking
Written complaints
C-MeX ranking
Written complaints
Outcome delivery
Outcome delivery
incentive (ODI)
incentive (ODI)
composite
composite
TCQi
TCQi
Personal objectives
Personal objectives
Relative total shareholder return (TSR)
Relative total shareholder return (TSR)
Sustainable dividends
Sustainable dividends
Customer service excellence
Customer service excellence
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Corporate governance report
Annual report on remuneration
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 2019/20 aligns with our business strategy and the results that it
delivers. Many of the performance measures are key performance indicators (KPIs) for the regulatory period 2015–20 (see pages 56 to 59).
Annual bonus
Underlying operating profit
Key measure of shareholder value.
Alignment to strategy
Customer service in year
Delivering the best service to customers is a strategic objective.
> C-MeX ranking
> Written complaints
Maintaining and enhancing
services for customers
> Outcome delivery incentive
(ODI) composite
> Time, cost and quality of the
capital programme (TCQi)
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
Long Term Plan (LTP)
directors and shareholders.
Relative total shareholder
return (TSR)
Direct measure of delivery of shareholder returns, rewarding management
for the outperformance of a comparator group of companies.
Outperformance will result in an increase to RoRE which should translate into
higher returns for investors through share price performance.
Return on Regulated Equity
(RoRE)
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 each executive director builds and maintains a significant
shareholding in shares of the company to provide alignment with shareholder
interests.
A long-term
approach
to creating
sustainable
value
Link to
strategic
themes
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
The best service to customers
At the lowest sustainable cost
In a responsible manner
Key:
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Executive directors’ remuneration for the year ended 31 March 2020
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
Year ended 31 March
2020
2019
2020
2019
2020
2019
2020
2019
2020(1)
2019(2)
Steve Mogford
Russ Houlden
Steve Fraser(4)
769
486
185
754
476
440
169
107
41
166
105
97
35(3)
24
9
28
25
21
707
446
0
774
486
452
884
558
0
707
446
167
Total
£’000
2020
2,564
1,621
235
2019
2,429
1,538
1,177
(1) The long-term incentive amount is in respect of the Long Term Plan (LTP) award which was granted in June 2017 for which the outcome is based on performance
over the three-year period from 1 April 2017 to 31 March 2020. The LTP amount is estimated as the vesting percentage for the one-third relating to customer
service excellence will not be known until later in 2020, and the awards for Steve Mogford and Russ Houlden will not vest until the end of an additional two-
year holding period. Steve Fraser’s 2017 LTP award lapsed on his departure. For the purposes of this table, the value of LTP awards has been calculated using an
average share price over the three-month period from 1 January 2020 to 31 March 2020 of 960.2 pence per share. This is higher than the share price at the time
these awards were made to participants and accordingly some of the value shown is attributable to share price appreciation. See page 166 for further details.
(2) The long-term incentive amount for the year ended 31 March 2019 is in respect of the LTP award that was granted in June 2016 and whose performance
period ended on 31 March 2019. The figure stated in last year’s report was based on a latest best estimate (LBE) for the customer service excellence
measure which indicated an overall vesting outcome of 60 per cent. The final confirmed outcome for the measure was better than the LBE which meant
the actual overall vesting outcome was 64.4 per cent. The figure for 2019 has been updated to reflect this. Additionally, dividend equivalents accrued to
31 March 2020 have been added. The awards for Steve Mogford and Russ Houlden are not due to vest until April 2021 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 2020
to 31 March 2020 of 960.2 pence per share. Steve Fraser’s award was granted prior to his appointment to the board and so no holding period applied.
(3) The increase in the value of benefits for Steve Mogford relates primarily to his group income protection benefit. With effect from 1 April 2019 the cost of
providing the benefit increased and so this is reflected in the value of benefits shown in the table above. The underlying value he would actually receive if
he were to access the benefit did not change.
(4) Steve Fraser’s final date of employment with the company was 31 August 2019 and therefore salary, benefits, pension and annual bonus figures for Steve
Fraser in year ended 31 March 2020 reflect part-year earnings for the period from 1 April 2019 to 31 August 2019.
Base salary
Executive director
Steve Mogford
Russ Houlden
Steve Fraser(1)
Base salary £’000
1 September
2019
1 September
2018
775.2
489.6
443.7
760.0
480.0
443.7
(1) Steve Fraser’s final date of employment with the company was 31 August 2019. He received no salary increase in 2019.
Executive director salaries were increased by 2.0 per cent with effect from 1 September 2019. This is lower than the 3.0 per cent increase applying
to the general workforce in 2019. The committee judged that the increase was supported by very good individual and business performance.
Pensions
The current executive directors receive a cash allowance of 22 per cent of base salary in lieu of pension, and no changes are expected
to the pensions cash allowance percentage for the current executive directors during the year commencing 1 April 2020. Pension
arrangements for the chief executive officer will be aligned to those of the wider workforce as part of the next directors’ remuneration
policy, expected to be put to shareholders at the 2022 AGM. When Phil Aspin joins the board as chief financial officer in July 2020 his
pension arrangements will align with the workforce rate.
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 2020.
External appointments
Steve Mogford is the senior independent director of G4S PLC for which he received and retained an annual fee of £79,500 for the year
ended 31 March 2020. Russ Houlden is an independent member of the supervisory board, and audit committee chairman, of Orange Polska
SA, for which he received and retained annual fees of around £81,000 for the year ended 31 March 2020.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Annual report on remuneration
Annual bonus
Annual bonus in respect of financial year ended 31 March 2020 (audited information)
The performance measures, targets and outcomes in respect of the executive directors’ annual bonus for the year ended 31 March 2020 are
set out below. The table on page 162 summarises how these performance measures are linked to our business strategy.
Measure
Underlying operating profit(1)
Customer service in year
C-MeX ranking versus
the other WASCs(2)
Threshold
(25%
vesting)
Target
Stretch
(100%
vesting)
Steve
Mogford
weighting
(% of award)
Outcome
Russ
Houlden
weighting
(% of award)
Outcome
Payout
as a % of
maximum
£851.8m
£876.8m
£901.8m
40.9%
Actual: £882.7m
30.0%
12.3%
30.0%
12.3%
6th position
4th position
3rd position
Actual: 3rd position
100%
12.0%
12.0%
Written complaints
16.62
16.06
15.50
100%
Actual: 14.63
Maintaining and enhancing services for customers
Outcome delivery incentive (ODI)
composite
(£21.6m)
(£10.5m)
£37.1m
Actual: £22.4m
Time, cost and quality of capital
programme (TCQi)(3)
85.0%
91.5%
98.0%
Actual: 77.7%
Personal objectives (see page 165 for further detail)
Steve Mogford
Russ Houlden
Total:
Actual award (% of maximum)
Maximum award (% of salary)
Actual award (% of salary)(4)
Actual award (£’000 – shown in single figure table)(4)
Actual: 95%
Actual: 95%
72.4%
77.7%
95.0%
95.0%
12.0%
12.0%
4.0%
4.0%
4.0%
4.0%
24.0%
17.4%
20.0%
15.5%
10.0%
9.5%
70.7%
130%
91.9%
707
24.0%
17.4%
20.0%
15.5%
10.0%
9.5%
70.7%
130%
91.9%
446
(1) The underlying operating profit figure for bonus purposes is based on the underlying operating profit on page 91 and excludes infrastructure renewals
expenditure and property trading. Recognising the performance of Water Plus during the year, of which Steve Mogford and Russ Houlden were directors,
the committee used its discretion to reduce the underlying operating profit outcome used for assessing their bonus outcomes, such that the vesting on that
measure was adjusted from 61.8 per cent to 40.9 per cent as shown in the table.
(2) As disclosed in the 2019 DRR, this element of the 2019/20 annual bonus was originally intended to be based on a ranking versus the other water and
wastewater companies using Ofwat’s C-MeX customer service survey (a sub-component of the overall C-MeX measure). When it became clear that relative
ranking positions for the customer service survey component would not be available as initially expected, the committee resolved to adjust this element to
be based instead on the overall C-MeX measure, with targets set to be of equivalent difficulty.
(3) 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.
(4) Under the Deferred Bonus Plan, 50 per cent of the annual bonus will be deferred in shares for three years.
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United Utilities Group PLC unitedutilities.com/corporate 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:
> Leadership of the company’s
preparations for the new
regulatory period 2020–25 and
the ongoing relationship with the
Regulator
> Mitigating the effect of unexpected
events on operational performance
and customer service
> Succession planning
> Developing the right organisation
culture
Russ Houlden
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:
> Continued development of the company’s relationship with the regulator including engagement
contributing to the final determination outcome, and positioning the company well in discussions
on supporting customer affordability during the recovery period following COVID-19.
> Strong leadership of the company’s response to addressing the impact of the storms (Ciara and
Dennis) during early 2020 and the rapid and effective mobilisation of the response to COVID-19.
> Delivery of an effective internal talent pipeline, such that both the departure of Steve Fraser during the
year and the planned retirement of Russ Houlden in July 2020 have been managed through internal
promotions.
> Continued growth of the senior leadership team’s capabilities and impact, as evidenced in the
delivery of improving operational performance, services to customers and levels of workforce
engagement scores.
Personal objectives related to:
> Preparations for the new
regulatory period 2020–25
Performance summary
The committee assessed that Russ Houlden’s performance warranted an outcome of
95 per cent in respect of the personal objective element of his bonus, including:
> Cyber security
> Material contribution to the company’s final determination outcome.
> Financing activities
> Led the design of the company’s response to the new NIS cyber security requirements including
> Succession planning
the formulation of the company’s plan for compliance.
> Continued to lead the delivery of the company’s financing competitive advantage, with low cost
financing raised within the context of a low risk hedging strategy delivering significant value to
customers and shareholders, benefiting service resilience and the environment.
> Delivered, over several years, a high engagement, high performance Finance function and
developed the talent within it, thereby facilitating the appointment of an internal candidate as the
next CFO.
Deferred Bonus Plan awards made in the year ended 31 March 2020 (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 17 June 2019 in respect of deferred share bonus payments made to executive
directors for the 2018/19 financial year.
Executive Director
Type of
award
Basis of
award
Steve Mogford
Conditional shares
50% of bonus
Russ Houlden
Steve Fraser
Conditional shares
50% of bonus
Conditional shares
50% of bonus
Number of
Shares
46,960
29,485
27,417
Face value of
award(1)
(£’000)
£387
£243
£226
End of
deferral period
18.6.2022
18.6.2022
18.6.2022
(1) The face value has been calculated using the closing share price on 14 June 2019 (the dealing day prior to the date of grant), which was 824.2 pence per share.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Annual report on remuneration
Long-term incentives
Performance for Long Term Plan awards
2017 Long Term Plan (LTP) awards with a performance period ended 31 March 2020 (audited information)
The 2017 LTP awards were granted in June 2017 and performance was measured over the three-year period from 1 April 2017 to 31 March
2020. Executive directors’ awards will normally vest in April 2022, 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 the customer
service scores for the other water and wastewater companies are published in late summer 2020. The values of the 2017 LTP awards in the single
total figure of remuneration table are therefore estimated and will be restated in next year’s report once the final outcome is known.
The table below shows how the long-term incentive amount in respect of the 2017 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
Median
TSR
Straight-line between
threshold and stretch
Median
TSR 1.15
Actual: TSR between threshold and stretch
Company TSR of 17.5% was between threshold
TSR of 9.4% and stretch TSR of 25.8%
62.0%
33.3%
33.3%
20.7%
20.7%
(50% vesting)
1.05
1.13
✓ Met
1.15
100%
33.3%
33.3%
Actual: 1.32
33.3%
33.3%
Median
rank (6th
position)
Straight-line between
threshold and stretch
Upper
quartile
rank (3rd
position)
``
Estimate: 4th position
75.0%
33.3%
33.3%
25.0%
25.0%
✓ Assumed met.
The committee will make a final assessment of the
company’s performance once the outcome of the
customer service excellence measure is known.
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 2017/18, 2018/19
and 2019/20(2) (2)
Customer service excellence(3)
Ranking for the year ended
31 March 2020 out of the 11 water
and wastewater companies using
a combined customer service
measure comprising C-MeX
performance and customer
complaints(4)
Overall underpin
Overall vesting is subject to the
committee being satisfied that
the company’s performance on
these measures is consistent with
underlying business performance
Estimated vesting (% of award)
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)(5)
Estimated value at end of performance period (£’000 – shown in single figure table)(6)
79.0%
103,572
12,963
116,535
92,062
960.2
884
79.0%
65,391
8,183
73,574
58,123
960.2
558
(1) For the purposes of calculating TSR, the TSR index is averaged over the three months prior to the start and end of the performance period. TSR is
independently calculated by the committee’s advisers.
(2) Subject to approval of the final dividend by shareholders at the 2020 AGM.
(3) As disclosed in the 2018 DRR, this element of the 2017 LTP was originally based on a ranking versus the other water and wastewater companies using
Ofwat’s Service Incentive Mechanism (SIM) combined score, with 25 per cent vesting for a median ranking and 100 per cent vesting for an upper quartile
ranking. As a result of Ofwat transitioning from SIM to C-MeX as its primary assessment of customer service, the committee resolved to adjust this
element of the 2017 LTP to be based on the new C-MeX measure and written complaints, with targets set to be of equivalent difficulty. A similar adjustment
has been made in respect of the 2018 LTP, details of which will be included in next year’s report.
(4) This is an estimate as the final outcome will not be known until the volume of written complaints received by other companies are published later in 2020.
(5) Average share price over the three-month period from 1 January 2020 to 31 March 2020.
(6) 5.2 per cent of the value vesting is attributable to share price appreciation which equates to £44,000 for Steve Mogford and £28,000 for Russ Houlden.
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United Utilities Group PLC unitedutilities.com/corporate Long Term Plan awards granted in the year
2019 LTP awards with a performance period ending 31 March 2022 (audited information)
The table below provides details of share awards made to executive directors on 28 June 2019 in respect of the 2019 LTP:
Executive director
Type of award
Steve Mogford
Conditional shares
Russ Houlden
Conditional shares
Basis of award
130% of salary
130% of salary
Face value
of award
(£’000)(1)
Number of
shares under
award
£988
£624
125,126
79,027
% vesting at
threshold
25%
25%
End of
performance
period(2)
31.3.2022
31.3.2022
(1) The face value has been calculated using the closing share price on 27 June 2019 (the dealing day prior to the date of grant) which was 789.6 pence per share.
(2) An additional two-year holding period applies after the end of the three-year performance period.
During the 2018/19 shareholder consultation process on the new directors’ remuneration policy the committee concluded that there was
shareholder support for the introduction of a new Return on Regulated Equity (RoRE) measure in the LTP under the new policy.
In recognition that setting meaningful targets for the sustainable dividend measure that could cross regulatory periods (from AMP6 to
AMP7) would be challenging the committee indicated to shareholders that it might replace the 1/3 sustainable dividends element that
would normally have applied to the 2019 LTP awards with one based on RoRE, and where delivery of the dividend policy would operate
as an overall underpin. No negative feedback was received from shareholders on this proposal, and so the committee proceeded with the
change.
Details about the 2019 LTP performance measures and targets are shown in the following table. Performance is measured over the three-year
period 1 April 2019 to 31 March 2022. The table on page 162 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
Return on Regulated Equity (RoRE)(2)
Average RoRE compared to the average allowed
return set by the regulator across the three-year
performance period
Customer service excellence
Ranking for the year ended 31 March 2022 out of the
11 water and wastewater companies using a combined
customer service measure comprising C-MeX
performance and customer complaints
Targets
Threshold
(25% vesting)
Median TSR
Stretch
(100% vesting)
Median TSR
× 1.15
Average RoRE of -0.5% below
the average allowed return
Average RoRE of 1% above
the average allowed return
Median rank
(6th position)
Upper
quartile rank
(3rd position)
Weighting
33.3%
33.3%
33.3%
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 and that the company’s dividend policy has been delivered in respect of each financial year of the
performance period.
(1) For the purposes of calculating TSR, the TSR index is averaged over the three months prior to the start and end of the performance period. TSR is
independently calculated by the committee’s advisers.
(2) Stretching targets were set for the RoRE measure taking into account the allowed return over the period (as set out in the final determination) and the
expected returns to be generated through financial and operational performance.
Straight-line vesting applies between the threshold and stretch targets, with nil vesting below threshold performance.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Annual report on remuneration
Incentives in 2020/21
Ensuring alignment with our business plan
The performance measures used in our incentive schemes during 2020/21 will be aligned directly with the business plan, with a material
weighting on measures that are linked to delivery for customers. Further details about the measures used and the stretching targets set will
be provided in next year’s directors’ remuneration report.
Annual bonus in respect of the financial year commencing 1 April 2020
The maximum bonus opportunity for the year commencing 1 April 2020 will remain unchanged at 130 per cent of base salary.
In a change to previous years, and consistent with the directors’ remuneration policy, the annual bonus for 2020/21 will be wholly aligned to the
group bonus scorecard, with no personal performance element. In making this change, the committee considered that individual contributions
are already directly reflected in the outcomes of the group scorecard and therefore a standalone element was no longer required.
In addition, unlike the approach adopted during AMP6, there will be no additional weighting applied to the underlying operating profit
(UOP) measure, with the 10 per cent weighting being redistributed to the scorecard measures. This change is driven by the fact that there
are lower allowed revenues in AMP7 due to the lower WACC and the importance to the overall financials of delivering the customer
measures and ODIs as they provide greater opportunity to earn value and impact Return on Regulated Equity.
The table below summarises the measures, weighting and targets for the 2020/21 bonus. Targets that are considered commercially
sensitive will be disclosed retrospectively in the 2020/21 annual report on remuneration.
Measure
Underlying operating profit(1)
Customer service in year
C-MeX ranking out of the 17 water companies
Written complaints
Maintaining and enhancing services for customers
Outcome delivery incentive (ODI) composite
Time, cost and quality of capital programme (TCQi)(2)
Total
Targets
Threshold
(25% vesting)
Target
(50% vesting)
Commercially sensitive
Stretch
(100%
vesting)
Weighting
(% of award)
25.0%
8th position
6th position
4th position
20.0%
14.63
14.49
14.36
Commercially sensitive
80%
87.5%
95%
35.0%
20.0%
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.
2020 LTP awards with a performance period ending 31 March 2023
As part of the directors’ remuneration policy review during 2018/19 the committee consulted with shareholders on changing the structure
of the LTP with effect from the 2020 awards, such that they would be based on two equally weighted components: Return on Regulated
Equity (RoRE) and a customer basket of measures. Shareholders subsequently approved the new policy at the 2019 AGM and so the new
structure will apply when the 2020 LTP awards are granted. The award level for executive directors will remain unchanged at 130 per cent
of base salary.
Stretching targets will be set for the RoRE measure taking into account the allowed return over the period (as set out in the final
determination) and the expected returns to be generated through financial and operational performance.
In respect of the customer basket the committee will finalise the selection of measures having reflected on the group’s research in relation
to customer priorities. The basket will demonstrate our focus on customer delivery, as committed to Ofwat in our PR19 business plan, and
will recognise evolving expectations in regard to Environmental, Social and Governance matters.
The targets for both the RoRE and customer basket measures are still being determined. Full details of the targets set will be disclosed
in the 2020/21 annual report on remuneration.
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United Utilities Group PLC unitedutilities.com/corporate 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.
With effect from 19 May 2020 the shareholding guideline was updated to include a post-employment shareholding requirement, under
which executive directors must continue to hold the lower of 200 per cent of salary in shares or their shareholding on departure, for two
years after ceasing employment with the group. Executive directors in role before 19 May 2020 must retain shares vesting from future
incentive awards if not doing so would take their shareholding below the guideline. Executive directors appointed on or after 19 May 2020
must retain shares vesting from all incentive awards (including in-flight awards) if not doing so would take their shareholding below the
guideline. The committee has put in place legal mechanisms to enable the post-employment shareholding requirements to be enforced.
Details of beneficial interests in the company’s ordinary shares as at 31 March 2020 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 both continue to exceed the target shareholding guideline level of 200 per cent of salary.
294
224
161
s
e
r
a
h
s
f
o
s
0
0
0
’
350
300
250
200
150
100
50
0
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 2020
140
111
102
2020
2019
Year ended 31 March
2020
2019
Year ended 31 March
Steve Mogford (CEO)
Russ Houlden (CFO)
Further details of the executive directors’ shareholdings and share plan interests are given in the table below and in the appendix on page 185.
Number
of shares
required
to meet
share-
holding
guide-
line(1)
Share-
holding
guideline
(% of
salary)
200% 161,466
200% 101,979
Director
Steve Mogford(5) (6)
Russ Houlden(5) (6)
Steve Fraser(5) (7)
200% 92,418
60,902
Number of
shares owned
outright (including
connected persons)
Unvested shares
not subject to
performance
conditions(2)
Total shares
counting towards
shareholding
guidelines(3)
2020
2019
2020
2019
2020
2019
70,178 158,299 289,524 255,366 223,646 293,665
140,217
110,791
14,195
55,040 182,219 160,669
43,069
60,608
64,065
94,864
83,457
Share-
holding
as % of
base
salary
at 31
March
2020(1)
277%
217%
n/a
Share-
holding
guideline
met at
31 March
2020
Unvested shares
subject to
performance
conditions(4)
2020
2019
Yes 381,010 352,738
Yes 240,605 222,701
0 129,081
n/a
(1) Share price used is the average share price over the three months from 1 January 2020 to 31 March 2020 (960.2 pence per share).
(2) Unvested shares subject to no further performance conditions such as matching shares under the ShareBuy scheme. Includes shares subject only to
withholding provisions such as Deferred Bonus Plan shares in the three-year deferral period and Long Term Plan shares in the two-year holding period.
(3) Includes unvested shares not subject to performance conditions (on a net of tax and National Insurance basis), plus the number of shares owned outright.
(4) Includes unvested shares under the Long Term Plan.
