Code principle – Relations with shareholders

Introduction by Dr John McAdam

"Both myself and Mark Clare, as senior independent director, welcome the opportunity to engage with investors. Face-to-face meetings are particularly useful in gaining a better understanding of investors' views which would be shared with board colleagues. I am planning for a number of such meetings to be held later in the year."

The board as a whole accepts its responsibility for engaging with shareholders and is kept fully informed about information in the marketplace including:

  • The investor relations adviser produces an annual survey of investors' views and perceptions about United Utilities, the results of which are presented 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.

Institutional investors

We are always keen to engage with our shareholders, hear their views and update them on developments in our business. As well as current investors, we engage actively with institutional investors who do not currently hold shares in United Utilities, as we are keen to ensure our business is well understood across the investment community, and to hear and discuss the views of all investors.

We have an active investor relations programme, which includes:

  • A regular schedule of 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 2017/18, through our investor relations programme, we met or offered to meet with 57 per cent, by value, of the overall shareholder base, which represents 96 per cent of the targetable institutional shareholder base (when 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 financing requirements; and dividends. The performance against the final determination for the 2015–20 period is a key area of interest, and investors are also keen to understand how the company is performing relative to the price review allowances and targets each year, along with the potential implications of regulatory change and political risk. Furthermore, investors are keen to hear that we are progressing with our plans for the 2020–25 regulatory period and beyond.

Retail shareholders

Despite the privatisation process being over 25 years ago, we have retained a large number of individual shareholders with registered addresses in the North West of England – in fact over 50 per cent of registered shareholdings on the share register. We have historically always held our AGM in our region in Manchester, which enables our more local shareholders, many of whom are also our customers, to attend the meeting. We endeavour to hold the meeting at a venue which is both centrally located in the city (to enable shareholders to use public transport should they so wish) whilst being mindful of the costs.

There is a considerable amount of information on our website, including our online report which provides information on our key social and environmental impacts and performance during the year. Together with the annual and half-yearly results announcements, our annual report and financial statements are also available on our website; these are the principal ways in which we communicate with our retail shareholders. Our company secretariat and investor relations teams, along with our registrar, Equiniti, are also on hand to help our retail shareholders with any queries. Information for shareholders can also be found on the inside back cover of this document, with a number of useful website addresses.

Outcome of 2017 AGM

At the 2017 AGM votes were cast in relation to approximately 64 per cent of the issued share capital. All 23 resolutions were passed by the required majority. Votes were cast in favour of the reappointment of the board directors as follows:

Dr John McAdam98.54%Russ Houlden99.06%
Steve Mogford99.69%Brian May99.45%
Stephen Carter99.68%Paulette Rowe99.90%
Mark Clare99.74%Sara Weller99.36%
Alison Goligher99.94%

Steve Fraser will stand for election by shareholders for the first time at the 2018 AGM.

Relations with other providers of capital

Running a water and wastewater business, by its very nature, requires a long-term outlook. Our regulatory cycle is based on five-year periods, and we raise associated funding in order to build and improve our water and wastewater treatment works and associated network of pipes for each five-year cycle and beyond. We are heavily reliant on successfully acquiring long-term funding from banks and the debt capital markets to fund our capital investment programme and refinance upcoming debt maturities.

This requires long-term support from our credit investors who invest in the company by making term funding available in return for receiving interest on their investment and repayment of principal on maturity of the loans or bonds. We arrange term debt finance in the bond markets (with maturities typically ranging from seven years to up to 50 years at issue). Debt finance is raised via the group's London listed multi-issuer Euro Medium Term Note Programme, which gives us access to the sterling and euro public bond markets and privately arranged note issues. Committed credit facilities are arranged with our relationship banks on a bilateral basis. Additionally, the European Investment Bank (EIB), which is the financing arm of the European Union (EU), is our single biggest lender, currently providing around £2 billion of debt and undrawn facilities to support our capital investment programmes (past and present). Following the 2016 referendum regarding the UK exiting the EU (Brexit), it is likely that the EIB will significantly curtail new lending into the UK once Brexit has been effected. We therefore expect that post-Brexit, further loans from the EIB will not be available and our existing loan portfolio with the EIB will enter into 'run-off' in line with the scheduled maturities of each loan. The group is therefore likely to access the debt capital markets on a more regular basis post Brexit. The group currently has gross borrowings of circa £7,912 million.

Given the importance of debt funding to our group, we have an active credit investor programme coordinated by our group treasury team, which provides a first point of contact for credit investors' queries and maintains a dedicated area of the company's website. One-to-one meetings are held with credit investors through a programme aimed at the major European fund managers known to invest in corporate bonds that may be existing holders of the group's debt or potential holders. Regular mailings of company information are sent in order to keep credit investors informed of significant events. The treasury team has regular dialogue with the group's relationship banks and the EIB and the credit rating agencies. More information can be found on our website at

Code principle – Accountability

Introduction by Dr John McAdam

A series of briefing sessions were held with other industry executives and stakeholders to share lessons learnt from the Lancashire water quality incident of 2015.

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. Sitting alongside the risk management framework, risk appetite captures on an annual basis 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.

