Code principle: Relations with shareholders
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 board welcomes engagement with institutional investors. The executive and non-executive directors are available to meet with major shareholders; in fact, this is one of the specific roles of the senior independent director.
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:
- the CEO and CFO have a regular schedule of meetings with representatives from major shareholders. This is 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;
- the CEO and CFO undertake presentations to groups of institutional shareholders and investors, both on an ad hoc basis and linked to our half and full year results announcements;
- the board receives regular feedback on the views of its 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 39 per cent by value of the overall shareholder base, which represents 72 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.
Despite the privatisation process being over 25 years ago, we have retained a large number of shareholders with registered addresses in the North West of England – in fact around 41 per cent. We have historically always held our AGM in Manchester, which enables our more local shareholders to attend the meeting. These shareholders are also our customers.
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 on the inside back cover of this document, 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 commitment and involvement from our credit investors who lend us the funds with the company paying them a return for doing so. 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. Committed credit facilities are arranged with various 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 circa £1.9 billion of term funding (of which circa £1.5 billion has been advanced and £400 million remains available to draw down) used to support our capital investment programme. The group currently has gross borrowings of £6,645 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 corporate.unitedutilities.com/93
Code principle: Accountability
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 are predominantly those of all regulated water and wastewater companies. One of the most significant 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. 2014/15 has been an important year for the company in managing this risk as this year we submitted our business plan to Ofwat for the 2015–20 period. The board engaged fully with the process to ensure the plan's robustness so that, having received the final determination, we are confident that the business can be managed within the parameters of the determination for the next five-year cycle.
The board, following the review by the audit committee, concluded that it was appropriate to adopt the going concern basis of accounting. Similarly, and as will be required in future years in applying the principles of the 2014 version of the UK Corporate Governance Code (the 2014 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 here, 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) 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 principal risks and uncertainties provided, 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 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.
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 and the external assessment of its activities;
- reviewing management's internal control self-assessment;
- reviewing reports from the GARB;
- reviewing the outcome of annual business unit risk assessment process; and
- reviewing the corporate risk management framework.
Going concern basis of accounting
The directors have a reasonable expectation that the group has adequate resources for a period of at least 12 months from the date of approval of the financial statements and have therefore assessed that the going concern basis of accounting is appropriate in preparing the financial statements and that there are no material uncertainties to disclose.
This conclusion is based on a review of the resources available to the group, taking account of the group's financial projections together with available cash and committed borrowing facilities as well as consideration of the group's capital adequacy, consideration of the primary legal duty of UUW's economic regulator to ensure that water and wastewater companies can finance their functions, and any material uncertainties. In reaching this conclusion, the board has considered the magnitude of potential impacts resulting from uncertain future events or changes in conditions, the likelihood of their occurrence and the likely effectiveness of mitigating actions that the directors would consider undertaking.
Long term viability statement
The directors have assessed the viability of the group over a five-year period to March 2020, taking account of the group's current position and the potential impact of the principal risks documented in the strategic report. Based on this 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 period to March 2020.
In making this statement the directors have considered the resilience of the group, taking account of its current position, the principal risks facing the business in severe but reasonable scenarios, and the effectiveness of any mitigating actions. This assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity over the period.
The directors have determined that the five-year period to March 2020 is an appropriate period over which to provide its viability statement. In making their assessment, the directors have taken account of the group's robust capital solvency position with a debt to RCV ratio of around 60 per cent, its ability to raise new finance in most market conditions, its key potential mitigating action of restricting dividend payments and the protections which exist under the regulatory model that a primary legal duty of UUW's economic regulator is to ensure that water and wastewater companies can finance their functions.
Code principle: Remuneration
Our remuneration policy has been designed in order to promote the long-term success of the company. Sara Weller's report as chair of the committee