(5) In the period 1 April 2020 to 19 May 2020, additional shares were acquired by Steve Mogford (34 ordinary shares) and Russ Houlden (34 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 2020, shares granted on 30 June 2015 under the Long Term Plan vested for Steve Mogford and Russ Houlden following their additional two-
year holding period. Steve Mogford had 66,320 shares vesting, of which 31,249 shares were sold to cover tax and National Insurance. Steve retained the
remaining balance of 35,071 shares. Russ Houlden had 41,869 shares vesting, of which 19,728 shares were sold to cover tax and National Insurance. Russ
retained the remaining balance of 22,141 shares.
(7) Steve Fraser left the company on 31 August 2019 and the shares reflect his shareholding at his departure date, valued using the average share price over the
three months from 1 January 2020 to 31 March 2020. As at 31 March 2020 he continued to have a beneficial interest in 64,953 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 employ a share purchase hedging strategy and shares are bought to satisfy the vesting of share plans. The rules of the Deferred Bonus Plan
do not permit awards to be satisfied by newly issued 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 (5 per cent in any rolling 10-year period).
No treasury shares were held or utilised in the year ended 31 March 2020.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE
Corporate governance report
Annual report on remuneration
Other information
Company performance and CEO remuneration comparison
The TSR chart below 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 chart shows the growth in the value of a hypothetical £100 holding invested in the company over the ten
year period. The table below the TSR chart shows the remuneration data for the CEO over the same period as the TSR chart.
300
250
200
150
100
)
£
(
e
u
a
V
l
100
2010
112
107
2011
120
109
2012
140
126
2013
174
134
2014
221
135
215
142
248
166
224
180
187
167
261
147
2015
2016
2017
2018
2019
2020
Year ended 31 March
United Utilities Group PLC
FTSE 100 Index
Year ended 31 March
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
CEO single figure of
remuneration (£’000) Steve Mogford
377
Annual bonus
payment (% of
maximum)
LTP vesting (% of
maximum)(4)
Philip Green
3,073
Steve Mogford
90.6
1,421
n/a
72.0
1,549
n/a
84.4
n/a
78.2
Philip Green
90.8
n/a
n/a
n/a
2,378
2,884
2,760(1)
2,233
2,221(2)
2,429(3)
2,564
n/a
77.4
n/a
n/a
54.5
n/a
83.7
n/a
74.9
n/a
79.0
n/a
n/a
n/a
n/a
n/a
70.7
n/a
Steve Mogford
n/a(5)
n/a(5)
n/a(5)
93.5
97.5
Philip Green
28.1(8)
100(9)
n/a
n/a
n/a
n/a
33.6
100(6)
n/a
54.5
55.4
64.4(3)
79.0(7)
n/a
n/a
n/a
n/a
(1) This includes the payout 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 that ended on 5 January 2016.
(2) The pay out from the 2015 LTP, which vested on 1 April 2020 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 867.8 pence per share.
(3) The payout and vesting percentage for the 2016 LTP have been restated to reflect the additional dividend equivalents accruing on these awards, final
vesting outcome and updated share price. See page 163 for further details.
(4) For performance periods ended on 31 March, unless otherwise stated.
(5) 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.
(6) The retention period applicable to Steve Mogford’s Matched Share Investment Scheme ended on 5 January 2016.
(7) The 2017 Long Term Plan amount vesting percentage is estimated. See page 166 for further details.
(8) 2008 Performance Share Plan (PSP) and Matching Share Award Plan (MSAP).
(9) The retention period applicable to Philip Green’s Matched Share Investment Scheme ended on 12 February 2011.
Date of service contracts
Executive directors
Steve Mogford
Russ Houlden
Date of service contract
5.1.11
1.10.10
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Pay arrangements across the wider workforce and their alignment with our
executive pay approach
The committee has always been mindful of the alignment of executive pay arrangements and those of the wider workforce, and as is
demonstrated in the table below there is a high level of alignment and consistency of approach.
When reviewing salaries and assessing incentive outcomes for the executives the committee takes account of how those elements of
remuneration have been (or will be) applied across the wider workforce in respect of the same periods. At least annually the committee
reviews a report detailing all elements of the workforce’s pay and benefits, with any notable changes since the previous review being
clearly identified and discussed.
The committee has mechanisms through which it hears from and engages with the workforce on executive pay, and its alignment with
wider arrangements. As a member of the committee, insights related to remuneration that arise via Alison Goligher in her role as Employee
Voice non-executive director can be quickly and appropriately considered, and Alison provides a formal report to the committee at least
annually in this respect. Additionally, Alison hosts sessions with the Employee Voice panel which cover the alignment of our executive pay
approach with that of the wider workforce.
Cascade of remuneration through the organisation
Employee group
(number of
employees covered)
Element of pay
Description
Employees at all
levels (circa 5,500)
Salary
Health and wellbeing
benefits
Flexible benefits
Pension
ShareBuy
Annual bonus cash
We aim to attract and retain employees of the experience and quality required to
deliver the company’s strategy. Executive directors will normally receive a salary
increase broadly in line with the increase awarded to the general workforce. For
2019 the average base salary increase for employees was 3 per cent (2 per cent for
executive directors).
All employees are eligible for company-funded healthcare. Employees have access
to a Best Doctors service for them and their families. Financial awareness courses
are available for all employees to help with their financial wellbeing and cover a
broad range of money management topics such as financial planning, managing
debt and pensions
All employees have access to a variety of additional voluntary benefits to suit
their lifestyle, and can choose from a range of deals and discounts all year round.
Employees can donate to their chosen charities directly from their pay if they want
to. Around 70 per cent of employees take up at least one of these flexible options.
Employees at all levels can participate in our award-winning pension arrangements
and 99 per cent of our employees do so. The company doubles any contributions
that employees make up to a maximum of 14 per cent of salary. As part of the
pension scheme employees receive company-funded life assurance.
Any employee can become a shareholder in our company and share in our success
by participating in our ShareBuy scheme. For every five shares an employee buys the
company gives another one free. Just over half of the workforce participate in our
ShareBuy scheme.
Employees at all levels participate in the annual bonus scheme, receiving financial
rewards based on the performance of the company and achievement of personal
objectives. Specific weightings and award levels vary by grade. There is a strong
level of alignment in measures throughout the organisation.
CEO, CFO and senior
executives (7)
Annual bonus - deferred
shares
Each of the executive directors and senior executives is required to defer a
proportion of their bonus into shares for three years.
CEO, CFO, executives
and directors (circa 60)
Long Term Plan (LTP)
Executives and directors may be invited to participate in the LTP. Performance
conditions are the same for all participants but award sizes vary.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Annual report on remuneration
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 2018/19 and 2019/20 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)
+4.5%
Bonus(2)
-8.7%
Bonus
+3.6%
Benefits(3)
+25.4%
Benefits
+8.6%
(1) On 1 September 2019, Steve Mogford received a base salary increase of 2.0 per cent.
(2) See page 164 for further details.
(3) The increase in the value of benefits for Steve Mogford relates primarily to his group income protection benefit. With effect from 1 April 2019 the cost of
providing the benefit increased and so this is reflected in the value of benefits shown in the single figure table. The underlying value he would actually
receive if he were to access the benefit did not change.
(4) To aid comparison, the group of employees selected by the committee are all those members of the workforce who were employed over the complete
two-year period.
(5) Includes promotional increases. The headline salary increase for employees was 3.0 per cent.
CEO pay ratios
New legislation requires listed companies with more than 250 employees to publish the ratio of their CEO’s pay to that of the 25th
percentile (P25), median (P50) and 75th percentile (P75) total remuneration of full-time equivalent employees. The regulations provide for
three calculation approaches to determine the pay ratio (Options A, B and C).
The data in the tables below has been calculated using Option A which is considered to be the most accurate methodology and uses the
same calculation basis as required for the CEO’s total remuneration as shown in the single figure table on page 163.
> We identified all employees who received base salary during the year ended 31 March 2020 and who were still employed on that date.
> The calculations were carried out using their total pay and benefits received in respect of the year ended 31 March 2020, including
bonuses earned by reference to performance in the financial year and paid in June following the end of the financial year.
> For employees who were employed on a part-time basis, or who were not employed for the full year, their remuneration has been
annualised to reflect the full-time equivalent.
> No other estimates or adjustments have been used in the calculations and no other remuneration items have been omitted.
Financial year
2019/20
Method
Option A
P25
77:1
Pay ratios
P50
58:1
P75
46:1
Along with the above ratios comparing total remuneration, the committee will keep under review the ratios for salary and salary plus annual bonus,
and track how these change over time. With a significant proportion of the remuneration of the CEO linked to company performance and share
price movements over the longer term, it is expected that the headline ratios will depend primarily on the Long Term Plan (LTP) outcome, and
accordingly may fluctuate from year to year. Participation in the LTP is currently limited to around 60 executives and directors, with none of the
individuals identified as P25, P50 and P75 in this group. On the other hand, employees at all levels participate in the annual bonus scheme, and so the
committee considers this ratio as well as the ratio comparing only salary, to provide helpful additional context.
Pay ratios for different elements of remuneration
Total remuneration (as above)
Salary plus annual bonus
Salary
P25
77:1
47:1
26:1
Pay ratios
P50
58:1
37:1
20:1
The table below shows the total remuneration, salary plus annual bonus, and salary at each of the three quartiles.
Total remuneration
Salary plus annual bonus
Salary
CEO
2,564
1,476
769
£’000
P25
33
32
30
P50
44
40
38
P75
46:1
31:1
17:1
P75
56
48
44
With this being the first full year under the revised reporting requirements, there is limited data against which to compare the pay ratios
above. The committee will consider the pay ratios in the context of the ratios reported in future years as well as other important metrics
such as the gender pay gap and employee engagement levels.
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United Utilities Group PLC unitedutilities.com/corporate 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
£288
-3.7%
2019/20
2018/19
£299
£285
+3.7%
£274
£0
£50
£100
£150
£200
£250
£300
(1) Employee costs includes wages and salaries, social security costs, and post-employment benefits.
Non-executive directors
Single total figure of remuneration for non-executive directors (audited information)
Year ended 31 March
Dr John McAdam(1)
Sir David Higgins(2)
Stephen Carter
Mark Clare
Alison Goligher
Brian May
Paulette Rowe
Sara Weller
Salary/fees £’000
2020
232
126
80
81
68
84
68
81
2019
307
n/a
78
80
66
82
66
80
Taxable benefits £’000
2019
2020
2
3
1
3
0
3
2
1
1
n/a
0
0
0
0
0
0
Total £’000
2020
234
129
81
84
68
87
70
82
2019
308
n/a
78
80
66
82
66
80
(1) Dr John McAdam retired from the board on 31 December 2019.
(2) Sir David Higgins joined the board as a non-executive director and chairman designate with effect from 13 May 2019, receiving annual fees of £80,000. On
his appointment as Chairman, effective 1 January 2020, his annual fees increased to £300,000.
Fees
Non-executive director annual fee rates were reviewed and increased with effect from 1 September 2019 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 2019. Additional fees for the
senior independent non-executive director and the chairs of committees were not increased.
Role
Base fee: Chairman(1) (2)
Base fee: other non-executive directors(3)
Senior independent non-executive director(3)
Chair of audit and treasury committees(3)
Chair of remuneration committee(3)
Chair of corporate responsibility committee(3)
(1) Approved by the remuneration committee.
(2) With effect from 1 January 2020 the base fee for the Chairman was set at £300,000.
(3) Approved by a separate committee of the board.
Fees £’000
1 Sept 2019
1 Sept 2018
315.0
68.2
13.5
16.0
13.5
12.0
309.0
66.9
13.5
16.0
13.5
12.0
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE
Corporate governance report
Annual report on remuneration
Non-executive directors’ shareholding (audited information)
Details of beneficial interests in the company’s ordinary shares as at 31 March 2020 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(2)
Sir David Higgins
Stephen Carter
Mark Clare
Alison Goligher
Brian May
Paulette Rowe
Sara Weller
Number
of shares
owned
outright
(including
connected
persons) at
31 March
2020(1)
1,837
3,000
3,075
7,628
3,000
3,000
3,000
11,000
Date first
appointed
to the board
4.2.08
13.5.19
1.9.14
1.11.13
1.8.16
1.9.12
1.7.17
1.3.12
(1) From 1 April 2020 to 19 May 2020 there have been no movements in the shareholdings of the non-executive directors.
(2) Dr John McAdam had 1,837 shares when he stepped down from the board with effect from 1 January 2020.
The remuneration committee
Summary terms of reference
The committee’s terms of reference were last reviewed in November 2019 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.
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.
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United Utilities Group PLC unitedutilities.com/corporate Support to the remuneration committee
By invitation of the committee, meetings are attended by the Chairman of the company, the chief executive officer, the company secretary
(who acts as secretary to the committee), the customer services and people director and the head of reward, 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 advisers:
Adviser
Appointed by
How appointed
New Bridge Street
(to 31 December 2019)
Committee
Reappointed
following committee
review in 2013
Mercer
(from 1 January 2020)
Committee
Appointed following
a tender process in
2019
General advice
on remuneration
matters
Services provided
to the committee in
year ended
31 March 2020
Additional services
provided in year
ended 31 March
2020
General advice
on remuneration
matters and support
for the directors’
remuneration policy
review
Benchmarking of
roles not under the
committee’s remit and
advice on non-
executive director
remuneration.
Provision of market
information relevant
to the price review
submission
Benchmarking of
roles not under the
committee’s remit and
advice on non-
executive director
remuneration
Fees paid by
company for these
services in respect
of year and basis of
charge
£67,000 on a time/cost
basis
£22,000 on a time/
cost basis
The independent consultants New Bridge Street (a trading name of Aon Hewitt Limited, an Aon PLC company) and Mercer 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 to the company in relation to the company’s share schemes.
Key activities of the remuneration committee over the past year
The committee met seven times in the year ended 31 March 2020.
Regular activities
> Approved the 2018/19 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 2018/19 annual bonus scheme, reviewed progress against the targets for the 2019/20 annual
bonus scheme, and considered the targets for the 2020/21 annual bonus scheme;
> Assessed the achievement of targets for the Long Term Plan (LTP) awards made in 2016 and set the targets for LTP awards made in 2019;
> 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 directors’ remuneration policy;
> Determined the remuneration arrangements for departing and new/designate board members falling under the remit of the committee;
> Reviewed the shareholding guidelines including the introduction of post-employment shareholding requirements; and
> Agreed to align pension arrangements for future executive directors with those of the wider workforce and that pension arrangements
for current executive directors would align as part of the next policy review.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Annual report on remuneration
2019 AGM: statement of voting
At the last annual general meeting on 26 July 2019, votes on the remuneration-related resolutions were cast as follows:
Approval of the directors’ remuneration policy
Votes for 458,175,960
(99.41% of votes cast)
Votes against 2,709,122
(0.59% of votes cast)
460,885,082
Total votes cast
667,337
Votes withheld
(abstentions)
Approval of the directors’ remuneration report
(other than the part containing the directors’ remuneration policy)
Votes for 454,289,863
(98.54% of votes cast)
Votes against 6,734,908
(1.46% of votes cast)
461,024,771
Total votes cast
527,648
Votes withheld
(abstentions)
The directors’ remuneration report was approved by the board of directors on 19 May 2020 and signed on its behalf by:
Sara Weller
Chair of the remuneration committee
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United Utilities Group PLC unitedutilities.com/corporate
Corporate governance report
Appendix 1: Directors’ remuneration policy (abridged)
This appendix to the directors’ remuneration report sets out an abridged version of the remuneration policy for the company which was
approved by shareholders at the AGM on 26 July 2019. The policy took effect from the data of approval and is intended to apply until the
2022 AGM.
In the interests of clarity, the report includes some minor annotations to additionally show, where appropriate, how the policy will be
implemented in 2020/21. A full version of the shareholder approved policy can be found in the Annual Report and Financial Statements
for the year ended 31 March 2019.
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 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’.
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;
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.
> 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).
Where the committee has set the salary of a new hire at a discount
to the market level initially, a series of planned increases can be
implemented over the following few years to bring the salary to the
appropriate market position, subject to individual performance.
On recruitment or promotion to executive director, the committee
will take into account previous remuneration, and pay levels for
comparable companies, when setting salary levels. This may lead
to salary being set at a lower or higher level than for the previous
incumbent.
Performance measures
None.
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Appendix 1: Directors’ remuneration policy (abridged)
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. Their pension
arrangements will be aligned to the wider workforce as part of the
next policy review.
Performance measures
None.
Benefits
Purpose and link to strategy: To provide market competitive benefits to help recruit and retain high-calibre executives.
Maximum opportunity
As it is not possible to calculate in advance the cost of all benefits,
a maximum is not predetermined.
Performance measures
None.
Operation
Provision of benefits such as:
> health benefits;
> car or car allowance;
> relocation assistance;
> life assurance;
> group income protection;
> all employee share schemes (e.g. opportunity to join the
ShareBuy scheme);
> travel; and
> communication costs.
Any reasonable business-related expenses can be reimbursed
(and any tax thereon met if determined to be a taxable benefit).
Executives will be eligible for any other benefits that 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.
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United Utilities Group PLC unitedutilities.com/corporate Annual bonus
Purpose and link to strategy: To incentivise performance against personal objectives and selected financial and operational KPIs that 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.
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Appendix 1: Directors’ remuneration policy (abridged)
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.
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.
Maximum opportunity
The normal maximum award level will be up to 130 per cent of salary
per annum.
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 it 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.
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.
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).
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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United Utilities Group PLC unitedutilities.com/corporate Notes to the policy table
Selection of performance measures and targets
Performance measures for the annual bonus are selected annually to align with the company’s key strategic goals for the year and reflect
financial, operational and personal objectives. ‘Target’ performance is typically set in line with the business plan for the year, following
rigorous debate and approval of the plan by the board. Threshold to stretch targets are then set based on a sliding scale on the basis of
relevant commercial factors.
Only modest rewards are available for delivering threshold performance levels, with rewards at stretch requiring substantial
outperformance of the business plan. Details of the measures used for the annual bonus are given in the annual report on remuneration.
The current Long Term Plan (LTP) measures were selected by the committee following an extensive review and shareholder consultation
in 2018/19. These measures are considered to align with the company’s key strategic goals and be closely linked to the creation of long-
term shareholder value. 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 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.
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Appendix 1: Directors’ remuneration policy (abridged)
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.
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
1)
2)
Fixed
100%
981
Target
49%
25.5%
25.5%
1,989
3)
Maximum
Maximum
plus 50%
share price
growth
4)
33%
33.5%
33.5%
2,996
28%
28.8%
28.8%
14.4%
3,500
0
500
1,000
1,500
2,000
2,500
3,000 3,500 4,000
Russ Houlden CFO
£’000s
1)
2)
Fixed
100%
621
Target
49%
25.5%
25.5%
1,258
3)
Maximum
33%
33.5%
33.5%
1,894
Maximum
plus 50%
share price
growth
4)
28%
28.8%
28.8%
14.4%
2,213
0
500
1,000
1,500
2,000
2,500
Fixed
Annual bonus
Long Term Plan
Additional Long Term Plan value if share price grows by 50%
Notes on the scenario methodology:
> ‘Fixed’ is base salary effective 31 March
2020 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 2019/20;
> ‘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.
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United Utilities Group PLC unitedutilities.com/corporate 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. With effect from 19 May 2020 the guidelines were updated to include
post-employment shareholding requirements as outlined on page 169.
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.
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 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 that 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.
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Appendix 1: Directors’ remuneration policy (abridged)
Payment for loss of office
The circumstances of the termination, including the individual’s performance and an individual’s duty and opportunity to mitigate losses,
are taken into account in every case. Our policy is to stop or reduce compensatory payments to former executive directors to the extent
that they receive remuneration from other employment during the compensation period. A robust line on reducing compensation is applied
and payments to departing employees may be phased in order to mitigate loss. Our policy is shown in the table below:
Provision
Summary terms
Compensation for loss of
office
> An executive director’s service contract may be terminated without notice and without any further
payment or compensation, except for sums earned up to the date of termination, on the occurrence of
certain contractually specified events such as gross misconduct.
> No termination payment if full notice is worked.
> Otherwise, a payment in respect of the period of notice not worked of basic salary, plus pension and car
allowance for that period.
> Half of the termination payment will be paid within 14 days of date of termination.
> The other half will be paid in monthly instalments over what would have been the second half of the notice
period. This will be reduced by the value of any salary, pension contribution and car allowance earned in
new paid employment in that period.
Treatment of annual
bonus on termination
> A time prorated bonus may be payable for the period of active service; however, there is no automatic
entitlement to payments under the bonus scheme. Any payment is at the discretion of the committee and
is subject to recovery and withholding provisions as detailed in the policy table.
> Performance targets would apply in all circumstances.
Treatment of deferred
bonus on termination
> Determined on the basis of the relevant plan rules. Full details can be found on the company’s website.
> Deferred bonuses are subject to recovery and withholding provisions as detailed in the policy table.
Treatment of unvested
long-term incentives on
termination
> 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.
Treatment of pensions on
termination
> 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.
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.
