1. Our opinion is unmodified
We have audited the financial statements of United Utilities Group PLC (the Company) for the year ended 31 March 2018 which comprise the Consolidated income statement, Consolidated statement of comprehensive income, Consolidated and company statements of financial position, Consolidated and company statements of changes in equity, Consolidated and company statements of cash flows, and the related notes, including the accounting policies.
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 2018 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.
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 appointed as auditor by the directors on 9 October 2017. The period of total uninterrupted engagement is for the seven financial years ended 31 March 2018. 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.
|Materiality: group financial statements as a whole||£19.0m (2017: £19.5m)|
4.9% (2017: 4.7%) of normalised group profit before tax
|Coverage||98% (2017: 98%) of group profit before tax|
|Risks of material misstatement||vs 2017|
|Recurring risks||Revenue recognition and allowance for customer debts||leftright|
|Capitalisation of costs relatingto the capital programme||leftright|
|Retirement benefit obligation valuation||leftright|
|Water Plus joint venture investment and loan carrying value||New risk|
|Recoverability of intercompany debtors and|
investment in United Utilities PLC (parent company only)
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in 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.
|The risk||Our response|
Revenue recognition and provisions for household customer debt
Revenue not recognised:£20.3 million (2017: £28.3 million)
Provision for customer debts:£63.4 million (2017: £85.4 million)
Refer to Audit Committee Report, accounting policy and (note 3 and note 14).
Household revenue recognition and provision for household customer debts are key areas of judgement, particularly in relation to:
- identifying properties where there is little prospect cash will be received for revenue that has been billed due to either the occupier not being able to be identified or a past history of non-payment of bills relating to that property; and
- assessing the recoverability of trade debtors.
Our procedures included:
- Accounting analysis – Assessing whether appropriate revenue recognition policies are applied through comparison with relevant accounting standards including the policy of not recognising revenue where it is not probable that cash will be received;
- Control observation – Testing the group's controls over revenue recognition and provision for customer debts, including reconciliations between sales and cash receipts systems and the general ledger;
- Methodology choice – Assessing the appropriateness of the customer debt provisioning policy based on historical cash collections, credits, re-bills and write-off information; and
- Assessing transparency – Assessing the adequacy of the group's disclosures of its revenue recognition and customer debt provisioning policies, including the judgement involved in recording revenue and estimation uncertainty of the bad debt provision.
- In respect of the recognition of revenue only where it is probable that economic benefits/cash will be received, we found the amount of revenue recognised to be appropriate; and
- From the evidence obtained, we considered the level of bad debt provisioning to be acceptable.
Capitalisation of costs relating to the capital programme
£741.3 million (2017: £717.9 million)
Refer to Audit Committee Report, accounting policy and (note A7 and note 9).
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 also inherently judgemental.
Our procedures included:
- Accounting analysis – Assessing the group's capitalisation policy for compliance with relevant accounting standards;
- Control observation – Testing controls over the application of the policy in the period including review of project business case submissions, and attending a sample of capital approval meetings to observe the judgements made and evaluating the documented conclusions;
- Tests of details – Critically assessing the costs capitalised for a sample of projects against the capitalisation policy;
- Tests of details – Identify and assess the impact of changing capitalisation rates for all existing projects;
- Historical comparisons – Critically assess the proportion of overhead costs by business area which are capitalised using historical comparisons and expected changes based upon corroborated enquiry and our sector knowledge; and
- Assessing transparency – Assessing the adequacy of the group's disclosures of its capitalisation policy and other related disclosures.
- We found the group's treatment of expenditure as capital or operating to be acceptable.
Retirement benefit obligation valuation
£3,498.7 million (2017: £3,615.5 million)
Refer to Audit Committee Report, accounting policy and (note A7 and note 17).
Estimation in valuation of retirement obligations:
The group's retirement benefit surplus is the difference between the fair value of the pension assets and the retirement benefit obligation.
Significant estimates are made in valuing the group's retirement benefit obligation. Small changes in assumptions and estimates used to value the group's pension obligation would have a significant effect on the group's financial position.
Our procedures included:
- Benchmarking assumptions – Challenging the key assumptions supporting the group's retirement benefit obligations valuation with input from our own actuarial specialists, including comparing the discount rate, inflation rate and life expectancy assumptions used against externally derived data. We performed a comparison of key assumptions against our own benchmark ranges which are derived from available data as well as comparing against those used by other companies reporting on the same period; and
- Assessing transparency – Assessing the group's disclosure in respect of the sensitivity of the liabilities to changes in the key assumptions.
- The results of our testing were satisfactory and we found the obligation recognised to be acceptable.
Water Plus joint venture investment and loans carrying value
£39.3 million investment in joint venture and £135.8 million loans to joint venture (2017: £39.1 million and £118.5 million respectively)
Refer to Audit Committee Report, accounting policy and (note A7 and note 11).
Forecast-based estimate valuation:
The group's investment in the equity of, and loans to Water Plus is significant. The estimated recoverable amount is subjective due to the inherent uncertainty involved in forecasting future cash flows. The estimate of the investment in Water Plus is also sensitive to the discount rate used.
