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Opinions and conclusions arising from our audit

1. Our opinion on the financial statements is unmodified

We have audited the financial statements of United Utilities Group PLC for the year ended 31 March 2015. 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 2015 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. Our assessment of risks of material misstatement

In arriving at our audit opinion above on the financial statements, the risks of material misstatement that had the greatest effect on our audit were as follows:

Capitalisation of costs relating to the capital programme (£728.5 million)

Refer to audit committee report, accounting policies and note 10 financial disclosures.

The riskOur response
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. Expenditure in relation to increasing the capacity or enhancing the network is treated as capital expenditure. Expenditure incurred in maintaining the operating capability of the network is expensed in the year in which it is incurred. Capital projects often contain a combination of enhancement and maintenance activity which are not distinct and therefore the allocation of costs between capital and operating expenditure is inherently judgemental. Within the costs of the capital programme is an allocation of overhead relating to the proportion of time that the group's support functions spend which relates directly to the capital programme. This allocation is also inherently judgemental. For these reasons there remains a risk that capital and operating expenditure may be significantly misstated and so the group's capital programme is an area of focus for our work.In this area our principal audit procedures included the following:
  • we assessed the group's capitalisation policy for compliance with relevant accounting standards;
  • we tested controls over the application of the policy to spend incurred on projects within the capital programme in the period including attending capital approval meetings to observe the judgements made; for a sample of capital projects we assessed the appropriate application of the capitalisation policy to actual spend incurred;
  • we assessed, also for a sample of projects, variances in actual expenditure to budgeted capital and operating expenditure and where significant variances were identified we tested the proportionate allocation of costs between capital and operating expenditure;
  • we agreed overhead costs incurred to supporting documentation on a sample basis and performed comparative analysis of overheads absorbed into capital projects by category to assess consistency with the policy and with prior years; and
  • we tested a sample of capital accruals to assess the existence and accuracy of the costs being capitalised.
We also assessed the adequacy of the group's disclosures of its capitalisation policy and other related disclosures.

Revenue recognition (£1,720.2 million) and provision for customer debts (£100.5 million)

Refer to audit committee report, accounting policies, and note 15 financial disclosures.
The riskOur response
Revenue recognition remains one of the key judgemental areas for the audit, particularly in relation to:
  • the estimate of the revenue value of water supplied to metered customers between the last meter reading and the period end; and
  • supplies to properties where there is little prospect of revenue being realised through the occupier not being able to be identified or due to a past history of non-payment of bills relating to that property.

A proportion of the group's customers do not or cannot pay their bills which results in the need for provisions to be made for non-payment of the customer balance. Due to the level of judgement and the complexity of the calculation which could lead to revenue and provision for customer debt being misstated, this is considered a key audit risk.

In this area our principal audit procedures included the following:
  • we assessed whether appropriate revenue recognition policies are applied through comparison with relevant accounting standards and industry practice, including the policy of not recognising revenue where there is little prospect of revenue being realised;
  • we tested the group's controls over revenue recognition, including reconciliations between sales and cash receipts systems and the general ledger;
  • we recalculated the metered accrued income calculation with the support of our own modelling specialists;
  • we assessed the appropriateness of the customer debt provisioning policy based on historical cash collections, credits, re-bills and write off information which we assessed through testing the data in the billing system and analysed by comparing the data to that which we collect independently across the industry;
  • we assessed the extent to which historical trends are taken into account and applied in the customer debt provision calculation; and
  • we remodelled the customer debt provision calculation to assess the mathematical accuracy with the support of our own modelling specialists.
We also assessed the adequacy of the group's disclosures of its revenue recognition, customer debt provisioning policy, disclosures in relation to the estimation uncertainty involved in calculating the provision and other related disclosures.

Retirement benefit surplus (£79.2 million)

Refer to audit committee report, accounting policies and notes 18 and A4 financial disclosures.
The riskOur response
Significant estimates are made in valuing the group's retirement benefit surplus. Small changes in assumptions and estimates used to value the group's net pension surplus (2014: deficit) would have a significant effect on the group's financial position.Our principal audit procedures included the following: we tested the controls over the maintenance of the schemes' membership data and we challenged the key assumptions supporting the group's retirement benefit surplus valuation with input from our own actuarial specialists, comparing the discount rate, inflation rate, salary, pension increase rates and life expectancy assumptions used against externally derived data. We also assessed the group's disclosure in respect of the sensitivity of the surplus to changes in the key assumptions.

Derivative financial instrument valuations (£477.4 million)

Refer to audit committee reportaccounting policies, and note A3 financial disclosures.
The riskOur response
The group has significant derivative financial instruments, the valuation of which is determined through the application of valuation techniques which often involve the exercise of judgement and the use of assumptions and estimates. Due to the significance of financial instruments and the related estimation uncertainty, this is considered a key audit risk.Our audit procedures included the following:
  • we assessed controls over the identification, measurement and management of derivative financial instruments and assessed the methodologies, inputs and assumptions used by the group in determining fair values;
  • we compared observable inputs into valuation models such as quoted prices to externally available market data; and
  • we recalculated valuations utilising our own valuation specialists.
Additionally, we assessed whether the financial statement disclosures of fair value risks and sensitivities appropriately reflect the group's exposure to valuation risk.

3. Our application of materiality and an overview of the scope of our audit

In establishing the overall audit strategy and performing the audit, materiality for the group financial statements as a whole was set at £25.0 million, determined with reference to a benchmark of group profit before taxation, normalised to exclude net fair value losses on debt and derivative instruments, of £104.7 million, of which it represents 5.6 per cent.

We 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.

The group consists of five reporting components, of which the most significant is United Utilities Water Limited which makes up the vast majority of the assets, liabilities, income and expense of the group. Audits for group reporting purposes were performed by the group audit team of four of the five components, using component materialities which ranged from £1.8 million for the smallest component to £24.0 million for United Utilities Water Limited, determined having regard to the mix of size and risk profile of the group across the components. These audits covered 99 per cent of group revenue, 100 per cent of group profit before taxation and 99 per cent of group total assets.

4. Our opinion on the other matter prescribed by the Companies Act 2006 is unmodified

In our opinion:

  • the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006;
  • the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
  • information given in the corporate governance statement with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements.

5. We have nothing to report in respect of the matters on which we are required to report by exception

Under International Standards on Auditing (UK and Ireland) (ISAs) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.

In particular, we are required to report to you if:

  • we have identified material inconsistencies between the knowledge we acquired during our 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 performance, business model and strategy; or
  • the audit committee section of the corporate governance report does not appropriately address matters communicated by us to the audit committee.

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; or
  • a corporate governance statement has not been prepared by the company.

Under the Listing Rules we are required to review:

We have nothing to report in respect of the above responsibilities.

Scope of responsibilities

As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the company's members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.

John Luke (Senior Statutory Auditor)
for and on behalf of KPMG LLP
Statutory Auditor
Chartered Accountants
One St Peter's Square
Manchester
M2 3AE
20 May 2015