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United Utilities Group PLC unitedutilities.com/corporate Corporate governance report
Appendix 2: Executive directors’ share plan interests 1 April 2019 to 31 March 2020
Awards held
at 1 April
2019
Award date
Granted in
year
Vested
in year
Lapsed/
forfeited in
year
Notional
dividends
accrued in
year(1)
Awards held
at 31 March
2020
Steve Mogford
365,862
47,003
97,530
97,530
40,691
Shares not subject to performance conditions at 31 March 2020
DBP
31,068
16.6.16
DBP
DBP
DBP(2)
LTP
LTP
LTP
ShareBuy matching shares(3)
Subtotal
16.6.17
18.6.18
17.6.19
30.6.14
30.6.15
28.6.16
1.4.19 to 31.3.20
–
–
–
45,031
49,584
–
46,960
66,415
63,221
110,496
47
–
–
–
43
–
–
125,126
125,126
172,129
–
–
–
Shares subject to performance conditions at 31 March 2020
LTP
111,089
27.6.17
LTP
LTP(4)
Subtotal
TOTAL
Russ Houlden
25.6.18
28.6.19
131,153
–
242,242
608,104
Shares not subject to performance conditions at 31 March 2020
DBP
16.6.16
19,430
DBP
DBP
DBP(2)
LTP
LTP
LTP
ShareBuy matching shares(3)
Subtotal
16.6.17
18.6.18
17.6.19
30.6.14
30.6.15
28.6.16
1.4.19 to 31.3.20
28,256
31,102
–
29,485
41,920
39,913
69,737
48
–
–
–
43
Shares subject to performance conditions at 31 March 2020
LTP
27.6.17
70,136
LTP
LTP(4)
Subtotal
TOTAL
Steve Fraser
25.6.18
28.6.19
82,828
–
152,964
383,370
Shares not subject to performance conditions at 31 March 2020
DBP
16.6.16
8,518
DBP
DBP
DBP(2)
LTP
ShareBuy matching shares(3)
Subtotal
16.6.17
18.6.18
17.6.19
28.6.16
1.4.19 to 31.3.20
11,276
23,227
–
26,175
48
69,244
Shares subject to performance conditions at 31 March 2020
LTP
26,328
27.6.17
LTP
Subtotal
TOTAL
25.6.18
76,578
102,906
172,150
–
–
79,027
79,027
108,555
–
–
–
27,417
–
15
27,432
–
–
0
31,068
–
–
–
66,415
–
–
47
–
–
–
0
–
–
–
0
19,430
–
–
–
41,920
–
–
48
8,518
–
–
–
17,436
20
25,974
–
–
0
–
–
–
–
–
–
40,691
–
40,691
–
–
–
0
–
–
–
–
–
–
25,681
–
25,681
–
–
–
0
–
–
–
–
9,639
43
9,682
27,234
79,213
106,447
116,129
–
2,207
2,430
2,302
–
3,099
4,842
–
–
47,238
52,014
49,262
–
66,320
74,647
43
14,880
289,524
5,446
6,429
1,767
13,642
28,522
–
1,384
1,524
1,444
–
1,956
3,056
–
9,364
3,438
4.060
1,116
8,614
17,978
–
552
1,138
1,343
900
–
3,933
906
2,635
3,541
7,474
116,535
137,582
126,893
381,010
670,534
–
29,640
32,626
30,929
–
41,869
47,112
43
182,219
73,574
86,888
80,143
240,605
422,824
–
11,828
24,365
28,760
0
0
64,953
0
0
0
64,953
230,406
29,528
61,398
61,398
25,681
(1) Note that these are subject to performance conditions where applicable.
(2) See page 165 for further details.
(3) Under ShareBuy, matching shares vest provided the employee remains employed by the company one year after grant. During the year Steve Mogford
purchased 214 partnership shares and was awarded 43 matching shares (at an average share price of 857 pence per share). Russ Houlden purchased 214
partnership shares and was awarded 43 matching shares (at an average share price of 857 pence per share). Steve Fraser purchased 75 partnership shares
and was awarded 15 matching shares (at an average share price of 857 pence per share).
(4) See page 166 for further details.
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27,432
25,974
Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Corporate governance report
Tax policies and objectives
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
2019/20, 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 35.3 per cent holding in
Tallinn Water which are fully taxable in Estonia on
distribution).
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 £4 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 awaiting the necessary
formalities before being dissolved and has no
income.
Consistent with our wider business objectives, we
are committed to acting in a responsible manner in
relation to our tax affairs.
Our tax policies and objectives, which are approved
by the board on an annual basis, ensure that we:
> only engage in reasonable tax planning aligned
with our commercial activities and we always
comply with what we believe to be both the letter
and the spirit of the law;
> do not engage in 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 adhere fully 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 actively any such risk.
In any given year, the group’s effective cash tax
rate on underlying profits may fluctuate from the
standard UK rate due to the available tax deductions
on capital investment and pension contributions.
These deductions are achieved as a result of utilising
tax incentives, which have been explicitly put in
place by successive governments precisely to
encourage such investment. This reflects responsible
corporate behaviour in relation to tax.
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United Utilities Group PLC unitedutilities.com/corporate Every year, the group pays significant contributions to the public finances on its own behalf as well as
collecting and paying further amounts for its 5,000 strong workforce. Details of the total payments for
2020 of around £250 million are set out below.
Taxes/contributions to public finances for 2020
Total taxes and contributions to public finances
£250m
£77m
Business rates
£56m
£23m
£54m
£12m £28m
Corporation tax
Employment taxes:
company
Employment taxes:
employees
Environmental taxes
and other duties
Regulatory services fees (e.g.
water extraction charges)
The above tax policy disclosure meets the group’s statutory requirement under Paragraph 16(2) of Schedule 19
of Finance Act 2016 to publish its UK tax strategy for the year ended 31 March 2020.
See our website for our latest separate annual tax report, which includes further details in relation to the
following key areas:
> How much tax we pay;
> How we ensure that we pay the right tax at the right time; and
> How we ensure that our tax affairs are transparent for all our stakeholders.
Recognising the group’s commitment to paying its fair share of tax and acting in an open and transparent
manner in relation to its tax affairs, we were delighted to secure the Fair Tax Mark independent certification.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Directors’ report
Statutory and other information
Our directors present their management report, including the strategic report, on pages 16 to 103 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 2020.
Business model
Dividends
Directors
Reappointment
Interests
Corporate governance
statement
Share capital
Voting
Transfers
A description of the company’s business model can be found within the strategic report on pages 28 to 53.
Our directors are recommending a final dividend of 28.40 pence per ordinary share for the year ended
31 March 2020, which, together with the interim dividend of 14.20 pence, gives a total dividend for the
year of 42.60 pence per ordinary share (the interim and final dividends paid in respect of the 2018/19
financial year were 13.76 pence and 27.52 pence per ordinary share respectively). Subject to approval by our
shareholders at our AGM, the final dividend will be paid on 3 August 2020 to shareholders on the register
at the close of business on 26 June 2020.
The names of our directors who served during the financial year ended 31 March 2020 can be found on
pages 108 to 111.
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 2018 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 126 to 132.
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 156 to 185 which is hereby incorporated by reference
into this directors’ report.
The corporate governance report on pages 108 to 185 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 2018 version of the Code,
as applicable to the company for the year ended 31 March 2020, 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 2020, 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 225. 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 2020.
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 2020 AGM. Our directors’ powers are
conferred on them by UK legislation and by the company’s articles. At the AGM of the company held on
26 July 2019, 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) no less than 48 hours before a general meeting and when calculating this period, the directors can
decide not to take account of any part of a day that is not a working day.
There are no restrictions on the transfer of our ordinary shares in the company, nor any limitations on the
holding of our shares in the company, save: (i) where the company has exercised its right to suspend their
voting rights or to prohibit their transfer following the omission of their holder or any person interested
in them to provide the company with information requested by it in accordance with Part 22 of the
Companies Act 2006; or (ii) where their holder is precluded from exercising voting rights by the Financial
Conduct Authority’s Listing Rules or the City Code on Takeovers and Mergers.
There are no agreements known to us between holders of securities that may result in restrictions on the
transfer of securities or on voting rights. All our issued shares are fully paid.
Major shareholdings
At 21 May 2020, 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:
Per cent of issued share capital Direct or indirect nature of holding
Lazard Asset Management LLC
BlackRock Inc.
Norges Bank
9.93
5.13
3.01
Indirect
Indirect
Direct
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United Utilities Group PLC unitedutilities.com/corporate Purchase of own shares
Change of control
At our AGM held on 26 July 2019, 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 2020 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 2021.
As at 31 March 2020, Ocorian Corporate Services (UK) 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 214. In line with current UK tax legislation, the amount is fully deductible
against the group’s corporation tax liability, resulting in tax relief of £7.7 million.
Directors’ indemnities and
insurance
Political donations
Trade associations
Employees
Environmental, social and
community matters
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 £23,627 (2019: £9,338; 2018: £21,662) as part of this
process. At the 2019 AGM, an authority was taken to cover such expenditure.
A similar resolution will be put to our shareholders at the 2020 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 wellbeing of the
North West. Our total contribution to these associations in 2019/20 was £400,916 (2018/19: £399,658).
Our policies on employee consultation and on equal opportunities for all employees can be found on
pages 32 and 46. 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 and where
it is safe and practical to do so. Importance is placed on strengthening employees’ engagement (see page
24). 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 102.
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 212.
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 22 to 27. 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 102.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE Directors’ report
Statutory and other information
Customers and suppliers
and key stakeholders
Our approach to engagement with customers, suppliers, regulators and other key stakeholders can be
found on pages 22 to 27. 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 102.
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 2020, our average time taken to pay
invoices was 15 days; in the previous six months it was 14 days.
Energy and carbon report Our TCFD reporting includes our energy and carbon report on pages 76 to 77 and is hereby incorporated by
reference into this directors’ report.
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 232.
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 226.
Our statement can be found on our website at: unitedutilities.com/human-rights
Annual General Meeting
Our 2020 annual general meeting (AGM) will be held on 24 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 2020 AGM, resolutions will be proposed, among other matters:
> to receive the annual report and financial statements; to approve the directors’ remuneration report; to declare a final dividend; and to
reappoint KPMG LLP as auditor; 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 clear 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 they are aware, there is no relevant audit information of which the company’s auditor is unaware; and
> they have taken all the steps that they ought to have taken as a director in order to make themselves 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 21 May 2020 and signed on its behalf by:
Simon Gardiner
Company Secretary
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United Utilities Group PLC unitedutilities.com/corporate Statement of directors’ responsibilities in respect of the
annual report and the financial statements
Responsibility statement of
the directors in respect of the
annual financial report
We confirm that to the best of our knowledge:
> the financial statements, prepared in accordance
with the applicable set of accounting standards,
give a true and fair view of the assets, liabilities,
financial position and profit or loss of the company
and the undertakings included in the consolidation
taken as a whole; 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.
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 21 May 2020 and signed
on its behalf by:
Sir David Higgins
Chairman
Russ Houlden
Chief Financial Officer
The directors are responsible for preparing the
annual report and the group and parent company
financial statements in accordance with applicable
law and regulations.
Company law requires the directors to prepare
group and parent company financial statements
for each financial year. Under that law they are
required to prepare the group financial statements
in accordance with International Financial Reporting
Standards 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;
> state whether they have been prepared in
accordance with IFRSs as adopted by the EU;
> 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.
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.
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Stock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 GOVERNANCE WHAT MATTERS
Resilience
Our continued investment in our assets
and risk management approach helps
ensure we maintain operational, financial
and corporate resilience for the long term.
We demonstrate a
Sector-
leading
approach to resilience according to Ofwat's
initial assessment of our business plan
submission for the 2020–25 period.
27061-UU-AR2020-Financials.indd 192
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Progress this AMP
Our future plans
£250m
additional investment made to improve
our resilience further, shared from
outperformance we earned over AMP6.
HARP
Major resilience programme to replace
sections of our Haweswater Aqueduct over
AMP7 and AMP8 being progressed through
direct procurement for customers.
S
T
N
E
M
E
T
A
T
S
L
A
C
N
A
N
I
F
I
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
194
201
201
202
203
204
205
206
207
211
227
252
253
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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 nine
financial years ended 31 March 2020. 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 2020, 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 207 to 210 and 246
to 250.
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
2020 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 (unchanged from 2019 with the exception of
going concern, which is a new key audit matter), in decreasing
order of audit significance, 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
£22.0m (2019: £20.0m)
4.5% (2019: 4.7%) of normalised group profit
before tax
Coverage
98% (2019: 98%) of group profit before tax
Key audit matters
Recurring
Revenue recognition and allowance
for household customer debts
Capitalisation of costs relating
to the capital programme
Retirement benefit obligations
valuation
Carrying value of interest in Water
Plus joint venture
Recoverability of investment
in United Utilities PLC (parent
company only)
New
Going concern
vs 2019
New
194
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United Utilities Group PLC unitedutilities.com/corporate Revenue recognition and
provisions for household
customer debt
Revenue not recognised:
£19.4 million (2019: £18.0 million)
Provision for customer debts:
£49.4 million (2019: £52.9
million)
Refer to pages 147 and 148
(Audit committee report), note
15 (financial disclosures) and
pages 208 and 209 (accounting
policies)
Capitalisation of costs relating
to the capital programme
£759.5 million (2019: £726.2
million)
Refer to page 147 (Audit
committee report) page 209
(accounting policies) and note 10
(financial disclosures)
The risk
Our response
Subjective estimate:
Our procedures included:
At each balance sheet date:
›
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, in particular
because of the potential effects of the
COVID-19 pandemic, with a potential
range of reasonable outcomes greater
than our materiality for the financial
statements as a whole. The financial
statements (see pages 208 and 209
accounting policies) disclose the
sensitivity estimated by the group.
› Accounting analysis – assessing the derecognition
of revenue for compliance with relevant accounting
standards where the collection of consideration is not
probable on the date of initial recognition;
› 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 estimates of future economic
scenarios and their impact on credit losses; and
› Assessing transparency – assessing the adequacy
of the group’s disclosures of its revenue recognition
and 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 (2019: acceptable); and
› we considered the level of doubtful debt provisioning
to be acceptable (2019: 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 in year 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 (Accounting policies section)
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 capital nature
of a sample of projects against the capitalisation policy
and then for a sample of cost transactions ensure
that the costs capitalised agree to respective project
purchase order authorisation and purchase invoice;
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 enquiry and our sector knowledge; and challenged
the estimates made by management for a sample of
specific cost centres; 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 (2019:
acceptable).
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Independent auditor’s report to the members of
United Utilities Group PLC only
Retirement benefit obligations
valuation
£3,057.6 million (2019: £3,425.2
million)
Refer to page 148 (Audit
committee report), pages 209
to 210 (accounting policies),
and notes 19 and A5 (financial
disclosures)
Carrying value of interest in
Water Plus joint venture
£nil interest in joint venture
(2019: £36.7 million)
Refer to page 148 (Audit
committee report), page 210
(accounting policies) and note 12
(financial disclosures)
The risk
Our response
Subjective valuation:
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 to 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
sensitivities estimated by the group.
› Our actuarial expertise – we use our own actuarial
specialists to challenge key assumptions and
estimates used in the calculation of the retirement
benefit obligations, and perform 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;
› Methodology assessment – we use our own
actuarial specialists to assess the appropriateness
and consistency of the methodology applied by
management in setting the key assumptions;
› Assessing external actuary's credentials – we assess
competence and independence of the external actuary
engaged by the group; and
› Assessing transparency – we consider the adequacy
of the group's disclosure in respect of retirement
benefits, in particular the gross defined benefit
obligations and the assumptions used, which are set
out in notes 19 and A5 to the financial statements.
Our results:
› We found the resulting estimate of the retirement
benefit obligations to be acceptable (2019:
acceptable).
Forecast-based valuation:
Our procedures included:
The carrying value of the group’s
interest in the Water Plus joint venture
is dependent on estimates of the
recoverable amount of intangible assets
within Water Plus, which are more
subjective because of the potential
effects of the COVID-19 pandemic.
› Assessing methodology – we challenged the group's
assessment of whether the separate loans made to
Water Plus formed part of the group's interest in the
joint venture and considered whether this was in
accordance with the relevant accounting standards;
› we assessed the principles and integrity of the cash
flow model used to estimate the recoverable amount
of intangibles within Water Plus;
› Our valuation expertise – we challenged the
assumptions used 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 reasonably possible
changes in forecast cash flows and an alternative
discount rate assumption, to assess the level of
sensitivity to these changes; and
› Assessing transparency – we assessed whether
the group's disclosures about both the accounting
judgement of what comprises the group's interest
in Water Plus and 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 estimates.
Our results:
› We found the resulting estimate of the recoverable
amount of the intangible assets within Water Plus and
the carrying value of the group's interest in the Water
Plus joint venture to be acceptable (2019: acceptable).
196
27061-UU-AR2020-Financials.indd 196
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United Utilities Group PLC unitedutilities.com/corporate Going concern
Refer to page 207 (accounting
policies)
The risk
The financial statements explain how the
board has formed a judgement that it is
appropriate to adopt the going concern
basis of preparation for the group and
parent company.
That judgement is based on an evaluation
of the inherent risks to the group's and
company's business model and how
those risks might affect the group's and
company's financial resources or ability
to continue operations over a period of at
least a year from the date of approval of
the financial statements.
The evaluation of going concern is based
on forecast cash flows which have a
greater level of estimation risk because of
the impact of the COVID-19 pandemic.
Our response
Our procedures included:
›
Funding assessment – we have considered the
availability of existing debt arrangements and
committed loan facilities, including a review of
compliance with covenants and expected maturity
dates;
› Historical comparison – we have compared the
budget to actual results for several periods to confirm
the accuracy of management's forecasts;
›
›
›
Benchmark assumptions – we compared the
key assumptions in the forecast including lower
expected household collections, lower non-household
consumption and delayed collection of household
charges and increased contractor costs to third party
evidence such as independent sector forecasts;
Sensitivity analysis – 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, including the potential effects of the
COVID-19 pandemic;
Evaluating directors' intent – we evaluated the
achievability of the actions the directors consider they
would take to improve the position should the risks
materialise, including assessment of mitigating actions
within their control; and
› Assessing transparency – we assessed the
completeness and accuracy of the matters covered in
the going concern disclosure through the procedures
performed above along with our assessment of the
viability statement.
Our results:
› We found the going concern disclosure, including the
assessment that there was no material uncertainty to
be acceptable (2019: acceptable).
Recoverability of parent
company's investment in
United Utilities PLC
Investment in United Utilities
PLC £6,326.8 million (2019:
£6,326.8 million).
Refer to page 246 (accounting
policies) and note 13 (financial
disclosures)
Low risk, high value:
Our procedures included:
The carrying amount of the parent
company's investment in United Utilities
PLC represents 99 per cent (2019: 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: compare 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, is 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 (2019: acceptable).
27061-UU-AR2020-Financials.indd 197
197
12-Jun-20 3:41:13 PM
FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Independent auditor’s report to the members of
United Utilities Group PLC only
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 £22.0 million (2019: £20.0 million), determined with reference
to a benchmark of group profit before tax of £303.2 million,
normalised to exclude net fair value gains or losses on debt and
derivative instruments as disclosed in note 6, of £76.3 million, the
accelerated depreciation of certain bioresources assets in note 4 of
£82.3 million; and impairment within the Water Plus joint venture in
note 12 of £32.0 million, of which it represents 4.5 per cent (2019:
4.7 per cent). The group team performed procedures on the items
excluded from normalised group profit before tax.
Materiality for the parent company financial statements as a whole
was set at £20.0 million (2019: £19.5 million), determined with
reference to a benchmark of company total assets, of which it
represents 0.3 per cent (2019: 0.3 per cent).
We agreed to report to the audit committee any corrected or
uncorrected identified misstatements exceeding £0.5 million (2019:
£0.5 million), in addition to other identified misstatements that
warranted reporting on qualitative grounds.
Of the group’s 34 (2019: 34) reporting components, we subjected
six (2019: seven) to full scope audits for group purposes and one
(2019: none) to specified risk-focused audit procedures. The latter
was not individually financially significant enough to require a full
scope audit for group purposes, but did present specific individual
risks that needed to be addressed.
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 £20.0 million (2019: £2.5 million to
£19.5 million), having regard to the mix of size and risk profile of the
group across the components.
The group team visited none (2019: none) of the component
locations to assess the audit risk and strategy. During the course
of the audit, we visited each of the seven (2019: we visited six
of seven) components and held meetings. 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.
The work on one of the seven components (2019: one of the seven
components) was performed by a component auditor and the rest,
including the audit of the parent company, was performed by the
group team. The group team instructed component auditors as
to the significant areas to be covered, including the relevant risks
detailed above and the information to be reported back.
Normalised group profit before tax
£493.8m (2019: £426.7m)
Materiality
Whole financial
statements materiality £22m
(2019: £19.0m)
Range of materiality at 7
components £2.5m to £20.0m
(2019: £2.5m to £19.5m)
Normalised group profit
before tax
Group materiality
£0.5m
Misstatements reported to the
audit committee (2019: £0.5m)
Group revenue
Group profit before tax
100%
(2019: 100%)
100
100
100%
(2019 100%)
100
100
Group total assets
Group profit before tax
1
1
99%
(2019: 99%)
99
99
2
2
98%
(2019: 98%)
98
98
Full scope for group audit
purposes 2020
Full scope for group audit
purposes 2019
Residual components
Specified risk-focused
audit procedures 2020
Specified risk-focused
audit procedures 2019
198
27061-UU-AR2020-Financials.indd 198
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United Utilities Group PLC unitedutilities.com/corporate 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.
We identified going concern as a key audit matter (see section 3 of
this report). based on the work described in our response to that
key audit matter, we are required to report to you if:
› we had anything material to add or draw attention to in relation
to the directors' statement in the accounting policies note
to 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
189 is materially inconsistent with our audit knowledge.
We have nothing to report in these respects.
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 emerging and 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 137 to 139 that they have carried out a
robust assessment of the emerging and principal risks facing
the group, including those that would threaten its business
model, future performance, solvency and liquidity;
the principal risks 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
provisions of the UK Corporate Governance Code specified by the
Listing Rules for our review.
We have nothing to report in these respects.
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:
›
›
›
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.
27061-UU-AR2020-Financials.indd 199
199
12-Jun-20 3:41:13 PM
FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Independent auditor’s report to the members of
United Utilities Group PLC only
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 identified 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
21 May 2020
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 191,
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.