Our procedures included:
- Benchmarking assumptions – Evaluating assumptions used, in particular those relating to discount rate, terminal growth rate, and the normalised level of working capital in the business, using our own valuation specialist and comparing to externally derived data;
- Sensitivity analysis – Performing sensitivity analysis on the assumptions noted above; and
- Assessing transparency – Assessing whether the group's disclosures are appropriate.
- We found the resulting estimate of the recoverable amount of the total investment and loans in the Water Plus joint venture to be acceptable.
Recoverability of intercompany debtors and
investment in United Utilities PLC
Investment in subsidiary and participating interests £6,326.8 million (2017: £6,326.8 million)
Amounts owed by subsidiary undertakings £74.2 million (2017: £69.0 million)
Refer to note A7 and note 12.
The carrying amount of the company's investments in subsidiaries held at cost less impairment and intercompany receivables represent 100 per cent (2017: 100 per cent) of the company's total assets.
We do not consider the valuation of these investments and recovery of intercompany receivables to be at a high risk of significant misstatement, or to be subject to a significant level of judgement. However, due to their materiality in the context of the company financial statements, this is considered to be the area that had the greatest effect on our overall parent company audit.
Our procedures included:
- Tests of detail: Comparing the carrying value of intercompany investments and receivables to the relevant subsidiary balance sheet to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of the investment carrying amounts and whether the intercompany receivables were included in the net assets.
- We found the assessment of the amounts recorded to be acceptable.
3. Our application of materiality and an overview of the scope of our audit
Normalised group profit before tax
£384.8m (2017: £418.1m)
- Normalised group profit before tax
- Group materiality
Group normalised profit before tax
Group total assets
Group profit before tax
- Full scope for group audit purposes 2018
- Specified risk-focused audit procedures 2018
- Full scope for group audit purposes 2017
- Specified risk-focused audit procedures 2017
- Residual components
Materiality for the group financial statements as a whole was set at £19.0 million (2017: £19.5 million), determined with reference to a benchmark of group profit before tax, normalised to exclude thisyear's net fair value gains on debt and derivative instruments as disclosed in note 5, of £384.8 million, of which it represents 4.9 per cent (2017: 4.7 per cent).
Materiality for the parent company financial statements as a whole was set at £18.5 million (2017: £18.5 million), determined with reference to a benchmark of company total assets, of which it represents 0.29 per cent (2017: 0.29 per cent).
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £0.5 million, in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the group's 34 (2017: 34) reporting components, we subjected six (2017: six) to full scope audits for group purposes.
The components within the scope of our work accounted for the percentages illustrated opposite.
The remaining two per cent of group profit before tax and one per cent of total group assets is represented by 28 of reporting components, none of which individually represented more than two per cent of any of total group revenue, group profit before tax or total group assets.
The group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The group team approved the component materiality of £2.5 million to £18.5 million, having regard to the mix of size and risk profile of the group across the components. The work on one of the six components (2017: one of the six components) was performed by component auditors and the rest, including the audit of the parent company, was performed by the group team. The group team performed procedures on the items excluded from normalised group profit before tax.
The group team visited no (2017: one) component locations (2017: Stoke). To assess the audit risk and strategy, telephone conference meetings were also held with the component auditor that was not physically visited. 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.
4. We have nothing to report on going concern
We are required to report to you if:
- we have anything material to add or draw attention to in relation to the directors' statement in accounting policies of the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the group and company's use of that basis for a period of at least 12 months from the date of approval of the financial statements; or
- the related statement under the Listing Rules set out in the Corporate governance report 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 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 statement (Corporate governance report) that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency and liquidity;
- the Principal Risks 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.
Corporate governance disclosures
We are required to report to you if:
- we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors' statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy; or
- the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the 11 provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
Based solely on our work on the other information described above:
- with respect to the Corporate Governance Statement disclosures about internal control and risk management systems in relation to financial reporting processes and about share capital structures;
- we have not identified material misstatements therein;
- the information therein is consistent with the financial statements; and
- in our opinion, the Corporate Governance Statement has been prepared in accordance with relevant rules of the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority.
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.
7. Respective responsibilities
As explained more fully in their statement set out in the Statement of directors' responsibilities, 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.
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 sector experience and through discussion with the directors and other management (as required by auditing standards).
We had regard to laws and regulations in areas that directly affect the financial statements, including financial reporting (including related company legislation) and taxation legislation. We considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items.
In addition, we considered the impact of laws and regulations in the specific areas of environmental law, 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. With the exception of any known or possible non-compliance and, as required by auditing standards, our work in respect of these was limited to enquiry of the directors and other management and inspection of regulatory and legal correspondence. We considered the effect of any known or possible non-compliance in these areas as part of our procedures on the related financial statement items.
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, with a request to report on any indications of potential existence of non-compliance with relevant laws and regulations (irregularities) in these areas, or other areas directly identified by the component team.
As with any audit, there remained a higher risk of non-detection of non-compliance with relevant laws and regulations, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.
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
St Peter's Square, Manchester, M2 3AE
23 May 2018