Corporate governance report continued - code principles

Code principle – Relations with shareholders

Introduction by Dr John McAdam

As Chairman, over the course of the year I receive a number of items of correspondence from investment and fund managers and institutional voting agencies. These communications provide useful insight and can act as a stimulus for review and change. They are very much welcomed.

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

  • Makinson Cowell 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 activities within investor relations and reports from sector analysts to ensure that the board maintains an understanding of investors' priorities; and
  • the executive and non-executive directors are available to meet with major shareholders and institutional investors; in fact, this is one of the specific roles of the senior independent director.

Institutional investors

We are always keen to hear the views of, and engage with, our shareholders and investors and we have an active investor relations programme. The activities of the programme include:

  • a regular schedule of meetings between the CEO and CFO and representatives from our major shareholders. This is also supplemented with meetings hosted by our investor relations team. During the year, the programme covered over 100 institutions based in the UK, Europe, North America and Asia Pacific region;
  • presentations by the CEO and CFO to groups of institutional shareholders and investors, both on an ad hoc basis and linked to our half and full year results announcements;
  • regular feedback is provided to the board on the views of our institutional investors following on from the CEO and CFO's meetings;
  • close contact is also maintained between the investor relations team and a range of City analysts that research United Utilities; and
  • in total, we met or offered to meet with 38 per cent by value of the overall shareholder base, which represents 69 per cent of the targetable institutional shareholder base (when adjusting for shareholders who do not typically meet with companies, such as indexed funds).

In meetings with investors, frequent areas of common interest include operational and environmental performance, customer service, capital investment, efficiency initiatives and regulatory outperformance. Investors are always keen to observe financial stability, and investors are interested in the level of gearing versus regulatory assumptions, cost of finance, debt portfolio and maturity profile, future financing requirements and dividends. The outcome of the price review, covering the 2015–20 period, was also a key area of interest for them. Looking ahead, investors will be keen to understand how the company is performing relative to the price review allowances and targets, along with the potential implications of regulatory change and political risk.

Retail shareholders

Despite the privatisation process being over 25 years ago, we have retained a large number of individual shareholders with registered addresses in the North West of England – in fact around 41 per cent. We have historically always held our AGM in our region in Manchester, which enables our more local shareholders, many of whom are also our customers, to attend the meeting. We endeavour to hold the meeting at a venue which is both centrally located in the city (to enable shareholders to use public transport should they so wish) whilst being mindful of the costs.

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

Relations with other providers of capital

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

This requires a 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. 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, is our single biggest lender, currently providing over £2 billion of debt and undrawn facilities to support our capital investment programmes (past and present). The group currently has gross borrowings of £6,978 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. More information can be found on our website at

Code principle – Accountability

Introduction by Dr John McAdam

We engaged the services of a risk management consultancy following the Lancashire water quality incident, as part of the internal investigation into the incident to assess whether our existing risk management framework was fit for purpose in identifying and assessing risk and whether the risk management framework was being used effectively.

Board's approach to risk management and internal control

The board is responsible for determining the nature and extent of the risks that it is willing to take to achieve its strategic objectives. The board is also responsible for ensuring that the company's risk management and internal control systems are effectively managed across the business and that they receive an appropriate level of scrutiny and board time. The group's risks predominantly reflect those of all regulated water and wastewater companies. One of the most significant risks is that of failing to achieve our regulatory performance targets or failing to fulfil our obligations in any five-year planning cycle, leading potentially to the imposition of fines and penalties. 2015/16 has been the first year of our current five-year planning cycle, and in terms of our capital programme we have had a smooth start.

During the year, the board engaged an independent review of the effectiveness of the risk management framework as part of the internal investigation led by the Senior Independent Director of the Lancashire water quality incident. The independent review concluded that the risk management framework was robust and reflected best practice and there was active engagement with risk management by senior management, the executive team and the board but could be strengthened. The recommendations of this internal investigation included: the need for centralisation of the drinking water safety plans within wholesale to aid consistency; improved application of the risk management process; further embedding existing risk management processes within wholesale and improving system integration; and increasing the focus on reputational and operational risks.

The board, following the review by the audit committee, concluded that it was appropriate to adopt the going concern basis of accounting. Similarly, in accordance with the principles of the Code, the board concluded, following a recommendation from the audit committee, that it was appropriate to provide a long-term viability statement. Assurance supporting these statements was provided by the review of: the group's key financial measures; the key credit financial ratios; the group's liquidity and UUW's ongoing ability to meet its financial covenants; and the contingent liabilities of the group.

As part of the assurance process, the board also took into account the principal risks and uncertainties facing the company, and the actions taken to mitigate those risks. These principal risks and uncertainties are detailed on the Principal risks and uncertainties page, 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. 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 Letter from the Chairman) including such matters as liquidity policy, the group's capital funding requirements and interest rate management.

Review of the effectiveness of the risk management and internal control systems

Taking into account the information on the principal risks and uncertainties page, and the ongoing work of the audit committee in monitoring the risk management and internal control systems on behalf of the board (and for whom the committee provides regular updates, see the Audit committee page), 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;
  • oversight of treasury matters;
  • reviewing and assessing the activities of internal audit;
  • reviewing management's internal control self-assessment;
  • reviewing reports from the group audit and risk board;
  • reviewing the outcome of annual business unit risk assessment process; and
  • reviewing the business risk management framework supported by the work of the independent reviewer.

Long-term viability statement

The directors have assessed the viability of the group, taking account of the group's current position, the potential impact of the principal risks facing the business in severe but reasonable scenarios, and the effectiveness of any mitigating actions. Based on this assessment, the directors have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the five-year period to March 2021.

This statement has been based upon the group's strategic planning process, which is aligned to the price control period and the group's robust capital solvency position with a debt to RCV ratio of around 60 per cent, providing considerable capital headroom and supporting any increase in medium-term liquidity if required. The group has a proven track record of being able to raise new forms of finance in most market conditions, and expects to continue to do so into the future. In addition, the board has considered the protections which exists from the regulatory and economic environment within which it operates. From an economic perspective, given the nature of water and wastewater services, threats to the group's viability from risks such as reduced market share, substitution of services and reduced demand are low compared to those faced by many other industries. From a regulatory perspective the group benefits from a rolling 25-year licence which, coupled with the price control set by Ofwat, provides a high degree of certainty of cash flows during the current price control period (which runs to March 2020), while between price control periods there exists additional protection afforded by Ofwat's primary legal duty to ensure that water and wastewater companies are able to finance their functions. For these reasons the board considers it appropriate to provide a medium-term viability statement of five years.

The directors have assessed the group's viability considering the principal risks, and its ability to absorb a number of severe but reasonable scenarios, taking into account those event-based risks assessed to have the highest possibility of occurrence and the most severe impact. These include political and regulatory risks, as well as the potential for a restriction to the availability of financing resulting from a global capital markets crisis. The viability assessment has considered the potential impacts of these risks on the group's business model, future performance, solvency and liquidity over the period. As well as the protections which exist from the regulatory environment within which it operates, a number of mitigating actions are available in the extreme scenarios considered, including the restriction of dividend payments. These actions provide the group with significant scope to improve its liquidity and capital position to further absorb such threats.

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

Code principle – Remuneration

Introduction by Dr John McAdam

Our remuneration policy has been designed in order to promote the long-term success of the company and delivery of the business strategy, with a significant proportion of senior executives' pay being performance related.