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, Environment 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 its
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
200
27061-UU-AR2020-Financials.indd 200
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United Utilities Group PLC unitedutilities.com/corporate Consolidated income statement
for the year ended 31 March
Revenue
Employee benefits expense
Other operating costs
Allowance for expected credit losses – trade and other receivables
Other income
Depreciation and amortisation expense
Infrastructure renewals expenditure
Total operating expenses
Operating profit
Investment income
Finance expense
Allowance for expected credit losses – loans to joint ventures
Investment income and finance expense
Share of (losses)/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
All of the results shown above relate to continuing operations.
Note
2
3
4
4
4
4
5
6
A6
12
7
7
7
8
8
9
2020
£m
1,859.3
(161.4)
(403.4)
(41.8)
3.4
(482.8)
(143.0)
(1,229.0)
630.3
24.0
(308.0)
(5.0)
(289.0)
(38.1)
303.2
(38.9)
(157.5)
(196.4)
106.8
2019
£m
1,818.5
(169.6)
(422.8)
(26.5)
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
15.7p
15.6p
53.3p
53.2p
42.60p
41.28p
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 taken directly to equity
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
Deferred tax adjustments in respect of prior years on net fair value gains
Tax on items taken directly to equity
Other comprehensive income that will not be reclassified to profit or loss
Total comprehensive income
27061-UU-AR2020-Financials.indd 201
2020
£m
106.8
(2.0)
0.4
1.3
(0.3)
154.6
34.2
1.3
(2.4)
(157.1)
30.6
137.1
2019
£m
363.4
0.4
(0.1)
(0.8)
(0.5)
73.0
6.6
(2.2)
–
(13.1)
64.3
427.2
201
12-Jun-20 3:41:14 PM
FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Consolidated and company statements of
financial position at 31 March
ASSETS
Non-current assets
Property, plant and equipment
Intangible assets
Investments in joint ventures
Other 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
EQUITY
Capital and reserves attributable to equity holders of the
company
Share capital
Share premium account
Other reserves
Retained earnings
Shareholders’ equity
Note
10
11
12
13
15
19
A4
14
15
16
A4
22
17
20
A4
22
17
21
A4
24
23
2020
£m
11,510.9
189.0
46.8
0.1
97.0
754.1
617.8
Group
2019
£m
11,153.4
202.7
79.0
11.5
148.1
483.9
387.8
2020
£m
Company
2019
£m
–
–
–
–
–
–
6,326.8
6,326.8
–
–
–
–
–
–
13,215.7
12,466.4
6,326.8
6,326.8
16.6
245.9
37.7
528.1
0.1
828.4
14.9
249.5
16.4
339.3
101.3
721.4
14,044.1
13,187.8
–
81.3
–
–
–
–
82.2
–
–
–
81.3
6,408.1
82.2
6,409.0
(761.2)
(7,518.1)
(1,462.6)
(135.4)
(9,877.3)
(334.4)
(845.0)
(16.4)
(8.9)
(1,204.7)
(11,082.0)
2,962.1
499.8
2.9
336.7
2,122.7
2,962.1
(697.3)
(7,115.6)
(1,146.0)
(66.1)
–
–
(1,752.0)
(1,718.4)
–
–
–
–
(9,025.0)
(1,752.0)
(1,718.4)
(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
(14.2)
(0.8)
–
–
–
(1,767.0)
4,641.1
499.8
2.9
1,033.3
3,105.1
4,641.1
(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
There has been a change in the presentation of reserves (see note 23).
These financial statements for the group and United Utilities Group PLC (company number: 6559020) were approved by the board of
directors on 21 May 2020 and signed on its behalf by:
Steve Mogford
Chief Executive Officer
Russ Houlden
Chief Financial Officer
202
27061-UU-AR2020-Financials.indd 202
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United Utilities Group PLC unitedutilities.com/corporate Consolidated statement of changes in equity
for the year ended 31 March
At 31 March 2019
Profit after tax
Other comprehensive income/(expense)
Remeasurement gains on defined benefit pension schemes (see note 19)
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
Deferred tax adjustments in respect of prior years on net fair value gains
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 2020
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 19)
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
Share
capital
£m
499.8
Share
premium
account
£m
Other
reserves*
£m
Retained
earnings
£m
2.9
338.3
2,269.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2.0)
1.3
(2.4)
0.2
1.3
(1.6)
–
–
–
Total
£m
3,110.8
106.8
106.8
154.6
154.6
34.2
–
–
–
34.2
(2.0)
1.3
(2.4)
(156.9)
(156.7)
–
138.7
(284.5)
1.5
(2.8)
1.3
137.1
(284.5)
1.5
(2.8)
499.8
2.9
336.7
2,122.7
2,962.1
Share
capital
£m
499.8
–
–
499.8
–
–
–
–
–
–
–
–
–
–
–
Share
premium
account
£m
Other
reserves
£m
Retained
earnings
£m
Total
£m
2.9
–
–
2.9
–
–
–
–
–
–
–
–
–
–
–
327.9
12.7
–
340.6
–
–
–
0.4
(2.2)
0.3
(0.8)
(2.3)
–
–
–
2,120.3
2,950.9
(12.7)
5.9
2,113.5
363.4
–
5.9
2,956.8
363.4
73.0
73.0
6.6
–
–
(13.5)
–
429.5
(274.4)
4.0
(2.8)
6.6
0.4
(2.2)
(13.2)
(0.8)
427.2
(274.4)
4.0
(2.8)
499.8
2.9
338.3
2,269.8
3,110.8
* Other reserves comprise the group's cumulative exchange reserve, capital redemption reserve, merger reserve, cost of hedging reserve and cash flow hedging
reserve. Further detail of movements in these reserves is included in note 23.
27061-UU-AR2020-Financials.indd 203
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Company statement of changes in equity
for the year ended 31 March
At 1 April 2019
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
Share
capital
£m
499.8
Share
premium
account
£m
2.9
Other
reserves
£m
1,033.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Retained
earnings
£m
3,139.4
251.5
251.5
(284.5)
1.5
(2.8)
Total
£m
4,675.4
251.5
251.5
(284.5)
1.5
(2.8)
At 31 March 2020
499.8
2.9
1,033.3
3,105.1
4,641.1
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
Share
capital
£m
499.8
Share
premium
account
£m
2.9
–
–
–
–
–
–
–
–
–
–
Other
reserves
£m
1,033.3
Retained
earnings
£m
Total
£m
3,162.9
4,698.9
–
–
–
–
–
249.7
249.7
(274.4)
4.0
(2.8)
249.7
249.7
(274.4)
4.0
(2.8)
At 31 March 2019
499.8
2.9
1,033.3
3,139.4
4,675.4
At 31 March 2020, 31 March 2019 and 31 March 2018, the company's entire retained earnings balance was distributable to shareholders.
The company's other reserves comprises a capital redemption reserve that 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 £251.5 million (2019: £249.7 million).
204
27061-UU-AR2020-Financials.indd 204
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United Utilities Group PLC unitedutilities.com/corporate 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
Repayment/(extension) of loans to joint ventures
Dividends received from joint ventures
Proceeds from disposal of investments
Net cash used in investing activities
Financing activities
Proceeds from borrowings net of issuance costs
Repayment of borrowings
Dividends paid to equity holders of the company
Exercise of share options – purchase of shares
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
2020
£m
1,005.5
(149.4)
9.9
(71.5)
15.8
810.3
(652.8)
(27.2)
–
34.7
34.5
4.9
12.0
Group
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
(593.9)
(627.7)
805.4
(545.9)
(284.5)
(2.8)
(27.8)
188.6
324.6
513.2
568.4
(668.6)
(274.4)
(2.8)
(377.4)
(172.8)
497.4
324.6
2020
£m
287.0
(33.4)
–
–
5.8
259.4
–
–
–
–
–
–
–
–
27.6
–
(284.5)
(2.8)
(259.7)
(0.3)
(0.5)
(0.8)
Company
2019
£m
278.8
(28.0)
–
–
10.4
261.2
–
–
–
–
–
–
–
–
16.0
–
(274.4)
(2.8)
(261.2)
–
(0.5)
(0.5)
Note
A1
22
A6
12
13
9
16
27061-UU-AR2020-Financials.indd 205
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 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
Page
Operations – information relating to our operating results
1
2
3
Segmental reporting
Revenue
Directors and employees
211
211
212
4
18
A1
Operating profit
Leases
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
214
214
216
217
220
17
24
A2
A3
A4
Borrowings
Share capital
Net debt
Borrowings
Financial risk management
Working capital – information relating to the day-to-day working capital of our business
14
15
16
Inventories
Trade and other receivables
Cash and cash equivalents
219
219
220
22
A6
Trade and other payables
Related party transactions
Tax – information relating to our current and deferred taxation
7
Tax
215
20 Deferred tax liabilities
Employees – information relating to the costs associated with employing our people
3
19
Directors and employees
Retirement benefit surplus
212
222
A5 Retirement benefits
Long-term assets – information relating to our long-term operational and investment assets
10
11
12
Property, plant and equipment
Intangible assets
Investment in joint ventures
Other – other useful information
21
23
25
Provisions
Other reserves
Contingent liabilities
217
218
218
223
224
226
13
19
A5
Other investments
Retirement benefit surplus
Retirement benefits
26
A7
A8
Events after the reporting period
Accounting policies
Subsidiaries and other group undertakings
213
221
227
221
225
227
230
232
223
245
223
240
219
222
240
226
246
251
206
27061-UU-AR2020-Financials.indd 206
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United Utilities Group PLC unitedutilities.com/corporate 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 in the form of cash and committed bank facilities as
well as consideration of the group's capital adequacy, along with
a baseline plan which reflects a view of the estimated impact of
the COVID-19 pandemic on the group. This baseline plan assumes
restrictions and social distancing extend through the summer of
2020 resulting in a one year GDP reduction of 8 per cent which
takes 10 quarters to recover, unemployment peaking at 9 per cent,
CPIH inflation reducing to zero in the year to March 2021 and
then increasing gradually, and non-household business revenues
reduced by around 30 per cent in the year to 31 March 2021 before
being rebalanced through the revenue cap in subsequent years.
This baseline plan has then been subject to a further more extreme
downside stress scenario with elevated levels of bad debt persisting
in the medium term, increased totex costs, outcome delivery
incentive penalties and lower CPIH inflation. Mitigating actions
were considered to include access to new debt finance; deferral of
capital expenditure; close out of derivative asset balances; access
to additional equity and deferral of dividends.
Having considered these matters, the directors do not believe there
are any material uncertainties to disclose in relation to the group's
ability to continue as a going concern.
Adoption of new and revised standards
The following standards, interpretations and amendments, effective
for the year ended 31 March 2020, are relevant to the group but
have had no material impact on the group’s financial statements:
›
›
›
›
IFRIC 23 'Uncertainty over Income Tax Treatments' (issued on 7
June 2017;
Amendments to IFRS 9 'Prepayment Features with Negative
Compensation' (issued on 12 October 2017);
Amendments to IAS 28 'Long-term interests Associates and
Joint Ventures' (issued on 12 October 2017);
Amendments to IAS 19 'Plan Amendment, Curtailment or
Settlement' (issued on 7 February 2017); and
›
Annual Improvements to IFRS Standards 2015–2017 Cycle
(issued on 12 December 2017)
The following standards, interpretations and amendments, effective
for the year ended 31 March 2020, have had a material impact on
the group’s financial statements – this impact is discussed further
below:
IFRS 16 'Leases' (issued on 13 January 2016)
›
IFRS 16 ‘Leases’
The group adopted IFRS 16 on 1 April 2019, applying the modified
retrospective transitional approach permitted by the standard in
which both the right-of-use assets and lease liabilities brought onto
the balance sheet were based on the present value of future lease
payments at the adoption date calculated using the appropriate
discount rate at 1 April 2019. Prior year comparatives have not been
restated. The group has utilised the practical expedient permitted
by the standard whereby a single discount rate has been applied
to portfolios of leases with reasonably similar characteristics.
Following initial adoption of the standard, lease liabilities and right-
of-use assets for new leases are based on the appropriate discount
rate at the date the new contract is entered into.
The value of right-of-use assets and lease liabilities brought onto
the balance sheet on 1 April was £54.4 million; there has been
no effect on retained earnings at the adoption date. The income
statement charge during the year ending 31 March 2020 has
been £3.5 million, split between £1.9 million of depreciation of
the right-of-use assets and £1.6 million in relation to the finance
charge recognised on the lease liabilities. This compares with
£3.3 million of operating lease expenses that would have been
recognised under IAS 17. Although the adoption of IFRS 16 has
directly impacted the profit for the group during the period, the
modest £0.2 million impact means that the EPS and diluted EPS
of the group have not been materially changed by the adoption of
IFRS 16. There has been no net cash flow impact arising from the
application of the new standard.
At 31 March 2020, the value of right-of-use assets included within
property, plant and equipment was £57.4 million and the value of
lease liabilities included within borrowings was £57.6 million, of
which £54.7 million was classified as non-current and £2.9 million
was classified as current.
As part of the group’s transition to IFRS 16 an exercise was carried
out to assess whether contracts it has entered into are, or contain,
leases as defined by the new standard. This has resulted in some
differences between the population of contracts identified as
containing leases under previous accounting standards, and for
which operating lease commitments were disclosed at 31 March
2019, and the population of contracts deemed to contain leases
under IFRS 16. Had all operating lease commitments disclosed
under previous accounting standards at 31 March 2019 been
recognised as leases under IFRS 16, by discounting future lease
payments using the group’s weighted average incremental
borrowing rate applied to lease liabilities of 3.09 per cent, the
right-of-use assets and lease liabilities brought onto the balance
sheet would have been £18.0 million higher. Expenses relating to
those contracts that do not contain leases within the scope of IFRS
16 continue to be recognised as operating expenses in the income
statement over the term of the agreement.
The typical items which the group leases include land, buildings,
operational assets and vehicles. The right-of-use assets and lease
liabilities 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
27061-UU-AR2020-Financials.indd 207
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Accounting policies
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 applying 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 it is not
implicit in the lease contract.
Due to the nature of the group’s operations, many of the current
leases have long remaining terms, which causes the discount rate
to be a key factor in determining the value of the lease liability.
When 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 is based on the relevant group
company’s nominal incremental borrowing rate adjusted for the
payment profile and term of each lease.
The group has applied recognition exemptions permitted by the
standard in relation to short-term leases and leases of low-value
items.
The adoption of IFRS 16 has not impacted the group’s ability to
comply with any banking or financing covenants.
Clarifications on the application of IFRS 16 made in IFRIC agenda
decisions during the year ('Subsurface rights' – June 2019; 'Lessee's
incremental borrowing rate' – September 2019; 'Lease term and
useful life of leasehold improvements' – November 2019; 'Definition
of a lease – decision making rights' – January 2020) have not
affected our application of the standard.
Early adopted new and revised standards
Interest Rate Benchmark Reform: Amendments to
IFRS 9, IAS 39 and IFRS 7
In January 2020, the EU endorsed the IASB-published amendments
to IFRS 9 ‘Financial Instruments’, IAS 39 ‘Financial Instruments:
Recognition and Measurement’ and IFRS 7 ‘Financial Instruments:
Disclosures’ in respect of interest rate benchmark reform, effective
for annual periods beginning on or after 1 January 2020 with
early adoption permitted. These amendments provide temporary
exceptions from applying specific hedge accounting requirements
where a hedging relationship is directly or indirectly affected by
the market-wide interest rate benchmark reform, where certain
financial market benchmark reference rates (such as LIBOR) will be
required to be changed to nearly risk-free alternative rates.
As the group has a significant proportion of debt and derivative
financial instruments designated in fair value hedge relationships
that are linked to LIBOR, which is expected to be replaced by an
alternative interest rate benchmark after 2021, these amendments
are applicable to the group’s hedge accounting. The temporary
exceptions provided for in the amendments mean that no changes
to the group’s hedge accounting are expected to the extent
that they are impacted by interest rate benchmark reform. In
accordance with the published provisions, these amendments are
adopted retrospectively to hedging relationships that existed at the
start of the reporting period. The relief set out in this amendment
will end at the earlier of when the uncertainty regarding the timing
and amount of interest rate benchmark-based cash flows is no
longer present, or the discontinuation of the hedging relationship.
The group’s treasury function is actively considering and preparing
for the potential implications of interest rate benchmark reform in
anticipation of any changes.
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
208
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.
As part of the evaluation of critical accounting judgements and
key sources of estimation uncertainty, the group has considered
the implications of climate change on its operations and activities.
The group has considered the potential financial statement
impacts, including asset lives and impairments and identified
that the environmental impact of certain bioresources assets
were considered as part of the strategic review leading to the
conclusion that the chances of any future economic benefit being
derived from these assets is now considered remote and resulting
in accelerated depreciation as set out in the Property, Plant and
Equipment section below.
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, including specific considerations in light of the
COVID-19 pandemic.
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 bills de-recognised and has more
than their current year debt outstanding.
This two-criteria approach resulted in a £19.4 million reduction in
revenue compared with what would have been recognised had
no adjustment been made for amounts where collectability is
not reasonably assured. 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 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 £8.5 million
lower.
Accounting estimate – At each reporting date, the company and
each of its subsidiaries evaluate the estimated recoverability
of trade receivables and record allowances for expected credit
losses based on experience. Estimates 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 2020,
the allowance for expected credit losses relating to household
customer debt of £49.4 million was supported by a six-year cash
collection projection. Based on a five-year or seven-year cash
27061-UU-AR2020-Financials.indd 208
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United Utilities Group PLC unitedutilities.com/corporate collection projection the allowance for doubtful receivables
would have increased by £2.3 million or reduced by £0.8 million
respectively.
In the current year, the expected future impact of the COVID-19
pandemic on the ability of some customers to pay their bills has
specifically been taken into consideration as part of the expected
credit loss assessment for trade receivables. This has given rise
to a further £16.7 million incremental increase in the allowance
for expected credit losses based on judgements around the likely
impact of the pandemic on the non-payment risk profile of the
group’s customer base on a segmented basis. Scenarios have
been modelled based on a moderate, shorter-term pandemic
impact, and a more severe and longer-lasting impact. In arriving at
the £16.7 million increase, the outcomes of these scenarios have
been weighted on a 50:50 basis representing management’s best
estimate of their relative probability. If this weighting were 70:30
towards either the more severe scenario or the more moderate
scenario, the incremental allowance relating to the COVID-19
pandemic would be +/- £1.6 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 household 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 2020 was £54.6 million.
Had actual consumption been 5 per cent higher or lower than the
estimate of units supplied, this would have resulted in revenue
recognised for unbilled amounts being £4.5 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.
Revenue in relation to wholesale charges billed to non-household
retailers is recognised based on a series of settlement statements
produced by the Central Market Operating System (CMOS).
These statements are based on a combination of meter readings
and estimated consumption. Due to the iterative nature of the
settlement process, the final wholesale charge for a period is
not known until 16 months after that period. Accordingly, an
estimate of credit notes that may need issuing in the future, for
example where future statements include allowances or premises
subsequently marked as vacant, is required. The estimated credit
note provision is based on an analysis of historic changes to
wholesale charges as settlement statements are received. At 31
March 2020, the credit note provision, and therefore the revenue
not recognised in relation to billed amounts, was £21.5 million.
Due to temporary business closures required as a result of
lockdown measures introduced by the UK Government during
March 2020, the level of non-household consumption fell
significantly in the final two weeks of March. As part of its
measures to protect liquidity within the non-household market,
Ofwat introduced a change to the market code to allow retailers to
temporarily mark premises as vacant where they had been forced
to close. Due to the timing of the code change, the impact of
increased vacancy had not flowed through to CMOS billing reports
at the end of March 2020, an estimate of the expected reduction
in revenue compared with what was billed for March 2020 has,
therefore, been required. The level of revenue not recognised
since lockdown measures began, is £7.1 million based on estimates
received from retailers pending a full analysis, reduction in
consumption during this period. If actual consumption was 20 per
cent lower in this period the revenue not recognised would have
been around £5.5 million, and if actual consumption were 40 per
cent lower the revenue not recognised would have been around
£8.7 million.
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 67 per cent of total spend in relation to
infrastructure assets during the year. A change of +/- 1 per cent
would have resulted in £4.4 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 44 per cent of total
support costs. A change in allocation of +/- 10 per cent would have
resulted in £5.6 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 economic lives have been required, during
the current year PPE with a net book value of £82.3 million was
written down to £nil following a review of the group's bioresources
strategy, which concluded that because of improvements in
alternative lower-cost and more environmentally friendly processes
the likelihood of these assets generating future economic benefit
is now considered to be remote. As such these assets are deemed
to have reached the end of their useful economic lives earlier than
previously anticipated. Excluding this accelerated depreciation,
the depreciation and amortisation expense for the year was £397.9
million. A 10 per cent increase in average asset lives would have
resulted in a £37.4 million reduction in this figure and a 10 per cent
decrease in average asset lives would have resulted in a £42.7
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.
27061-UU-AR2020-Financials.indd 209
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 part of the group's long-term interest in Water Plus. If the future
cash flows had been 10 per cent lower this would have resulted
in the group's unrecognised share of losses increasing by £12.0
million.
Accounting estimate – The significant economic impact of the
COVID-19 pandemic has given rise to a significant increase in credit
risk in respect of loans extended to Water Plus. Accordingly, these
balances have been assessed for expected credit losses, which have
been estimated based on a forward-looking economic assessment
derived from Water Plus’s latest board-approved business plan out
to 2025, assuming a 2 per cent growth rate beyond this point and
Water Plus securing external financing of a portion of its working
capital in the year ending 31 March 2023. A 2.5 per cent (1 in 40
years) probability of a loss event occurring in a given year during
which loan balances are assumed to be outstanding has been
considered against the forward-looking economic assessment and
applied against the assumed outstanding loan balances. Various
scenarios have then been modelled based on higher and lower
generation of free cash that could be used to repay the loans,
and these have been probability-weighted to give an expected
credit loss estimated at £5.0 million as at 31 March 2020. Within
the expected credit loss assessment the most significant source
of estimation uncertainty is considered to be the level of trade
receivables that could be recovered in the event of Water Plus
suffering a liquidation event, with the group having estimated
that 70 per cent of Water Plus’s gross trade receivables could
be recovered. If the recovery rate were 60 per cent, the group’s
expected credit losses in respect of loans to Water Plus would have
been £2.1 million higher, and if the recovery rate were 80 per cent
the group’s expected credit losses would have been £2.2 million
lower.