All the actions relating to improvements to the risk management framework that were identified by the investigation undertaken by Mark Clare, senior independent director, following the Lancashire water quality incident in 2015 have been completed. A series of briefing sessions were held with other industry executives and stakeholders to share lessons learnt from the Lancashire water quality incident of 2015.

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, 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 Audit committee), the board:

  • Is satisfied that it has carried out a robust assessment of the principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity; and
  • Has reviewed the effectiveness of the risk management and internal control systems including all material financial, operational and compliance controls (including those relating to the financial reporting process) and no significant failings or weaknesses were identified. After review, it was concluded that through a combination of the work of the board, the audit committee and the UUW board (with specific responsibility for operational and compliance controls), the company's risk management and internal controls were indeed effectively monitored throughout the year.

In the review of the effectiveness of risk management and internal controls systems the board also took into account the:

  • Biannual review of significant risks (see How we manage risks);
  • Reviewing the outcome of the biannual business unit risk assessment process (see Audit committee);
  • Reviewing and assessing the activities and effectiveness of internal audit (see Audit committee);
  • Reviewing management's internal control self-assessment (see Audit committee);
  • Reviewing reports from the group audit and risk board (see Audit committee);
  • Oversight of treasury matters (in particular the debt financing and interest rate management (see Financial performance); and
  • Reviewing the business risk management framework and management's approach and tolerance towards risk with a particular focus on financial and operational risk (see Audit committee).

Going concern and long-term viability

The board, following the review by the audit committee, concluded that it was appropriate to adopt the going concern basis of accounting (see Accounting policies). 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. These principal risks and uncertainties are detailed in the How we manage risks section, 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 in the Corporate governance report) including such matters as liquidity policy, the group's capital funding requirements and interest rate management. Furthermore, the board believes that under the current regulatory and statutory framework a period of five years to assess the group's long-term viability is appropriate, amongst other things, because of the underlying protection provided by Ofwat's primary legal duty to ensure that water and wastewater companies are able to finance their functions.

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 company will be able to continue in operation and meet its liabilities as they fall due over the five-year period to March 2023.

This viability statement is based on the fundamental assumption that the current regulatory and statutory framework does not substantively change, for example a change which facilitated the compulsory purchase of the shares or assets of either UUW or UUG for the Renationalisation of the water sector, throughout the viability assessment period.

The long-term planning detailed in the Our planning cycles section assesses the group's prospects and establishes its strategy over a 25-year time horizon consistent with its rolling 25-year licence and its published long-term strategy. This provides a framework for the group's strategic planning process, and is key to achieving the group's aim of providing the best service to customers at the lowest sustainable cost and in a responsible manner over the longer-term, underpinning our business model. In order to achieve this aim and promote the long-term sustainability and resilience of the business, due consideration is given to the management of risks that could impact on the business model, future performance, solvency and liquidity of the group. An overview of our risk management approach that supports the group's long-term planning and prospects, together with the principal risks and uncertainties facing the business, can be found in the How we manage risks section.

The viability statement for the five-year period to March 2023 has been assessed 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 – which provides headroom to cover projected financing needs through until mid-2019;
  • The group's robust capital solvency position – with a debt to regulatory capital value (RCV) ratio of around 60 per cent, providing considerable headroom supporting access to medium-term liquidity as required; and
  • The current regulatory framework within which the group operates – which provides a high degree of certainty over cashflows in the short to medium-term and broader regulatory protections in the longer-term.

The analysis underpinning this assessment has been through a robust internal review process, which has included scrutiny and challenge from the audit committee, and has been reviewed by the group's external auditors, KPMG, as part of their normal audit procedures.

The group has a proven track record of being able to raise new forms of finance in most market conditions, and expects to continue to do so into the future. In addition, the board has considered the protections which exist from the regulatory and economic environment within which it operates. From an economic perspective, given the 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.

From a regulatory perspective the group currently 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 which 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.

The business planning process is closely aligned with these principles, and, coupled with the group's robust management of risks, gives confidence that current and future regulatory price controls will provide certainty around cash flows that will support the continuing viability and prospects of the group. For these reasons the board considers it appropriate to provide a medium-term viability statement of five years.

The directors have assessed the group's viability in the context of its expected performance and past ability to deliver for customers, considering the principal risks and its ability to absorb a number of severe but reasonable scenarios including those arising from operational and environmental risks, political and regulatory risks, the risk of critical asset failure and the potential for a restriction to the availability of financing resulting from a global capital markets crisis. The viability assessment has considered the potential impacts of these risks on the group's business model, future performance, solvency and liquidity based on a number of stress-tested and sensitised scenarios in which the group is assumed to face a series of the top risks in terms of the most severe impact and likelihood of occurence over the course of the viability assessment period. As well as the protections which exist from the regulatory environment within which the group operates, a number of mitigating actions are available in the kind of severe scenarios considered, including the raising of new finance, capital programme deferral, the close-out of derivative asset positions, the restriction of dividend payments and access to additional equity. These actions provide the group with significant scope to improve its liquidity and capital position to further absorb such threats.

The directors also considered it appropriate to prepare the financial statements on the going concern basis, as explained in the basis of preparation paragraph in Accounting policies.