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.
Accounting policies
Accounting estimate – Included within the group’s defined benefit
pension scheme assets are assets with a fair value estimated to
be £232.1 million that are categorised as ‘level 3’ assets within
the IFRS 13 ‘Fair value measurement’ hierarchy, meaning that
the value of the assets is not observable at 31 March 2020. The
fair value of these assets has been estimated based on the latest
available observable prices, updated with reference to movements
in comparable observable indices to the reporting date, and
adjusted for judgements to reflect differences in the liquidity and
credit components of the asset pricing. Judgement is required in
estimating the fair value of these assets, with the values estimated
to fall within a range of £219 million and £245 million.
Joint ventures – Water Plus
Accounting judgement – The group’s financial interests in Water
Plus Group Limited, a joint venture with Severn Trent PLC,
comprise an investment in the ordinary shares of Water Plus,
and loans issued to the joint venture in the form of revolving
credit facilities and a zero coupon shareholder loan note, further
details of which are included in note A6. Judgement is required in
determining whether these loans form part of the group’s long-
term interest in Water Plus whose value would be reduced in
accordance with the group’s share of joint venture losses in excess
of the value of its equity investment when applying the equity
method in accordance with IAS 28 ‘Investments in Associates and
Joint Ventures’. As they bear interest, have a relatively near-term
expiry date and tend to fluctuate as amounts are drawn down and
repaid, the revolving credit facilities are not considered to be part
of the group’s long-term interest in Water Plus. In contrast, the zero
coupon shareholder loan notes are considered to be part of the
group’s long-term interest given that they do not bear interest and
have a longer-term maturity. Had an alternative judgement been
applied such that the revolving credit facilities were considered to
be part of the group’s long-term interest in Water Plus, the group’s
£5.3 million unrecognised share of Water Plus’s losses for the year
(see note 12) would have been recognised in the income statement
resulting in a higher share of losses from joint ventures, and the
carrying value of the amount owed by Water Plus in respect of the
revolving credit facility (see note A6) would have been reduced
by this amount. Similarly, had an alternative judgement been
applied such that the zero coupon shareholder loan note were not
considered to be part of the group’s long-term interest in Water
Plus, the group’s share of Water Plus losses for the year would have
been £9.5 million lower.
Accounting estimate – During the year, the impact of the COVID-19
pandemic crystallised an impairment of £51.1 million in Water Plus,
which was recognised in relation to the joint venture’s goodwill
and certain intangible assets and was a significant contributor to
Water Plus’s losses for the year, of which the group has allocated
its share against its equity investment and other long-term interest
in the joint venture. The impairment assessment undertaken by the
management of Water Plus was calculated based on the company’s
value in use, 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. The
inputs into the value in use assessment were subject to judgements
in respect of the future cash flows included in the Water Plus five-
year business plan, discount rate, and terminal growth rate. If the
future cash flows were 10 per cent higher than those included in
the Water Plus impairment assessment this would have resulted in
a £12.0 million reduction in the group's share of Water Plus losses,
eliminating the £5.3 million unrecognised loss and reducing by £6.7
million the share of Water Plus losses recognised by the group. This
would have resulted in a corresponding £6.7 million increase in the
carrying value of the zero coupon shareholder loan notes forming
210
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United Utilities Group PLC unitedutilities.com/corporate 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 91). 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 1 per cent of external
revenue and non-current assets being overseas.
Wholesale water charges
Wholesale wastewater charges
Household retail charges
Other
2020
£m
784.8
939.5
83.8
51.2
2019
£m
767.4
905.8
86.7
58.6
1,859.3
1,818.5
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 removal and treatment 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.
Wholesale water and wastewater charges relate to services provided to household customers and non-household retailers. Household
retail charges relate solely to the margin applied to the wholesale amounts charged to residential customers. These wholesale charges and
the applicable retail margin are combined in arriving at the total revenues relating to water and wastewater services provided to household
customers. No margin is applied to wholesale water and wastewater services provided to non-household retailers.
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.
27061-UU-AR2020-Financials.indd 211
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements
3 Directors and employees
Directors’ remuneration
Fees to non-executive directors
Salaries
Benefits
Bonus
Share-based payment charge
2020
£m
0.8
1.4
0.3
0.7
1.0
4.2
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 163 to 176.
Remuneration of key management personnel
Salaries and short-term employee benefits
Share-based payment charge
2020
£m
6.4
1.3
7.7
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 19)
Defined contribution pension expense (see note 19)
Charged to other areas including regulatory capital schemes
Employee benefits expense
2020
£m
229.6
23.8
7.2
12.3
22.5
34.8
(134.0)
161.4
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
Included within employee benefits expense were £11.8 million (2019: £7.2 million) of restructuring costs.
In the prior year, £6.6 million of costs associated with the equalisation of Guaranteed Minimum Pension (GMP) benefits were recognised,
along with £1.4 million of employee costs incurred in relation to the group's response to a severe dry weather event.
The total expense included within employee benefits expense in respect of equity-settled share-based payments was £1.5 million (2019:
£4.0 million). The company operates several share option schemes, details of which are given on pages 166 to 169 in the Directors’
remuneration report.
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.
2020
number
5,302
2019
number
5,267
212
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United Utilities Group PLC unitedutilities.com/corporate 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
Power
Property rates
Materials
Regulatory fees
Loss on disposal of property, plant and equipment
Cost of properties disposed
Settlement of commercial claims
Other expenses
Allowance for expected credit losses – trade and other receivables
Allowance for expected credit losses – trade and other receivables (see note 15)
Other income
Other income
Depreciation and amortisation expense
Depreciation of property, plant and equipment: owned assets (see note 10)
Amortisation of intangible assets (see note 11)
2020
£m
96.6
78.9
75.9
75.1
28.3
13.9
0.4
–
34.3
403.4
41.8
41.8
(3.4)
(3.4)
441.6
41.2
482.8
2019
£m
112.2
72.8
94.7
77.8
32.5
3.9
4.7
(9.9)
34.1
422.7
26.5
26.5
(3.6)
(3.6)
357.3
35.9
393.2
Included within depreciation of property, plant and equipment for the current year is £82.3 million relating to the accelerated depreciation
of certain bioresources assets, primarily incineration assets at the group's Mersey Valley Sludge Processing Centre, known as Shell Green.
These assets have been fully depreciated in the year following a strategic bioresources review, as the likelihood of the group deriving
future economic benefit from them is now considered remote in light of improvements in alternative lower-cost and more environmentally
friendly processes. In addition to this, inventory spares held for use by these assets have been written down to £nil.
During the current year, the group incurred operating costs of £19.2 million relating to the COVID-19 pandemic, comprising £16.7 million in
relation to allowances for expected credit losses in respect of household trade receivables and £1.4 million allowances for expected credit
losses in respect of non-household trade receivables.
Property rates expenses in the current year include the impact of an £8.1 million refund in relation to rates paid in previous years resulting
from a revision to the rateable value of the group's water assets as agreed with the Valuation Office Agency (VOA). This reduction ensures
that the cumulative property rates paid by the group are appropriately recorded. In addition to this, accrued property rates relating to
wastewater assets have been reassessed during the current year resulting in an £8.2 million reduction in rates costs reflecting properties
identified as being non-rateable and management's revised estimate of the likely rates payable on properties whose rateable values are yet
to be assessed.
During the current year, operating costs of £3.1 million and infrastructure renewals expenditure of £4.7 million were incurred in response to
Storms Ciara and Dennis that occurred in February 2020.
During the prior 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, £10.1 million of infrastructure renewals expenditure and £1.4 million of employee costs
(see note 3).
Research and development expenditure for the year ended 31 March 2020 was £1.0 million (2019: £1.2 million)
During the year, the group obtained the following services from its auditor:
Audit services
Statutory audit – group and company
Statutory audit – subsidiaries
Non-audit services
Regulatory audit services provided by the statutory auditor
Other non-audit services
2020
£’000
2019
£’000
119
355
474
62
77
613
97
340
437
47
65
549
213
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements
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 19)
6 Finance expense
Interest payable
Interest payable on borrowings held at amortised cost(1)
Fair value losses/(gains) 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
Fixed interest rate swaps(5)
Net receipts on derivatives and debt under fair value option
Inflation swaps(5)
Other
Net fair value losses/(gains) on debt and derivative instruments(6)
2020
£m
6.0
4.0
14.0
24.0
2020
£m
231.7
231.7
87.1
(68.6)
18.5
57.8
(49.8)
8.0
52.3
(15.3)
13.4
(0.6)
49.8
76.3
308.0
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
Notes:
(1)
Includes a £100.8 million (2019: £98.3 million) non-cash inflation expense repayable on maturity in relation to the group’s index-linked debt and £1.6 million
(2019: £nil) interest expense on lease liabilities, representing the unwinding of the discounting applied to future lease payments.
Includes foreign exchange losses of £14.8 million (2019: £37.6 million gains). These losses/gains are largely offset by fair value gains/losses on derivatives.
Under the provisions of IFRS 9 ‘Financial instruments’, a £1.3 million fair value gain resulting from changes to the foreign currency basis spread (2019: £2.2
million loss) has been recognised in other comprehensive income rather than profit or loss as they relate to items designated in an accounting hedge
relationship.
Under the provisions of IFRS 9 ‘Financial instruments’, a £34.2 million fair value gain resulting from changes in the group’s own credit risk (2019: £6.6
million gain) has been recognised in other comprehensive income rather than 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 £16.0 million income (2019: £30.6 million) due to net interest on derivatives and debt under fair value option and £0.5 million income (2019: £nil)
due to non-cash inflation uplift on index-linked derivatives.
(2)
(3)
(4)
(5)
(6)
Interest payable is stated net of £40.6 million (2019: £37.4 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 3.2 per
cent (2019: 3.1 per cent) to expenditure on such assets as prescribed by IAS 23 ‘Borrowing Costs’.
In addition to the £308.0 million finance expense, a £5.0 million allowance for expected credit losses was recognised during the year (2019:
£nil) in respect of loans to the group's joint venture, Water Plus (see note A6 for further details).
214
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United Utilities Group PLC unitedutilities.com/corporate
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
Change in tax rate
Total deferred tax charge for the year
Total tax charge for the year
2020
£m
51.1
(12.2)
38.9
16.4
5.6
22.0
135.5
157.5
196.4
2019
£m
41.6
(2.8)
38.8
35.4
(1.4)
34.0
–
34.0
72.8
The deferred tax charge of £135.5 million (2019: £nil) reflects the Government's reversal of the planned reduction in the rate of corporation
tax from 19 per cent to 17 per cent from 1 April 2020.
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 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
Change in tax rate
Net expense/(income) not taxable
Deferred tax rate adjustment
Total tax charge and effective tax rate for the year
2020
£m
303.2
57.6
(6.6)
135.5
9.9
–
196.4
2020
%
19.0
(2.2)
44.7
3.2
–
64.7
2019
£m
436.2
82.9
(4.2)
–
(1.8)
(4.1)
72.8
2019
%
19.0
(1.0)
–
(0.4)
(0.9)
16.7
The prior year deferred tax rate adjustment comprises the deferred tax movement calculated at the then future tax rate from April 2020 of
17 per cent rather than the current rate of 19 per cent.
In the prior year, there is also an adjustment for items included in retained earnings, following the adoption of IFRS 15.
The increase in the net expense not taxable is mainly due to the increase in losses from our joint venture interest in Water Plus.
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 net losses/(profits)
Expenses not deductible/(income not taxable) for tax purposes
Depreciation charged on non-qualifying assets
Current tax charge for the year
2020
£m
303.2
57.6
(82.1)
81.6
11.7
(22.5)
(7.7)
2.6
(12.2)
7.2
0.5
2.2
38.9
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
The group's current tax charge is lower than the UK headline rate of 19 per cent, primarily due to a range of adjustments which are simply
timing differences between recognition of the income or expense in the accounts and in the related tax computations submitted to HMRC.
These include deductions in relation to capital spend, pension timing differences, unrealised profits or losses in relation to financing and
related treasury derivatives and capitalised interest.
27061-UU-AR2020-Financials.indd 215
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements
7 Tax continued
The current year net timing differences in relation to capital spend, i.e. capital allowances less depreciation, was lower than the prior year
due to the atypical bioresources asset write down in the period, together with the reduction in the rate of long life plant and machinery tax
allowances from 8 per cent to 6 per cent from April 2019.
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 current year pension timing differences of £22.5 million was higher than the prior year mainly due to the company making accelerated
deficit repair contributions of £103.0 million in April 2019.
The current year adjustments to tax charge in respect of prior years of £12.2 million was higher than the prior year mainly due to the
agreement of various capital allowance matters from earlier years.
The joint venture profits in the prior year are mainly our share of profits relating to AS Tallinna Vesi. In the current year, the AS Tallinna Vesi
profits are offset by our share of the losses in relation to Water Plus.
Tax on items taken directly to equity
Deferred tax (see note 20)
On remeasurement gains on defined benefit pension schemes
Adjustments in respect of prior years on net fair value gains
On net fair value gains on credit assumptions for debt reported at fair value through
profit and loss and cost of hedging
Total tax charge on items taken directly to equity
2020
£m
150.0
2.4
6.7
159.1
2019
£m
12.4
–
0.8
13.2
The tax adjustments taken to equity, primarily relate to remeasurement movements on the group’s defined benefit pension schemes
including the adjustment arising from a change in the rate at which the deferred tax liabilities are measured, from 17 per cent to 35 per
cent. This change in rate reflects a revised judgement as to the most likely method by which the defined benefit pension surplus would be
realised. Whereas previously it was assumed that the surplus could be realised through a reduction in future contributions, management
now consider that the most likely method of realisation would be through a refund, which would be taxed at the rate applicable to refunds
from a trust (currently 35 per cent).
8 Earnings per share
Profit after tax attributable to equity holders of the company – continuing operations
Earnings per share
Basic
Diluted
2020
£m
106.8
2020
pence
15.7
15.6
2019
£m
363.4
2019
pence
53.3
53.2
Basic earnings per share is calculated by dividing profit after tax for the financial year attributable to equity holders of the company by
681.9 million, being the weighted average number of shares in issue during the year (2019: 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 683.6 million, being the
weighted average number of shares in issue during the year including dilutive shares (2019: 683.4 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
2020
million
681.9
1.7
683.6
2019
million
681.9
1.5
683.4
216
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United Utilities Group PLC unitedutilities.com/corporate 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 2019 at 27.52 pence per share (2018: 26.49 pence)
Interim dividend for the year ended 31 March 2020 at 14.20 pence per share (2019: 13.76 pence)
Proposed final dividend for the year ended 31 March 2020 at 28.40 pence per share (2019: 27.52 pence)
2020
£m
187.7
96.8
284.5
193.7
2019
£m
180.6
93.8
274.4
187.7
The proposed final dividends for the years ended 31 March 2020 and 31 March 2019 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 2020 and 31 March 2019.
10 Property, plant and equipment
Land and
buildings
£m
Infra-
structure
assets
£m
Operational
assets
£m
Fixtures,
fittings, tools
and
equipment
£m
Assets in
course of
construction
£m
367.2
5,386.3
7,250.8
526.6
Group
Cost
At 1 April 2018
Additions
Transfers
Disposals
At 31 March 2019
Opening balance adjustment on adoption
of IFRS 16
Additions
Transfers
Disposals
At 31 March 2020
Accumulated depreciation
At 1 April 2018
Charge for the year
Transfers
Disposals
At 31 March 2019
Charge for the year
Disposals
At 31 March 2020
Net book value at 31 March 2019
Net book value at 31 March 2020
5.5
(12.1)
(0.9)
60.8
43.3
–
359.7
5,490.4
126.3
87.3
(42.3)
7,422.1
4.4
157.5
358.8
(251.2)
–
140.5
131.1
(31.5)
5,730.5
7,691.6
385.4
35.4
0.5
–
421.3
44.4
(31.2)
434.5
5,069.1
5,296.0
3,092.3
279.3
–
(37.7)
3,333.9
353.5
(237.1)
3,450.3
4,088.2
4,241.3
48.6
6.0
6.0
(13.6)
406.7
119.7
8.3
(0.5)
(0.6)
126.9
9.8
(13.5)
123.2
232.8
283.5
Total
£m
14,759.3
726.2
–
(49.7)
11.6
6.5
(6.5)
1,228.4
522.0
(125.0)
–
538.2
1,625.4
15,435.8
1.4
10.1
24.1
(13.1)
560.7
371.4
34.3
–
(5.4)
400.3
33.9
(12.8)
421.4
137.9
139.3
–
445.4
(520.0)
–
1,550.8
–
–
–
–
–
–
–
–
1,625.4
1,550.8
54.4
759.5
–
(309.4)
15,940.3
3,968.8
357.3
–
(43.7)
4,282.4
441.6
(294.6)
4,429.4
11,153.4
11,510.9
Included within the net book value at 31 March 2020 is £57.4 million relating to leased assets. Further details on the group's leases are
disclosed in note 18.
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 2020, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to
£432.6 million (2019: £300.7 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 2020 or 31 March 2019.
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements
11
Intangible assets
Group
Cost
At 1 April 2018
Additions
At 31 March 2019
Additions
Disposals
At 31 March 2020
Accumulated amortisation
At 1 April 2018
Charge for the year
At 31 March 2019
Charge for the year
Disposals
At 31 March 2020
Net book value at 31 March 2019
Net book value at 31 March 2020
Total
£m
395.6
40.9
436.5
27.6
(22.7)
441.4
197.9
35.9
233.8
41.2
(22.6)
252.4
202.7
189.0
The group’s intangible assets relate mainly to computer software.
At 31 March 2020, the group had entered into contractual commitments for the acquisition of intangible assets amounting to £2.6 million
(2019: £1.5 million).
Company
The company had no intangible assets or contractual commitments for the acquisition of intangible assets at 31 March 2020 or 31 March
2019.
12 Investment in joint ventures
Group
At 1 April 2018
Share of profits of joint ventures
Dividends received from joint ventures
Currency translation differences
At 31 March 2019
Share of losses of joint ventures
Less: Losses allocated to other components of long-term interest
Dividends received from joint ventures
Currency translation differences
At 31 March 2020
£m
75.2
6.7
(2.2)
(0.7)
79.0
(38.1)
9.5
(4.9)
1.3
46.8
The group’s interests in joint ventures mainly comprise its 50 per cent interest in Water Plus Group Limited (Water Plus) and its 35.3 per
cent interest in 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.
The group’s total share of Water Plus losses for the year was £51.5 million (2019: £0.4 million share of losses), of which £46.2 million has
been recognised in the Income Statement and £5.3 million has not been recognised as at 31 March 2020 (2019: £nil not recognised). The
£46.2 million recognised share of losses comprises £36.7 million that has been allocated to the group’s equity investment, and £9.5 million
allocated to the zero coupon shareholder loan notes extended to Water Plus as these form part of the group’s long-term interest in the joint
venture. The share of losses recognised against each component of the group’s net investment in Water Plus has reduced each of them
to £nil at 31 March 2020. Of the £46.2 million recognised share of losses, £32.0 million represents the group’s recognised share of Water
Plus’s losses relating to the COVID-19 pandemic, including the crystallisation of an impairment of goodwill and certain other intangible
assets recognised by Water Plus, and a significant incremental charge to recognise additional expected credit losses in relation to trade
and other receivables. The remaining £14.2 million relates to the group’s share of Water Plus’s underlying loss for the year.
218
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United Utilities Group PLC unitedutilities.com/corporate 12 Investment in joint ventures continued
As at 31 March 2020, the carrying value of the group’s 35.3 per cent interest in Tallinn Water was £46.8 million (2019: £42.4 million). Tallinn
Water recognised a provision of EUR 13.2 million in its latest financial statements relating to possible third-party claims. The maximum
potential undiscounted payments if potential claims were recognised by the courts would amount to EUR 33.1 million. If the value of actual
claims exceed the amount provided 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 the period in which this occurs.
Other than the fact that at 31 March 2020 Water Plus did not have any distributable reserves, 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 2020 or 31 March 2019.
13 Other investments
Group
At the start of the period
Change in fair value
Reduction in investment stake
Disposal of investment
Currency translation differences
At the end of the period
2020
£m
11.5
0.6
(1.1)
(10.9)
–
0.1
2019
£m
7.1
4.4
(1.0)
–
1.0
11.5
On 3 December 2019, the group completed the disposal of its overseas investment in the Muharraq sewerage treatment plant (STP).
Consideration for the disposal was equal to the fair value at which the asset was carried resulting in no gain or loss on disposal.
Company
At 31 March 2020, the company’s investments related solely to its investments in United Utilities PLC, which was recorded at a cost of
£6,326.8 million (2019: £6,326.8 million).
14 Inventories
Group
Properties held for resale
Other inventories
Company
The company had no inventories at 31 March 2020 or 31 March 2019.
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
2020
£m
4.5
12.1
16.6
2019
£m
4.7
10.2
14.9
2020
£m
81.2
–
147.9
39.1
74.7
342.9
Group
Company
2019
£m
102.2
–
182.9
34.4
78.1
397.6
2020
£m
–
81.3
–
–
–
2019
£m
–
82.2
–
–
–
81.3
82.2
At 31 March 2020, the group had £97.0 million (2019: £148.1 million) of trade and other receivables classified as non-current, of which £95.0
million (2019: £143.5 million) was owed by related parties.
The carrying amounts of trade and other receivables approximates to their fair value at 31 March 2020 and 31 March 2019.
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements
15 Trade and other receivables continued
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
At the end of the year
2020
£m
56.5
41.8
(28.0)
1.1
71.4
2019
£m
63.4
26.5
(33.4)
–
56.5
Amounts charged to deferred income relate to amounts invoiced for which revenue has not yet been recognised in the income statement.
At each reporting date, the group evaluates the recoverability of trade receivables and records allowances for expected credit losses which
are measured in a way that reflects an unbiased and probability-weighted amount that is determined by evaluating a range of possible
outcomes and considers past events, current conditions and forecasts of future conditions. In the current year, an allowance for expected
credit losses of £18.1 million was recognised in relation to trade and other receivables reflecting the direct impact of the COVID-19
pandemic.
At 31 March 2020 and 31 March 2019, 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:
At 31 March 2020
Gross trade receivables
Allowance for expected credit losses
Net trade receivables
At 31 March 2019
Gross trade receivables
Allowance for expected credit losses
Net trade receivables
Aged
less than one
year
£m
72.8
Aged
between one
year and two
years
£m
31.6
Aged
greater than
two years
£m
43.4
(19.3)
53.5
(15.7)
15.9
(36.4)
7.0
Aged
less than one
year
£m
Aged
between one
year and two
years
£m
Aged
greater than
two years
£m
69.1
(5.3)
63.8
36.5
(10.9)
25.6
42.0
(40.2)
1.8
Carrying
value
£m
146.9
(71.4)
76.4
Carrying
value
£m
147.7
(56.5)
91.2
At 31 March 2020, the group had £4.8 million (2019: £11.0 million) of trade receivables that were not past due.
Company
At 31 March 2020 and 31 March 2019, 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 2020 and 31 March 2019.
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
2020
£m
33.0
495.1
528.1
(14.9)
513.2
Group
2019
£m
4.7
334.6
339.3
(14.7)
324.6
2020
£m
–
–
–
(0.8)
(0.8)
Company
2019
£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.
220
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United Utilities Group PLC unitedutilities.com/corporate 17 Borrowings
Group
Non-current liabilities
Bonds
Bank and other term borrowings
Lease liabilities
Current liabilities
Bonds
Bank and other term borrowings
Book overdrafts (see note 16)
Lease liabilities
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)
2020
£m
5,648.5
1,814.9
54.7
7,518.1
–
827.2
14.9
2.9
845.0
8,363.1
2020
£m
1,752.0
1,752.0
0.8
0.8
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
Borrowings are unsecured and are measured at amortised cost. The carrying amounts of borrowings approximate their fair value.
18 Leases
As part of its activities, the group typically leases items such as land, buildings and vehicles. The group does not typically lease assets on a
short-term basis or enter into leases for low value assets and therefore no material costs were incurred during the year, either individually
or in aggregate, in relation to lease contracts with a duration of less than 12 months or for low value assets.
Lease terms range from one year to 999 years. Due to the nature of the group's operations, many of the group's leases have extremely long
terms.
The maturity profile in the following table represents the future contractual lease payments on an undiscounted basis.
1,752.8
1,718.9
Less than 1 year
1 to 5 years
5 to 10 years
10 to 25 years
25 to 50 years
50 to 100 years
100 to 500 years
Longer than 500 years
2020
£m
2.9
8.9
9.7
25.2
40.5
80.1
106.9
3.2
277.4
2019*
£m
–
–
–
–
–
–
–
–
–
* The group has chosen to use the modified retrospective transitional approach in adopting IFRS 16 'Leases', therefore prior year comparatives have not been
restated.
Right-of-use assets are included within property, plant and equipment in the statement to financial position. Details of the right-of-use
assets, by class of assets are as follows:
Cost
Property
Land
Operational assets
Vehicles
2020
£m
37.0
15.8
4.8
1.7
59.3
2019*
£m
–
–
–
–
–
221
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements
18 Leases continued
Accumulated depreciation
Property
Land
Operational assets
Vehicles
2020
£m
0.8
0.2
0.1
0.9
2.0
2019*
£m
–
–
–
–
–
* The group has chosen to use the modified retrospective transitional approach in adopting IFRS 16 'Leases', therefore prior year comparatives have not been
restated.
Further details on additions and disposals of right-of-use assets can be found in note 10.
During the year ending 31 March 2020, £1.6 million of interest expense on lease liabilities was recognised, representing the unwinding of
the discounting applied to future lease payments (see note 6).
The carrying amount of lease liabilities is included within borrowings (see note 17).
The total cash outflow for leases for the year end 31 March 2020 was £3.3 million, of this £1.6 million was payment of interest and £1.7
million payment of principal.
19 Retirement benefit surplus
Defined benefit schemes
The net pension (income)/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 (income)/expense (credited)/charged before tax
2020
£m
6.1
4.6
1.6
12.3
(14.0)
(1.7)
2019
£m
6.2
9.0
2.8
18.0
(9.5)
8.5
Defined benefit pension costs excluding curtailments/settlements included within employee benefit expense were £7.7 million (2019: £9.0
million) comprising current service costs and administrative expenses. Total post-employment benefits expense excluding curtailments/
settlements charged to operating profit of £30.2 million (2019: £32.0 million) comprise the defined benefit costs described above of £7.7
million (2019: £9.0 million) and defined contribution pension costs of £22.5 million (2019: £23.0 million) (see note 3).
Included within curtailments/settlements is £nil (2019: £6.6 million) relating to the equalisation of GMP benefits (see note A5 for further
details).
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
Income/(expense) recognised in the income statement
Contributions
Remeasurement gains gross of tax
At the end of the year
2020
£m
483.9
1.7
113.9
154.6
754.1
2019
£m
344.2
(8.5)
75.2
73.0
483.9
Included in the contributions paid of £113.9 million (2019: £75.2 million) were deficit repair contributions of £103.0 million (2019: £66.1
million), enhancements to benefits provided on redundancy of £1.9 million (2019: £1.6 million), payments in relation to historic unfunded,
unregistered retirement benefit schemes of £1.4 million (2019: £nil), and administration expenses of £0.4 million (2019: £0.5 million).
Following the 2018 actuarial valuation, contributions in relation to current service cost remained stable at £7.2 million (2019: £7.0 million).
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 gains/(losses) arising from changes in financial assumptions
Actuarial (losses)/gains arising from changes in demographic assumptions
Actuarial gains arising from experience
Remeasurement gains on defined benefit pension schemes
For more information in relation to the group’s defined benefit pension schemes see note A5.
222
2020
£m
(131.6)
257.3
(7.2)
36.1
154.6
2019
£m
58.5
(160.6)
70.9
104.2
73.0
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United Utilities Group PLC unitedutilities.com/corporate 19 Retirement benefit surplus continued
Defined contribution schemes
During the year, the group made £22.5 million (2019: £23.0 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 2020 and 31 March 2019.
20 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 2018
Charged/(credited) to the income statement (see note 7)
Charged to equity (see note 7)
At 31 March 2019
Charged/(credited) to the income statement (see note 7)
Change in tax rate
Charged to equity (see note 7)
At 31 March 2020
Accelerated
tax
depreciation
£m
Retirement
benefit
obligations
£m
1,049.9
26.8
–
1,076.7
13.2
127.5
–
1,217.4
58.5
11.3
12.4
82.2
22.0
9.7
150.0
263.9
Other
£m
(9.6)
(4.1)
0.8
(12.9)
(13.2)
(1.7)
9.1
(18.7)
Total
£m
1,098.8
34.0
13.2
1,146.0
22.0
135.5
159.1
1,462.6
Certain deferred tax assets and liabilities have been offset in accordance with IAS 12 ‘Income Taxes’.
The deferred tax charge of £135.5 million (2019: £nil) reflects the Government's reversal of the planned reduction in the rate of corporation
tax from 19 per cent to 17 per cent from 1 April 2020.
Company
The company had no deferred tax assets or liabilities at 31 March 2020 or 31 March 2019.
21 Provisions
Group
At 1 April 2018
Charged/(credited) to the income statement
Utilised in the year
At 31 March 2019
Charged/(credited) to the income statement
Utilised in the year
At 31 March 2020
Severance
£m
Other
£m
2.6
4.8
(4.6)
2.8
7.2
(5.1)
4.9
19.5
(0.3)
(5.2)
14.0
(0.6)
(1.9)
11.5
Total
£m
22.1
4.5
(9.8)
16.8
6.6
(7.0)
16.4
The group had no provisions classed as non-current at 31 March 2020 or 31 March 2019.
The severance provision as at 31 March 2020 and 31 March 2019 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 2020 or 31 March 2019.
22 Trade and other payables
Non-current
Deferred grants and contributions
Other creditors
2020
£m
736.8
24.4
761.2
Group
2019
£m
671.2
26.1
697.3
2020
£m
–
–
–
Company
2019
£m
–
–
–
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements
22 Trade and other payables continued
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
Group
Company
2020
£m
36.7
–
4.8
5.8
14.5
227.9
44.7
334.4
2019
£m
34.4
–
0.6
5.4
13.3
232.7
34.8
321.2
2020
£m
–
12.1
–
–
–
2.1
–
14.2
The average credit period taken for trade purchases is 15 days (2019: 25 days).
The carrying amounts of trade and other payables approximates to their fair value at 31 March 2020 and 31 March 2019.
Deferred grants and contributions
Group
At the start of the year
Amounts capitalised during the year
Transfers of assets from customers
Credited to equity – IFRS 15 opening balance adjustment
Credited to the income statement – revenue
Credited to the income statement – other operating expenses (see note 4)
Credited to allowance for bad and doubtful receivables
At the end of the year
23 Other reserves
2020
£m
684.5
35.1
47.0
–
(13.8)
(0.4)
(1.1)
751.3
Group
At 1 April 2019
Other comprehensive income
Changes in fair value recognised in other comprehensive
income
Amounts reclassified from other comprehensive income to
profit or loss
Deferred tax adjustments in respect of prior years on net fair
value gains
Tax on items taken directly to equity
Foreign exchange adjustments
At 31 March 2020
Cumulative
exchange
reserve
£m
Capital
redemp-
tion
reserve
£m
Merger
reserve
£m
Cost of
hedging
reserve
£m
Cash flow
hedging
reserve
£m
(3.7)
1,033.3
(703.6)
12.0
0.3
–
–
–
–
1.3
(2.4)
–
–
–
–
–
–
–
–
–
–
1,033.3
(703.6)
1.3
–
(2.4)
(0.2)
–
10.7
(7.6)
(6.3)
5.6
–
0.4
–
(1.3)
5.6
(2.4)
0.2
1.3
336.7
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
Total
£m
338.3
224
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United Utilities Group PLC unitedutilities.com/corporate 23 Other reserves continued
Group
At 1 April 2018
Adjustment on initial application of IFRS 9
At 1 April 2018
Other comprehensive income
Changes 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
Capital
redemp-
tion
reserve
(restated)
£m
Cumulative
exchange
reserve
£m
Merger
reserve
(restated)
£m
Cost of
hedging
reserve
£m
Cash flow
hedging
reserve
£m
(1.8)
(1.1)
(2.9)
–
–
–
(0.8)
(3.7)
1,033.3
(703.6)
–
–
1,033.3
(703.6)
–
–
–
–
–
–
–
–
1,033.3
(703.6)
–
13.8
13.8
(2.2)
–
0.4
–
12.0
–
–
–
3.5
(3.1)
(0.1)
–
0.3
Total
£m
327.9
12.7
340.6
1.3
(3.1)
0.3
(0.8)
338.3
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. The merger reserve arose in the same year on consolidation and
represents the capital adjustment to reserves required to effect the reverse acquisition. In the prior period, the group financial statements
showed a merger reserve of £329.7 million and a capital redemption reserve of £nil. The opening and closing balances of these reserves
have been restated to show a merger reserve of £(703.6) million and a capital redemption reserve of £1,033.3 million. This is to better
reflect the nature of the transactions associated with the reverse acquisition in the group's consolidated financial statements.
On adoption of IFRS 9 on 1 April 2018, the group recognised the cost of hedging reserve as a new component of equity. 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.
Company
The company's other reserves at 31 March 2020, 31 March 2019 and 1 April 2018, were comprised entirely of a £1,033.3 million capital
redemption reserve that arose as a result of a return of capital to shareholders following the acquisition of United Utilities PLC by the
company in the year ended 31 March 2009.
24 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
2020
million
681.9
274.0
955.9
2020
£m
34.1
465.7
499.8
2019
million
681.9
274.0
955.9
2019
£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 188.
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 204),
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.
27061-UU-AR2020-Financials.indd 225
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements
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 (2019: none).
The company has not entered into performance guarantees as at 31 March 2020 or 31 March 2019.
26 Events after the reporting period
As at the time of reporting, the developing and uncertain situation in respect of the COVID-19 pandemic continues to be closely monitored.
Ofwat initiated a consultation during March 2020 aimed at identifying ways in which the non-household retail market might be supported
through the current challenging situation, and this remains ongoing as at the date these financial statements were approved. The outcome
of this consultation will impact both non-household retailers such as Water Plus, and wholesalers such as UUW.
226
27061-UU-AR2020-Financials.indd 226
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United Utilities Group PLC unitedutilities.com/corporate Notes to the financial statements – appendices
A1 Cash generated from operations
Profit before tax
Adjustment for investment income and finance expense (see notes 5, 6 and
A6)
Adjustment for share of losses/(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 22)
Equity-settled share-based payments charge (see note 3)
Changes in working capital:
(Increase)/decrease in inventories (see note 14)
Decrease in trade and other receivables
(Decrease)/increase in trade and other payables
Decrease in provisions (see note 21)
Pension contributions paid less pension expense charged
to operating profit
Cash generated from operations
2020
£m
303.2
289.0
38.1
630.3
441.6
41.2
13.9
(13.8)
1.5
(1.7)
4.6
(10.1)
(0.4)
(101.6)
1,005.5
Group
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
2020
£m
251.6
32.9
–
284.5
–
–
–
–
–
–
2.7
(0.2)
–
–
Company
2019
£m
243.8
30.5
–
274.3
–
–
–
–
–
–
4.4
0.1
–
–
287.0
278.8
The group has received property, plant and equipment of £47.0 million (2019: £39.4 million) in exchange for the provision of future goods
and services (see notes 22 and A7).
A2 Net debt
Net debt comprises borrowings, net of cash and short-term deposits and derivatives. As such, movements in net debt during the year
are impacted by changes in liabilities from financing activities as detailed in the tables overleaf. The tables overleaf, along with the chart
reconciling opening to closing net debt, should be read in conjunction with the consolidated statement of cash flows.
27061-UU-AR2020-Financials.indd 227
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12-Jun-20 3:41:17 PM
FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020
Notes to the financial statements – appendices
A2 Net debt continued
Borrowings
Derivatives
Bank and
other term
borrowings
£m
Lease
liabilities
£m
in a fair
value
hedge
£m
Bonds
£m
at fair
value
through
profit or
loss
£m
Total
liabilities
from
financing
activities
£m
Derivatives
in a cash
flow hedge
£m
Cash
and cash
equivalents
£m
Net
debt
£m
At 31 March 2019
(5,256.5)
(2,544.6)
–
327.1
82.6
(7,391.4)
–
–
(5,256.5)
(2,544.6)
(54.4)
(54.4)
–
327.1
–
(54.4)
82.6
(7,445.8)
(58.2)
(93.4)
(9.5)
(1.5)
(42.6)
(2.0)
(5.3)
–
–
–
–
(6.5)
(651.1)
(157.1)
421.7
109.5
–
–
–
–
–
–
–
1.7
–
–
–
–
57.8
–
–
–
–
(100.8)
(4.7)
–
–
(42.3)
(14.8)
(8.0)
–
(808.2)
10.8
2.2
545.9
–
–
–
–
–
–
–
–
–
(0.5)
–
(0.5)
–
(1.7)
–
–
–
–
–
–
–
324.6
(7,067.3)
–
(54.4)
324.6
(7,121.7)
–
–
–
–
(100.8)
(44.0)
(14.8)
(8.0)
808.2
(545.9)
(284.5)
–
–
(284.5)
(2.8)
(2.8)
(2.8)
(2.8)
Adjustment on initial application
of IFRS 16
At 1 April 2019
Non-cash movements:
Inflation uplift on index-linked
debt
Fair value movements
Foreign exchange
Other
Cash flows used in financing
activities:
Receipts in respect of
borrowing
and derivatives(1)
Payments in respect of
borrowings and derivatives(1)
Dividends paid
Exercise of share options –
purchase of shares
Other
Changes arising from
financing activities
Cash flows used in investing
activities
Cash flows generated from
operating activities
(392.0)
(97.5)
(4.8)
68.6
(2.5)
(428.2)
(1.7)
(27.8)
(457.7)
At 31 March 2020
(5,648.5)
(2,642.1)
(57.6)
395.7
80.1
(7,872.4)
(2.2)
–
–
–
–
–
1.6
–
–
–
–
–
1.6
–
–
(593.9)
(593.9)
810.3
513.2
811.9
(7,361.4)
Note:
(1) Where derivatives are in an economic hedge of borrowings, derivative cash flows are shown netted with the net payment or receipt being reported
against the underlying borrowing cash flow to provide a more faithful representation of the substance of the transaction.
Summary of net debt movement
Operating activities
Investing activities
Financing activities
6,867.8
(995.5)
163.2
624.9
6.0
(1.0)
(2.2)
98.3
27.3
4.1
274.4
Net debt
at
31.03.18
Operating
cash flows
Interest
and
Tax
Net
capex
Loan to
joint
ventures
Proceeds from
disposal of
investments
Dividends
Dividends
from
joint
ventures
Other
Inflation
uplift on
index linked
debt
Fair value
movements
(including
foreign
exchange)
7,750
7,250
6,750
6,250
5,750
228
27061-UU-AR2020-Financials.indd 228
12-Jun-20 3:41:17 PM
United Utilities Group PLC unitedutilities.com/corporate
A2 Net debt continued
Borrowings
Derivatives
Bank and
other term
borrowings
£m
Lease
liabilities
£m
in a fair
value
hedge
£m
Bonds
£m
at fair
value
through
profit or
loss
£m
Total
liabilities
from
financing
activities
£m
Derivatives
in a cash
flow hedge
£m
Cash
and cash
equivalents
£m
Net
debt
£m
At 31 March 2018
(5,306.6)
(2,593.1)
–
431.5
103.0
(7,365.2)
–
497.4
(6,867.8)
Adjustment on initial
application
of IFRS 9
–
–
At 1 April 2018
(5,306.6)
(2,593.1)
Non-cash movements:
Inflation uplift on index-linked
debt
Fair value movements
Foreign exchange
Other
Cash flows used in financing
activities:
Receipts in respect of
borrowing
and derivatives
Payments in respect of
borrowings and derivatives(1)(2)
Dividends paid
Exercise of share options –
purchase of shares
Changes arising from
financing activities
Cash flows used in investing
activities
Cash flows generated from
operating activities
(58.5)
(33.9)
(35.2)
(1.3)
(39.8)
(2.1)
(2.4)
–
(428.1)
(107.5)
607.1
200.3
–
–
–
–
50.1
48.5
–
–
–
–
At 31 March 2019
(5,256.5)
(2,544.6)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.9
0.9
431.5
103.9
(7,364.3)
(0.9)
(0.9)
–
–
497.4 (6,867.8)
–
35.5
–
–
–
10.4
–
–
(98.3)
9.8
(37.6)
(1.3)
(1.1)
(31.7)
(568.4)
(138.8)
–
–
–
–
–
668.6
–
–
–
0.4
–
–
–
–
–
–
–
–
–
–
(98.3)
10.2
(37.6)
(1.3)
568.4
(668.6)
–
–
(274.4)
(274.4)
(2.8)
(2.8)
(104.4)
(21.3)
(27.1)
0.4
(377.4)
(404.1)
–
–
–
–
–
–
–
–
(627.7)
(627.7)
832.3
832.3
327.1
82.6
(7,391.4)
(0.5)
324.6
(7,067.3)
Notes:
(1) Where derivatives are in an economic hedge of borrowings, derivative cash flows are shown netted with the net payment or receipt being reported
against the underlying borrowing cash flow to provide a more faithful representation of the substance of the transaction.
(2) During the year ended 31 March 2019, a series of cross-currency interest rate derivatives in a fair value hedge relationship settled enabling repayment of
foreign currency denominated bonds. The net sterling value received in respect of these derivatives £(138.8) million is shown as a negative payment reducing
the overall value of 'payments in respect of borrowings and derivatives' to better reflect the net sterling cost to the company of redeeming the bonds.
7,067.3
(1,005.5)
645.3
(4.9)
(12.0)
(34.5)
195.2
60.9
100.8
284.5
58.8
5.5
7,361.4
Net debt
at
31.03.19
Operating
cash flows
Interest
and
Tax
Net
capex
Dividends
from
joint
ventures
Proceeds
from
disposal of
investments
Loans
to joint
ventures
Dividends
Inflation
uplift on
index linked
debt
Non-cash
movements
in lease
liabilities
Fair value
movements
(including
foreign
exchange)
Other
Net debt
at
31.03.20
27061-UU-AR2020-Financials.indd 229
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12-Jun-20 3:41:18 PM
FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020
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
Fair
value
2020
£m
Carrying
value
2020
£m
Fair
value
2019
£m
Carrying
value
2019
£m
2,440.0
2,590.5
2,749.3
2,765.8
Borrowings in fair value hedge relationships
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
EUR
GBP
GBP
HKD
HKD
EUR
HKD
GBP
5.02% JPY 10bn dual currency loan
JPY/USD
2.058% 30m bond
2.625% 350m bond
1.641% 30m bond
2.9% 600m bond
1.707% 28m bond
1.653% 26m bond
1.70% 30m bond
2.0% 50m bond
5.0% 200m bond
EUR
GBP
EUR
HKD
EUR
EUR
EUR
GBP
GBP
2020
2022
2025
2026
2026
2027
2027
2027
2029
2030
2031
2031
2031
2032
2032
2033
2033
2035
Borrowings designated at fair value through profit or loss
6.875% 400m bond
USD
2028
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
0.288%+CPI 100m 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
0.01%+RPI 38m bond
230
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
2020
2020
2020
2020
2020
2020
2020
2020
2020
2022
2023
2025
2025
2026
2028
2029
2029
2029
2029
2029
2029
2030
2030
2030
2030
2031
2031
–
405.1
451.8
33.4
77.2
44.2
82.7
380.6
94.5
26.8
366.4
25.7
62.2
23.8
21.9
25.3
51.4
267.0
397.5
397.5
5,996.0
192.2
68.1
68.1
68.1
68.1
68.0
67.9
67.9
68.2
99.7
121.2
118.9
29.1
116.2
23.1
43.6
110.3
45.9
45.3
45.2
46.1
46.0
46.6
46.7
42.2
20.7
43.8
–
399.4
468.5
35.9
83.4
48.6
93.3
398.7
106.8
30.2
380.5
28.9
67.2
28.7
26.2
30.8
53.3
310.1
397.5
397.5
5,375.1
192.2
67.0
66.9
66.9
66.8
66.7
66.6
66.5
66.6
100.0
118.1
113.6
28.3
112.1
23.6
40.8
101.3
42.8
42.5
42.4
43.7
43.5
43.4
43.5
39.6
21.4
44.2
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
44.7
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
43.3
27061-UU-AR2020-Financials.indd 230
12-Jun-20 3:41:18 PM
United Utilities Group PLC unitedutilities.com/corporate A3 Borrowings continued
Currency
Year of final
repayment
Borrowings measured at amortised cost (continued)
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
2.0% 250m bond
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
1.75% 250m 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)
Lease liabilities
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
GBP
GBP
2032
2032
2032
2033
2033
2033
2033
2034
2034
2034
2035
2035
2035
2036
2036
2036
2037
2037
2038
2039
2040
2041
2042
2043
2046
2048
2049
2053
2056
2056
2056
2056
2056
2056
2056
2056
2057
2057
2057
2020
various
Fair
value
2020
£m
105.1
71.3
110.4
75.5
117.7
257.0
100.1
75.0
75.0
75.0
204.0
91.3
69.3
30.3
20.1
32.4
57.3
60.5
232.1
129.6
193.5
100.7
147.3
37.9
94.2
28.2
97.1
50.7
194.6
188.8
186.1
92.8
46.3
92.4
90.0
62.3
284.1
26.7
93.6
14.9
57.6
Carrying
value
2020
£m
81.7
75.0
117.2
81.3
126.6
245.7
98.0
73.4
75.6
75.6
152.7
96.9
75.0
32.8
21.3
33.9
63.6
49.0
248.0
95.5
151.1
75.4
150.6
30.1
75.3
33.5
75.0
26.8
147.7
147.1
146.8
73.4
36.6
73.0
72.7
50.9
141.3
34.2
71.3
14.9
57.6
Fair
value
2019
£m
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
–
Carrying
value
2019
£m
79.5
81.2
126.6
87.5
135.9
–
102.2
76.6
78.7
78.7
148.6
100.0
75.0
32.3
21.0
33.2
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
–
8,833.5
8,363.1
8,905.1
7,815.8
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 £100 million fixed rate notes in addition to the £250 million fixed rate notes issued in the prior
year. These notes were issued under the same terms with year of final repayment being 2031 and coupon rate of 2.625 per cent.
27061-UU-AR2020-Financials.indd 231
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12-Jun-20 3:41:19 PM
FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 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 2020, the group had £1,208.1 million (2019: £1,039.3 million) of available liquidity, which comprised £528.1 million (2019: £339.3
million) of cash and short-term deposits and £680.0 million (2019: £700.0 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.
2020
£m
50.0
100.0
650.0
800.0
(120.0)
680.0
2019
£m
100.0
50.0
650.0
800.0
(100.0)
700.0
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 2020 or 31 March 2019.
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. This table does not include the impact of lease liabilities for which the maturity profile on an undiscounted basis has been
disclosed in note 18.
Group
At 31 March 2020
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
10,685.2
2,894.9
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
144.3
884.9
520.4
122.0
124.9
352.1
126.0
122.7
577.2
255.8
9,192.4
1,157.4
(5,274.6)
(5,274.6)
8,305.5
(5,274.6)
1,029.2
642.4
477.0
248.7
833.0
10,349.8
952.7
(1,508.6)
82.3
(473.6)
82.3
82.3
67.4
(105.7)
45.7
(90.2)
41.8
(116.9)
38.2
(82.6)
35.4
(165.3)
724.2
(947.9)
(38.3)
(44.5)
(75.1)
(44.4)
(129.9)
(223.7)
232
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United Utilities Group PLC unitedutilities.com/corporate A4 Financial risk management continued
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
Total(1)
£m
10,174.4
3,008.0
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)
7,815.8
(5,366.6)
876.7
809.5
630.0
465.3
235.5
10,165.4
1,389.0
(1,825.0)
26.8
(409.2)
26.8
26.8
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)
Notes:
(1) Forecast future cash flows are calculated, where applicable, using forward interest rates based on the interest environment at year end and are therefore
susceptible to changes in market conditions. For index-linked debt it has been assumed that RPI will be 3 per cent and CPI will be 2 per cent over the life of
each instrument.
(2) 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, excluding £57.6 million (2019:
£nil) of lease liabilities.
Company
The company has total borrowings of £0.8 million (2019: £0.5 million), which are payable within one year, and £1,752.0 million (2019:
£1,718.4 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 from household customers are limited due to the customer base being comprised of a large number of
unrelated households. However, collection can be challenging as 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 credit terms for the
group’s retail customers are set out in market codes. In reaction to the impact of the COVID-19 pandemic, changes have been made to the
payment terms set out within the market codes. These changes provide the option for extended credit terms for retailers. As at 31 March
2020, Water Plus was the group’s single largest debtor, with amounts outstanding in relation to wholesale services of £52.7 million (2019:
£39.1 million). During the year, sales to Water Plus in relation to wholesale services were £438.3 million (2019: £454.8 million). Details of
transactions with Water Plus can be found in note A6.
Under the group’s revenue recognition policy, revenue is only recognised when collection of the resulting receivable is reasonably assured.
Considering the above, the directors believe there is no further credit risk provision required in excess of the allowance for doubtful
receivables (see note 15).
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 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.
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Summary of net debt movement
FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements – appendices
A4 Financial risk management continued
At 31 March 2020 and 31 March 2019, 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
2020
£m
528.1
342.9
0.1
617.9
Group
2019
£m
339.3
397.6
11.5
489.1
1,489.0
1,237.5
2020
£m
–
81.3
–
–
81.3
Company
2019
£m
–
82.2
–
–
82.2
* Included within trade and other receivables is £95.0 million of amounts owed by joint ventures in respect of borrowings, further details of which are disclosed in
note A6.
The credit exposure on derivatives is disclosed gross of any collateral held. At 31 March 2020, the group held £72.2 million (2019: £52.0
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.
In the year to 31 March 2020, the group's regulatory assets were linked to RPI inflation; however, for the 2020–25 regulatory period, from
1 April 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 weighted towards RPl-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 both nominal and RPI-linked debt to CPI since 2018. 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, including the carrying value of the nominal debt swapped to CPI, was £4,082.2
million at 31 March 2020 (2019: £3,775.8 million).
Sensitivity analysis
The following table details the sensitivity of profit before tax to changes in the RPI and CPI on the group’s index-linked borrowings. The
sensitivity analysis has been based on the amount of index-linked debt held at the reporting date and, as such, is not indicative of the years
then ended. In addition, it excludes the impact of inflation on revenues and other income statement costs as well as 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
2020
£m
(39.6)
39.6
2019
£m
(38.2)
38.2
The sensitivity analysis assumes a 1 per cent change in RPI and CPI having a corresponding 1 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 2020 or 31 March 2019.
234
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United Utilities Group PLC unitedutilities.com/corporate A4 Financial risk management continued
Interest rate risk
The group’s policy is to structure debt in a way that best matches its underlying assets and cash flows. The group 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).
From 1 April 2020 for the regulatory period to 2025, Ofwat has continued to set a fixed real cost of debt in relation to embedded debt (80
per cent of net debt), but has introduced a debt indexation mechanism in relation to new debt (20 per cent of net debt), where the allowed
rate on new debt will vary in line with specific debt indices. The debt indexation mechanism will be settled as an end of regulatory period
adjustment.
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. As such, at the start of each regulatory period, a proportion of the projected nominal net debt
representing new debt for that regulatory period, will remain floating until it is fixed via the above 10-year reducing balance basis, which
should approximate 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
2020
£m
122.7
(131.0)
Group
2019
£m
130.2
(141.3)
2020
£m
(17.5)
17.5
Company
2019
£m
(17.2)
17.2
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.
Hedge accounting
Details regarding the interest rate swaps designated as hedging instruments to manage interest rate risk are summarised below:
Notional principal amount £m
Average contracted fixed interest rate %
1 year or less
1 to 2 years
2 to 5 years Over 5 years
–
–
375.0
1.98
450.0
1.36
900.0
2.49
This table represents the derivatives that are held in fair value hedging relationships, with only the weighted average for the fixed interest
elements of the swaps disclosed.
Further detail on the fair value hedging relationships is provided below:
Nominal
amount of
the hedging
instruments
£m
Carrying
amount of
the hedging
instruments
£m
Accumulated
fair value
(gains)/losses
on hedged
items
£m
Fair value (gains)/losses*
used for calculating hedge
ineffectiveness for the year
ended 31 March 2020(1)
Hedged items
£m
Hedging
instruments
£m
Hedge
ineffective-
ness
recognised
in the income
statement
£m
Nominal
amount of
hedging
instruments
directly
impacted by
IBOR reform
£m
1,725.0
285.6
287.4
50.6
(50.1)
0.5
1,675.0
Risk exposure
Interest rate risk on
borrowings
Note:
(1) The change in fair value of the hedging instruments used to measure hedge ineffectiveness exclude interest accruals and changes in credit spread
adjustments. The full impact of fair value movements on the income statement is disclosed in note 6.
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020
Notes to the financial statements – appendices
A4 Financial risk management continued
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.
Hedge accounting
Details regarding the cross-currency interest rate swaps designated as hedging instruments to manage currency and interest rate risk are
summarised below:
Notional principal amount £m
Average contracted fixed interest rate %
1 year or less
1 to 2 years
2 to 5 years Over 5 years
–
–
–
–
–
–
442.8
2.46
This table represents the derivatives that are held in fair value hedging relationships, with only the weighted average for the fixed interest
rate elements of the swap disclosed.
Further detail on the fair value hedging relationships is provided below:
Nominal
amount of
the hedging
instruments
£m
Carrying
amount of
the hedging
instruments
£m
Accumulated
fair value
(gains)/losses
on hedged
items
£m
Fair value (gains)/losses*
used for calculating hedge
ineffectiveness for the year
ended 31 March 2020(1)
Hedged items
£m
Hedging
instruments
£m
Hedge
ineffective-
ness
recognised
in the income
statement
£m
Nominal
amount of
hedging
instruments
directly
impacted by
IBOR reform
£m
442.8
125.8
132.8
(36.5)
35.6
1.0
442.8
Risk exposure
Foreign currency
and interest rate risk
on borrowings
Note:
(1) The change in fair value of the hedging instruments used to measure hedge ineffectiveness exclude interest accruals and changes in credit spread
adjustments. The full impact of fair value movements on the income statement is disclosed in note 6.
Interest rate benchmark reform
Globally, financial regulators are requiring that market participants cease using certain financial market benchmark reference rates (i.e.
interbank offered rates, IBORs), and transition to the use of alternative nearly risk-free rate such as the Sterling Overnight Index Average
(SONIA). The IASB have amended IFRS 9 'Financial Instruments', providing temporary exceptions from applying specific hedge accounting
requirements in cases where hedging relationships are directly impacted by the IBOR reform. The temporary exception allows the group
to assume that the economic relationship between the hedged debt and hedging derivatives remains in place, despite the uncertainties
around this process. Uncertainties include whether market wide mechanisms will be available to replace references to IBORs with relevant
alternative reference rates plus a spread adjustment (e.g. the expected ISDA protocol for derivatives) or whether bilateral amendments
to financial instruments will need to be negotiated with each counterparty, the timing of when the IBORs will be replaced with alternative
benchmark rates and how and when the spread adjustment between the IBORs and the alternative rate will be determined. This exception
will be applied until the uncertainty surrounding the IBOR reform has ended, and we have judged that this uncertainty remains in place at
31 March 2020.
The London Inter-bank Offered Rate (LIBOR) is the interest rate benchmark to which the group’s hedging relationships are significantly
exposed. The majority of fair value hedging relationships, mitigating interest rate risk and/or currency risk, are directly affected by the
reform. The amount of debt held as hedged items in these relationships is £1,675 million of fixed rate debt and £443 million of cross-
currency fixed rate debt. Further detail on how the group manages these risks can be found in the interest rate risk sections of this note.
In calculating the fair value attributable to the hedged risk for the fixed rate debt, the group has assumed that once the hedging
instruments transition to the alternative risk-free rate, the alternative risk-free rate plus spread will be economically equivalent to the pre-
transition LIBOR currently included in the hedging instruments, and no other changes to the terms of the hedging instrument will occur.
A transition project is being undertaken to manage and respond to all aspects of IBOR reform across the business. This will encompass:
›
›
›
the amendment of existing financial instrument contracts that reference IBORs, including swaps, European Investment Bank floating
rate debt, bilateral loan agreements, intercompany borrowings and committed lending facilities
the adoption of alternative reference rates for new financial instruments;
the accounting impact, covering the amendment of hedge documentation, enhanced disclosure requirements and the valuation of
financial instruments; and
ensuring appropriate system capabilities are developed and implemented.
›
The group proactively monitors market developments and announcements relating to IBOR reform, and will seek to ensure that the risk of
the group being economically disadvantaged by the proposed changes is minimised by ensuring that appropriate actions are taken on a
timely basis. During the year ending 31 March 2020, the group has entered into a number of financial instruments that reference alternative
reference rates (SONIA).
236
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United Utilities Group PLC unitedutilities.com/corporate
A4 Financial risk management continued
The IASB published an exposure draft relating to phase 2 of the proposed IFRS Standards amendments in April 2020. These proposed
amendments aim to address issues affecting financial statements when changes are made to contractual cash flows and hedging
relationships as a result of the reform. The group is actively considering the amendments proposed.
Repricing analysis
The following tables categorise the group’s borrowings, derivatives and cash deposits on the basis of when they reprice or, if earlier,
mature. The repricing analysis demonstrates the group’s exposure to floating interest rate risk.
Our largest concentration of floating interest rate risk is with index-linked instruments. This has been classified as repricing in one year or
less due to the refixing of the interest charge with changes in RPI and CPI.
Group
At 31 March 2020
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 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
Company
Borrowings measured at amortised cost
Floating rate instruments
Total borrowings
1 year or
less
£m
Total
£m
2,590.5
–
2,590.5
–
2,590.5
2,590.5
397.5
–
397.5
770.3
686.9
3,917.9
5,375.1
–
397.5
397.5
193.2
686.9
3,917.9
4,798.0
–
(2,382.3)
8,363.1
5,403.7
(528.1)
(528.1)
7,835.0
4,875.6
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
–
373.9
373.9
152.6
720.9
3,775.8
4,649.3
–
(2,330.9)
7,815.8
(339.3)
7,476.5
5,458.1
(339.3)
5,118.8
1–2 years
£m
2–3 years
£m
3–4 years
£m
4–5 years
£m
More than
5 years
£m
399.4
(399.4)
–
–
–
–
1.0
–
–
1.0
50.0
51.0
–
51.0
–
–
–
–
–
–
1.1
–
–
1.1
164.5
165.6
–
165.6
–
–
–
–
–
–
0.7
–
–
0.7
575.0
575.7
–
575.7
468.5
1,722.6
(468.5)
(1,722.6)
–
–
–
–
0.8
–
–
0.8
350.0
350.8
–
–
397.5
(397.5)
–
573.5
–
–
573.5
1,242.8
1,816.3
–
350.8
1,816.3
1–2 years
£m
2–3 years
£m
3–4 years
£m
4–5 years
£m
More than
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
2020
1 year or less
£m
Total
£m
–
–
–
–
–
–
0.7
–
–
0.7
164.5
165.2
–
165.2
–
–
–
–
–
–
0.7
–
–
0.7
575.0
575.7
–
1,917.7
(1,917.7)
–
373.9
(373.9)
–
24.1
–
–
24.1
1,392.9
1,417.0
–
575.7
1,417.0
2019
1 year or less
£m
Total
£m
1,752.0
1,752.0
1,752.0
1,752.0
1,718.4
1,718.4
1,718.4
1,718.4
27061-UU-AR2020-Financials.indd 237
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020
Notes to the financial statements – appendices
A4 Financial risk management continued
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 proportion of its anticipated net electricity usage out to the end of the regulatory period from
2020 to 2025, partially through entering into electricity swap contracts.
Hedge accounting
Electricity swaps have been designated in 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 in the effective portion of the hedge being recognised in other
comprehensive income.
Details of electricity swaps that have been designated in cash flow hedging relationships are summarised below:
Fair value
(gains)/losses
used for
calculating
hedge
ineffectiveness
for the year
ended 31 March
2020
£m
Hedge
ineffectiveness
recognised
in the income
statement
£m
Cash flow
hedge reserve
£m
Amount
reclassified
from the cash
flow hedge
reserve to
the income
statement
£m
Nominal amount
of the hedging
instrument
£m
Carrying
amount of
the hedging
instrument
£m
44.9
(2.2)
2.0
–
(1.3)
5.6
Risk exposure
Electricity price risk
Due to the relative low value of the electricity swaps in comparison to that of the derivative portfolio, no maturity profile and fixed price
breakdown has been disclosed.
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 2020, RCV gearing was within
the range at 62 per cent (2019: 61 per cent).
Assuming no significant changes to existing rating agencies’ methodologies or sector risk assessments, the group aims to maintain long-
term issuer credit ratings for UUW of at least A3 with Moody's Investors Service (Moody's) and BBB+ with S&P Global (S&P) and a senior
unsecured debt rating for UUW of at least A- with Fitch Ratings (Fitch). Debt issued by UUW's financing subsidiary, United Utilities Water
Finance PLC, is guaranteed by UUW and is therefore rated in line with UUW.
In order to maintain its targeted credit ratings, the group needs to manage its capital structure with reference to the ratings methodology
and measures used by Moody’s, S&P and Fitch. The ratings methodology is normally based on a number of key ratios (such as RCV
gearing, adjusted interest cover, post maintenance interest cover (PMICR) and Funds from Operations (FFO) to debt) and threshold levels
as updated and published from time to time by Moody's, S&P and Fitch. The group looks to manage its risk by maintaining the relevant key
financial ratios used by the credit ratings 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.
238
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United Utilities Group PLC unitedutilities.com/corporate 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
2020
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
Investments
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
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
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
Investments
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
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
–
–
–
–
–
–
–
–
(1,981.5)
(199.9)
(2,181.4)
Level 1
£m
–
–
–
–
–
–
–
–
395.7
222.0
0.2
0.1
–
(141.9)
(2.4)
(397.5)
(458.5)
(5,796.1)
(6,178.4)
Level 2
£m
329.4
158.5
1.2
11.5
(2.3)
(75.9)
(1.7)
(373.9)
(2,316.9)
(680.9)
(2,997.8)
(432.4)
(5,101.0)
(5,486.6)
–
–
–
–
–
–
–
–
–
–
–
Level 3
£m
–
–
–
–
–
–
–
–
–
–
–
Total
£m
395.7
222.0
0.2
0.1
–
(141.9)
(2.4)
(397.5)
(2,440.0)
(5,996.0)
(8,359.8)
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)
Note:
(1) These derivatives form economic hedges and, as such, management intends to hold these through to maturity. Derivatives forming an economic hedge of
the currency exposure on borrowings included in these balances were £221.9 million (2019: £151.3 million)
›
›
›
Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for
the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not
based on observable market data (unobservable).
The group has calculated fair values using quoted prices where an active market exists, which has resulted in £2,181.4 million (2019:
£2,997.8 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 £816.4 million decrease (2019: £1,620.2 million decrease) 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
2020.
During the year, changes in the fair value of financial liabilities designated at fair value through profit or loss resulted in a £23.6 million gain
(2019: £26.2 million loss). Included within this was a £34.2 million gain (2019: £6.6 million gain) attributable to changes in own credit risk,
recognised in other comprehensive income. The cumulative amount due to changes in credit spread was £79.0 million profit (2019: £44.8
million profit). The carrying amount is £171.4 million (2019: £147.8 million) higher than the amount contracted to settle on maturity.
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.
27061-UU-AR2020-Financials.indd 239
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020
Notes to the financial statements – appendices
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.
During April 2018, 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 was a consequence of an increase in future service costs and was 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 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.
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.
Information about the pension arrangements for executive directors is contained in the directors’ remuneration report.
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
2020
£m
665.6
521.9
1,870.1
3,057.6
2019
£m
754.3
651.4
2,019.5
3,425.2
The duration of the combined schemes is around 17 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.
The estimated profile of cash flows out of the schemes as retirement benefits are paid is as follows:
ESPS
)
m
£
(
s
w
o
fl
h
s
a
c
e
r
u
t
u
F
25
20
15
10
5
0
0
5
10
15
20 25 30 35
Term (years)
40 45 50 55 60
0
5
10 15 20 25 30 35
40 45 50 55 60 65 70
Term (years)
Active members
Deferred pensioners
Current pensioners
Active members
Deferred pensioners
Current pensioners
UUPS
)
m
£
(
s
w
o
fl
h
s
a
c
e
r
u
t
u
F
125
100
75
50
25
0
240
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United Utilities Group PLC unitedutilities.com/corporate
A5 Retirement benefits continued
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 2020 and 31 March 2019 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 the pension schemes will be
fully funded on a low dependency basis without additional contributions from the company.
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.
In addition, in the year ended 31 March 2020, 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. 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 £7.7 million in the year ending 31 March 2021, £6.4 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. 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 2020, the discount rate decreased by 0.1 per cent (2019: 0.2 per cent decrease), which includes a 0.7 per cent
increase in credit spreads and a 0.8 per cent decrease in gilt yields over the year. The IAS 19 remeasurement gain of £154.6 million (2019:
£73.0 million) reported in note 19 has largely resulted from an increase in credit spreads during the year. The impact of movements in credit
spreads is less pronounced on a scheme funding basis compared with the remeasurement gain recognised on an IAS 19 accounting basis as
the discount rate used for valuing obligations utilises a fixed credit spread assumption.
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 prior year 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.
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements – appendices
A5 Retirement benefits continued
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
2020, 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
Pension increases
Pensionable salary growth:
ESPS
UUPS
Price inflation – RPI
Price inflation – CPI
2020
% p.a.
2.30
2.80
2.80
1.60
2.80
1.60
2019
% p.a.
2.40
3.45
3.45
2.05
3.45
2.05
The discount rate is consistent with a high-quality corporate bond rate, with 2.30 per cent being equivalent to gilts plus 160 basis points
(31 March 2019: 2.40 per cent being equivalent to gilts plus 90 basis points).
In September 2019, the Chancellor of the Exchequer highlighted the UK Statistics Authority’s proposals to change RPI to align with CPIH
(Consumer Pricing Index, including housing costs). The Chancellor commented that any change would not be made before 2025 and
possibly not until 2030. At the March 2020 budget, the Chancellor launched a public consultation on these proposals which is due to
close in August 2020. To provide an indication of the differential between RPI and CPIH, broadly CPIH increases are expected to average
around 1 per cent p.a. below RPI in the long-term (about the same as CPI), so this change could have a significant impact on many pension
schemes. A reduction in RPI will result in a reduction to pension scheme liabilities; however, as our pension schemes are hedged for RPI
inflation this will also result in a comparable reduction to pension scheme assets.
Demographic assumptions
At both 31 March 2020 and 31 March 2019, 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, reflecting actual mortality experience. At 31
March 2020, mortality in retirement is based on CMI 2019 (2019: CMI 2018) long-term improvement factors, with a long-term annual rate of
improvement of 1.50 per cent (2019: 1.50 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
2020
years
26.6
27.7
28.9
30.2
2019
years
26.4
27.5
28.6
30.0
Sensitivity of the key scheme assumptions
The measurement of the group’s defined benefit surplus is sensitive to changes in key assumptions, which are described above. The
sensitivity calculations presented below allow for the specified movement in the relevant key assumption, 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 0.25 per cent would have resulted in a £132.8 million (2019: £73.2 million,
based on an increase/decrease of 0.1 per cent) decrease/increase in the schemes’ liabilities at 31 March 2020, 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 0.25 per cent would have resulted in a £124.5 million (2019: £68.4
million, based on an increase/decrease of 0.1 per cent) increase/decrease in the schemes’ liabilities at 31 March 2020, 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 2020, meaning that this sensitivity is likely to be insignificant as a result. The sensitivity to price
inflation allows for the impact of changes to pensionable salary growth and pension increases, which are both assumed to be linked to
price inflation.
242
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United Utilities Group PLC unitedutilities.com/corporate A5 Retirement benefits continued
› Mortality long-term improvement rate – An increase in the mortality long-term improvement rate to 1.75 per cent would have resulted
in a £31.1 million decrease in the schemes' liabilities at 31 March 2020.
›
Life expectancy – An increase/decrease in life expectancy of one year would have resulted in a £116.6 million (2019: £137.1 million)
increase/decrease in the schemes’ liabilities at 31 March 2020. 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
Non-equity growth assets
Gilts
Bonds
Other
Total fair value of schemes’ assets
Present value of defined benefit obligations
Net retirement benefit surplus
Schemes’
assets
%
–
9.3
47.1
48.0
(4.4)
100.0
Schemes’
assets
%
–
7.7
33.5
46.2
12.6
100.0
2020
£m
–
356.4
1,795.8
1,828.1
(168.6)
3,811.7
(3,057.6)
754.1
2019
£m
0.8
302.5
1,310.2
1,805.8
489.8
3,909.1
(3,425.2)
483.9
The fair values in the table above are all based on quoted prices in an active market or observable inputs, with the exception of £232.1
million (2019: £203.8 million) of assets included in 'Other', which fall within the 'Level 3' fair value categorisation in accordance with IFRS
13 'Fair Value Measurement'. The fair value of these assets has been estimated based on the latest available observable prices, updated
with reference to movements in comparable observable indices to the reporting date, and adjusted for judgements to reflect differences in
the liquidity and credit components of the asset pricing. Judgement is required in estimating the fair value of these assets, with the values
estimated to fall within a range of £219 million and £245 million.
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 2020
Equities
Non-equity growth assets
Gilts
Bonds
Other
Total fair value of schemes' assets
At 31 March 2019
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
–
356.4
1,795.8
1,865.0
330.0
4,347.2
4.8
302.5
1,310.2
1,821.0
370.0
3,808.5
–
–
–
(36.9)
(498.6)
(535.5)
(4.0)
–
–
(15.2)
119.8
100.6
–
365.4
1,795.8
1,828.1
(168.6)
3,811.7
0.8
302.5
1,310.2
1,805.8
489.8
3,909.1
The derivative values in the table above represent the net market value of derivatives held within each of these asset categories as follows:
›
In the prior year, derivatives were held within the UUPS equity portfolio to gain economic exposure equivalent to around 4.0 per cent of
that scheme’s assets, and comprised of currency forwards with a value of £(4.0) million.
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements – appendices
A5 Retirement benefits continued
› Derivatives are used within both the UUPS and ESPS bond portfolio to hedge non-sterling exposure back to sterling:
›
›
The UUPS total value of £(27.7) million comprises interest rate swaps with a value of £nil (2019: £(15.0) million) and currency
forwards with a value of £(27.7) million (2019: £(2.1) million); and
The ESPS total value of £(9.2) million (2019: £1.9 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 £(485.4) million (2019: £112.7 million) in the UUPS and £(13.2)
million (2019: £7.1 million) in the ESPS. These are further broken down as follows:
›
›
The UUPS net value of £(485.4) million (2019: £112.7 million) comprises asset swaps with a value of £(30.2) million (2019: £(32.7)
million), interest rate swaps with a value of £25.7 million (2019: £143.6 million), gilt repurchase agreements with a value of £(405.9)
million (2019: £nil) and RPI inflation swaps with a value of £(75.0) million (2019: £1.8 million); and
The ESPS net value of £(13.2) million (2019: £7.1 million) represents gilt repurchase agreements with a value of £(1.2) million (2019:
£7.4 million), RPI inflation swaps with a value of £(10.6) million (2019: £(0.3) million), interest rate swaps with a value of £(0.4) million
and total return swaps with a value of £(1.0) million.
The derivatives shown in the tables only cover those expressly held for the purpose of reducing certain undesirable asset and liability risks.
The schemes 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 £698.3 million (2019: £628.1 million).
The intention is that the schemes' assets provide a 100 per cent interest rate hedge and a 100 per cent inflation risk hedge of the schemes'
liabilities on a scheme funding basis. As the scheme funding basis is more prudent than the IAS 19 measurement basis for the defined
benefit obligation, the schemes are more than 100 per cent hedged on an accounting basis.
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 (loss)/return on plan assets, excluding amounts included in interest
Member contributions
Benefits paid
Administrative expenses
Company contributions
At the end of the year
2020
£m
3,909.1
94.3
(131.6)
2.6
(175.0)
(1.6)
113.9
3,811.7
2019
£m
3,842.9
98.4
58.5
2.9
(166.0)
(2.8)
75.2
3,909.1
The group’s actual return on the schemes’ assets was a gain of £37.3 million (2019: £156.9 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 gains/(losses) arising from changes in financial assumptions
Actuarial (losses)/gains arising from changes in demographic assumptions
Actuarial gains arising from experience
Curtailments/settlements arising on reorganisation
Member contributions
Benefits paid
Current service cost
At the end of the year
2020
£m
2019
£m
(3,425.2)
(3,498.7)
(80.3)
257.3
(7.2)
36.1
(4.6)
(2.6)
175.0
(6.1)
(88.9)
(160.6)
70.9
104.2
(9.0)
(2.9)
166.0
(6.2)
(3,057.6)
(3,425.2)
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United Utilities Group PLC unitedutilities.com/corporate 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:
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
2020
£m
438.3
0.4
0.1
–
4.0
147.9
4.8
2019
£m
455.8
0.5
0.1
0.2
4.3
182.9
0.6
Sales of services to related parties during the year mainly represent non-household wholesale charges to Water Plus that were billed during
the period. These transactions were on the market credit 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 2020, amounts owed by joint ventures, as recorded within trade and other receivables in the statement of financial position,
were £147.9 million (2019: £182.9 million), comprising £52.9 million (2019: £39.4 million) of trade balances, which are unsecured and will be
settled in accordance with normal credit terms, and £95.0 million (2019: £143.5 million) relating to loans.
Included within these loans receivable were the following amounts owed by Water Plus:
›
›
£93.6 million (2019: £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 2021 (2019: maturity date of 30 September 2020),
bearing a floating interest rate of LIBOR plus a credit margin. This balance comprises £98.0 million outstanding net of a £5.0 million
allowance for expected credit losses (2019: £nil allowance for expected credit losses) recognised in the income statement during the
year;
£nil (2019: £9.6 million) receivable being the £10.0 million (2019: £9.6 million) 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, net of a £0.5 million (2019: £nil) allowance
for expected credit losses recognised in the income statement during the year, and £9.5 million (2019: £nil) of the group's recognised
share of joint venture losses as the loan is deemed to be part of the group's long-term interest in Water Plus. This is a zero coupon
shareholder loan with a total amount outstanding at 31 March 2020 of £12.5 million, comprising the £10.0 million (2019: £9.6 million)
receivable measured at fair value, and £2.5 million (2019: 2.9 million) recorded as an equity contribution to Water Plus recognised
within interests in joint ventures; and
›
£nil (2019: £32.5 million) outstanding on a £32.5 million revolving credit facility provided by United Utilities PLC, with a maturity date of
30 September 2021 (2019: 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 (2019: £1.4 million) was owed by other related parties at 31 March 2020.
The allowances for expected credit losses of £4.5 million and £0.5 million, recognised against the revolving credit facilities and zero
coupon shareholder loan note respectively, together with the £9.5 million share of joint venture losses recognised against the zero coupon
shareholder loan note, result from the impacts of the COVID-19 pandemic, which has resulted in Water Plus recognising significant losses
during the year and has caused a significant increase in credit risk. No allowances for expected credit losses or share of joint venture losses
were recognised against any of these balances in the prior year.
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 £54.1 million (2019: £58.1 million), of which £32.1 million (2019: £35.1 million) related to guarantees
to United Utilities Water Limited.
At 31 March 2020, amounts owed to related parties were £4.8 million (2019: £0.6 million). Included within this amount is £4.5 million due to
Water Plus for the surrender of consortium relief tax losses for the year ended 31 March 2020. The amounts outstanding are unsecured and
will be settled in accordance with normal credit terms.
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 £284.5 million (2019: £274.5 million) and total net interest payable
during the year was £32.9 million (2019: £30.5 million). Amounts outstanding at 31 March 2020 and 31 March 2019 between the parent
company and subsidiary undertakings are disclosed in notes 15, 17 and 22.
At 31 March 2020 and 31 March 2019, 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 2020 and 31 March 2019.
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements – appendices
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 208 to 210.
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.
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
Operating profit
Operating profit is stated after charging operational expenses but
before investment income and finance expense.
Borrowing costs and finance income
Except as noted below, all borrowing costs and finance income are
recognised in the income statement on an accruals basis.
Transaction costs that are directly attributable to the acquisition
or issue of a financial asset or financial liability are included in the
initial fair value of that instrument.
Where borrowing costs are attributable to the acquisition,
construction or production of a qualifying asset, such costs are
capitalised as part of the specific asset.
Tax
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
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United Utilities Group PLC unitedutilities.com/corporate are expected to reverse based on tax rates and laws that have been
enacted or substantively enacted at each reporting date.
useful economic lives, based on management’s judgement and
experience.
The carrying amount of deferred tax assets is reviewed at each
reporting date and is reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all
or part of the asset to be recovered.
Deferred tax is charged or credited in the income statement,
except when it relates to items charged or credited to equity, in
which case the deferred tax is also dealt with in equity.
Property, plant and equipment
Property, plant and equipment (PPE) 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;
›
Buildings 10 to 60 years;
Sea outfalls 77 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.
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
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
generally 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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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements – appendices
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).
248
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United Utilities Group PLC unitedutilities.com/corporate 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.
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 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).
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Notes to the financial statements – appendices
Group companies
On consolidation, the statements of financial position of overseas
subsidiaries and joint ventures (none of which has the currency
of a hyperinflationary economy) are translated into sterling at
exchange rates applicable at each reporting date. The income
statements are translated into sterling using the average rate unless
exchange rates fluctuate significantly, in which case the exchange
rate at the date the transaction occurred is used. Exchange
differences resulting from the translation of such statements of
financial position at rates ruling at the beginning and end of the
period, together with the differences between income statements
translated at average rates and rates ruling at the period end, are
dealt with as movements on the group’s cumulative exchange
reserve, a separate component of equity. Such translation
differences are recognised as income or expense in the period in
which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition
of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate. The group has
elected to treat goodwill and fair value adjustments arising on
acquisitions before the date of implementation of IFRS 3 ‘Business
Combinations’ (1 April 1999) as sterling-denominated assets and
liabilities.
Grants and contributions
Grants and contributions receivable in respect of property, plant
and equipment are treated as deferred income, which is credited to
the income statement over the estimated useful economic lives of
the related assets.
Leases
At inception of a contract, the group assesses whether a
contract is or contains a lease. Where a lease is present, at the
commencement date, a right-of-use asset and lease liability is
recognised. The lease liability is measured at the present value of
future lease payments due over the term of the lease. The typical
items which the group leases include land, buildings and vehicles.
The lease payments are discounted using the group's incremental
rate of borrowing if the interest rate implicit in the lease cannot
be readily determined. For materially all of the group's leases,
the group's incremental rate of borrowing is used. This rate is
calculated using a number of inputs, being observable risk-free
gilt rates, specific data based on bonds already in circulation for
the relevant group company as well as data from the wider utility
sector. Further adjustments for payment profile and the term of the
lease are made.
Right-of-use assets are recognised as property, plant and
equipment at cost, this is generally equivalent to the initial
measurement of the lease liability. Depreciation is charged on a
straight-line basis over the term of lease.
After the commencement date, the lease liability is increased for
the accretion of interest (being the unwinding of the discounting
applied to future leases payments) and reduced by lease payments
made. In addition to this, the carrying amount is updated to reflect
any remeasurement or lease modifications. Remeasurements are
typically required as a result of rent reviews or changes to the lease
term. In these cases a corresponding adjustment to the right-of-use
asset is made.
Where leases have a term of less than 12 months or are leases of
low value assets, the group has elected not to recognise right-of-
use assets and lease liabilities as permitted by IFRS 16 'Leases'.
Lease payments are instead charged to the income statement on a
straight-line basis over the period of the lease.
250
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United Utilities Group PLC unitedutilities.com/corporate A8 Subsidiaries and other group undertakings
Details of the group’s subsidiary undertakings, joint ventures and associates are set out below. Unless otherwise specified, the registered
address for each entity is Haweswater House, Lingley Mere Business Park, Lingley Green Avenue, Great Sankey, Warrington, WA5 3LP,
United Kingdom. For further details of joint ventures and associates please see notes 12 and 13.
Class of
share
capital held
Proportion of
share capital
owned/voting
rights %* Nature of business
Subsidiary undertakings
Great Britain
Halkyn District Mines Drainage Company Limited
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(1)
Thailand
Manta Management Services Limited(2)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
99.9 Dormant
90.6
Property management
100.0 Holding company
100.0 Dormant
100.0 Holding company
100.0 Wastewater services
100.0
Energy generation
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
100.0
Property management
Renewable energy generation
100.0 Waste treatment
100.0 Holding company
100.0
Financing company
100.0 Water and wastewater services
100.0 Corporate trustee
100.0 Dormant
100.0 Dormant
100.0 Non-trading
Ordinary
100.0 Holding company
Ordinary
100.0 Management company
Joint ventures
All joint ventures are accounted for using the equity method and are strategic to the group's activities to varying degrees.
Great Britain
Lingley Mere Business Park Development Company
Limited
Selectusonline Limited
Water Plus Group Limited(3)
Water Plus Limited(3)
Water Plus Select Limited(3)
Estonia
AS Tallina Vesi(4)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
50.0 Development company
16.7
Procurement portal
50.0 Holding company
50.0 Water and wastewater retail services
50.0 Water and wastewater retail services
Ordinary
35.3 Water and wastewater services
* With the exception of United Utilities PLC, shares are held by subsidiary undertakings rather than directly by United Utilities Group PLC.
(1) Registered address: Herikerbergweg 88, 1101 CM Amsterdam, the Netherlands.
(2) Registered address: Unit 2201, No. 1. Soi Chan 2, Yak 3 Chan Road, Thung Wat Don Sub District, Sathorn District, Bangkok, Thailand 10120.
(3) Water Plus Limited and Water Plus Select Limited are wholly owned subsidiaries of Water Plus Group Limited. Registered address: Two Smithfield,
Leonard Coates Way, Stoke-on-Trent, ST1 4FD, United Kingdom.
(4) Registered address: Ädala 10, Tallinn 10614, Estonia.
27061-UU-AR2020-Financials.indd 251
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 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 2020. 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
Reported operating profit
Underlying operating profit
Reported profit before tax
Underlying profit before tax
Reported profit after taxation
Underlying profit after tax
Reported earnings per share (basic)
Underlying earnings per share
2020
£m
1,859.3
630.3
743.9
303.2
492.0
106.8
429.6
15.7p
63.0p
2019
£m
1,818.5
634.9
684.8
436.2
460.3
363.4
407.9
53.3p
59.8p
2018
£m
1,735.8
636.4
645.1
432.1
370.2
354.6
304.9
52.0p
44.7p
2017
£m
1,704.0
605.5
622.9
442.4
389.4
433.9
313.4
63.6p
46.0p
2016
£m
1,730.0
567.9
604.1
353.5
408.1
397.5
325.3
58.3p
47.7p
Dividend per ordinary share
42.6p
41.28p
39.73p
38.87p
38.45p
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) (%)
13,215.7
828.4
14,044.1
(9,877.3)
(1,204.7)
(11,082.0)
2,962.1
810.3
(593.9)
(27.8)
188.6
7,361.4
62%
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)
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)
7,067.3
61%
6,867.8
61%
6,578.7
61%
6,260.5
61%
Note:
(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.
252
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United Utilities Group PLC unitedutilities.com/corporate Shareholder information
Key dates
− 25 June 2020
Ex-dividend date for the 2019/2020 final dividend
− 26 June 2020
Record date for 2019/20 final dividend
− 24 July 2020
Annual general meeting
− 3 August 2020
Payment of 2019/20 final dividend to shareholders
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.
− 25 November 2020
Log on to shareview.co.uk and you can:
Announcement of half-year results for the six months ending
30 September 2020
− 17 December 2020
Ex-dividend date for 2020/21 interim dividend
− 18 December 2020
Record date for 2020/21 interim dividend
− 1 February 2021
Payment of 2020/21 interim dividend to shareholders
− May 2021
Announce the final results for the 2020/21 financial year
− June 2021
Publish the Annual Report and Financial Statements for the
2020/21 financial year
›
›
›
›
set up electronic shareholder communication;
view your shareholdings;
update your details if you change you address; and
get your dividends paid directly into your bank account.
Please do not use any electronic address provided in this annual
report or in any related document to communicate with the
company for any purposes other than those expressly stated.
Make life easier and have you dividends paid
straight into your bank account
›
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.
27061-UU-AR2020-Financials.indd 253
253
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FINANCIAL STATEMENTSStock Code: UU.Annual Report and Financial Statements for the year ended 31 March 2020 Shareholder information
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 2020
2
1
.
2
4
5
3
,
7
5
0
0
0
,
1
-
1
2
7
.
4
6
4
9
,
3
1
-
1
0
0
,
1
0
0
0
0
1
,
8
7
.
3
1
4
7
2
-
1
0
0
0
0
1
,
,
0
0
0
0
0
0
,
1
6
1
.
3
659
-
1
0
0
0
1
,
0
0
0
0
0
1
,
.
8
8
9
3
4
3
.
6
3
8
9
2
1
% of shares
Number of
holdings
,
-
1
0
0
0
0
0
,
1
,
0
0
0
0
0
0
0
1
,
,
1
0
0
0
0
0
0
1
,
t
s
e
h
g
h
o
t
i
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
11%
18%
27%
44%
United Kingdom
North America
Europe
Rest of the World
Dividend history – pence per share
Interim
Final
Total ordinary
2016
12.81
25.64
38.45
2017
12.95
25.92
38.87
2018
13.24
26.49
39.73
2019
13.76
27.52
41.28
2020
14.20
28.40
42.60
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
This document is printed on Revive 100% Recycled Silk 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.
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.
254
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United Utilities Group PLC unitedutilities.com/corporate
27061-UU-AR2020-Financials.indd 255
12-Jun-20 3:41:24 PM
I
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Job Number
5 June 2020 12:50 pm
Proof Number
Job Number
5 June 2020 12:50 pm
Proof Number
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
Job Number
Job Number
5 June 2020 12:50 pm
5 June 2020 12:50 pm
Proof Number
Proof Number
27061-UU-AR2020-Strategic.indd 1
12-Jun-20 3:44:01 PM
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