Delivering benefits for customers and shareholders

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Capital investment

2013-2014

£836m

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Read more at unitedutilities.com

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Read more in our Governance section.

Read more about our Performance

PHOTOGRAPH: Thirlmere reservoir, Cumbria.

Dr John McAdam
Chairman

Steve Mogford
Chief Executive Officer

Performance

We are pleased to have delivered another year of good performance in what remains a difficult economic environment for customers in the North West of England. Underpinning all we do is our vision of becoming a leading North West service provider and one of the best UK water and wastewater companies and we have made progress against this objective on a broad front.

High levels of customer satisfaction remain our core objective. We have again delivered a year of improvement as measured by our regulator, Ofwat's, Service Incentive Mechanism (SIM). This places us as one of the most improved companies for customer satisfaction over the last three years.

Whilst comparison with other water and sewerage companies is an important benchmark for us, we recognise that customer expectations are often set by standards of service delivered by other companies operating in the North West. So we conduct a brand tracker survey and we are happy to find ourselves consistently ranked third out of ten leading companies, just behind the respected brands of John Lewis and Marks & Spencer.

Even so, we don't always get it right, and customer satisfaction will remain an area of focus for us – reducing service failure benefits both customers and shareholders.

Targeted investment in our people, assets and processes is delivering results and we are ahead of schedule in delivering our regulatory outperformance targets.

Asset serviceability has again been stable or improving over the last twelve months and we have met our leakage target for the eighth consecutive year. Water quality over the year reflects our best performance for many years. The Environment Agency assessed us as an upper quartile company in 2012/13, and we have made more progress over the last twelve months.

Much of our capital programme of over £3.5 billion for the period 2010–15 supports renewal and upgrade of our asset base to maintain serviceability but a significant proportion also delivers our capability to meet new environmental standards. We delivered our largest annual capital programme for a decade, investing £836 million – £49 million more than the previous year – in areas that included contributions to river and bathing water quality and inspecting the Haweswater aqueduct for the first time since it was built in the mid 1900s. We measure the effectiveness of our investment using our Time, Cost and Quality index, TCQi, and we scored 98 per cent for the year – ahead of our targets and a significant improvement on our performance of three years ago.

Our good performance in this five-year regulatory period, AMP5, has created the ability for us to re-invest. We are investing around £200 million of capital savings into projects which improve service to customers or benefit the environment.

Around £40 million of our financing outperformance is supporting our private sewer network and we have committed a £75 million cash tax refund from HMRC to assist customers struggling to return to regular payment. We believe that this reflects a responsible approach to sharing the benefits of outperformance between customers and shareholders.

The North West remains a region with the highest proportion of disadvantaged households in England and reducing customer indebtedness continues to be a major challenge for us. Our collection teams have worked hard in another difficult year to hold bad debt levels at 2.2 per cent of revenue, with over 30,000 customers taking advantage of our many assistance schemes. Containing bad debt at this level will remain a challenge as benefit reforms continue to roll out across our region.

Our good performance in this five-year regulatory period has created the ability for us to reinvest.

 

We were ranked

3rd

out of 10 leading North West service providers, behind only John Lewis and Marks & Spencer

We are grasping the opportunities presented by reform of water regulation. We welcome the opening of the competitive business retail market for water and United Utilities Scotland has rapidly secured a profitable position as the largest new-entrant business retailer in Scotland, second only to the incumbent, Business Stream. The lessons learned in Scotland will be applied in the English market, delivering better customer service in the run-up to market opening in 2017 and beyond. In mid 2013 we launched a range of on-site water and wastewater services to add value to non-household customers in our region.

Strategy

During the last year, we updated our Strategic Direction Statement, 'Playing our part to support the North West', and this document reflects extensive consultation with customers and other stakeholders to generate our best view of what the next 25 years holds for the region. This includes economic, social and environmental developments such as the increasing impact of climate change.

Our business plan, published in December 2013, sets out our plans for the 2015-20 period. We sought the views of over 27,000 customers, as well as consulting with our regulators, to deliver a plan which we believe strikes the right balance for all our stakeholders.

The North West is home to some of the most beautiful rural areas of the UK, supporting a diverse and productive agricultural sector. These areas of natural beauty, combined with a long coastline, mean that tourism is an important sector in the regional economy, contributing some £3.2 billion per annum. The EU's Water Framework and Bathing Water Directives target the protection and enhancement of this environment and our plans set an appropriate pace for implementation of new environmental legislation, balanced against the size of bill that customers are prepared to pay.

Our plans recognise that as a lone agent United Utilities could not deliver the scale of required environmental improvement at an acceptable level of cost. Instead, we are committing to partnering with others who can support the achievement of the required outcomes. This includes our 'Turning Tides' partnership with the Environment Agency, Local Authorities, the Marine Conservation Society and others to improve bathing waters in the North West.

Our updated Water Resources Management Plan describes the expected pattern of water resource availability in our region until 2040. The majority of the North West is in surplus, benefitting from an integrated network that supports movement of water across the region to accommodate its changing supply and demand balance. Our business plan focuses on maintaining existing levels of service across the region, whilst acting to improve the security of supply to West Cumbria by connecting it to our integrated network. This is necessary because the need to protect the local environment puts West Cumbria's future supply and demand balance at risk.

Dividend per share of

36.04p

2013 – 2014

We are developing a new business operating model for our wholesale business area, embracing innovation in control technology and work processes.

Planning for the future

Read more about our plans for the next 25 years by visiting our website unitedutilities.com/future

A fair deal for customers

We have continued to invest heavily in schemes designed to mitigate the risk of flooding of our customers' homes. This includes incidence based targeting on areas more likely to experience flooding and more use of CCTV sewer surveys to identify issues. For 2015–20 we are targeting a further reduction in the risk of sewer flooding inside customers' properties, seeking opportunities to work in partnership with others to deliver cost-effective joint schemes and promoting the use of more sustainable drainage systems. Our wastewater network will continue to benefit from significant investment going forward as we adapt to weather patterns likely to result from climate change.

We are developing a new business operating model for our wholesale business area, embracing innovation in control technology and work processes. Delivery of this business model is critical to our future ability to offset the growth in bills arising from new environmental regulation whilst continuing to deliver our target return for shareholders. Our progress over the current regulatory period, combined with our plans for further improvements in the next five years, will mean average household bills will have grown by less than inflation in the decade to 2020.

Attractive deal for shareholders

Good underlying operational performance, effective capital programme delivery and improving levels of customer satisfaction are delivering value for our shareholders. Revenue increased by 4.2 per cent to £1.70 billion and underlying operating profit was up 6.1 per cent to £641 million in continued difficult economic conditions. Underlying earnings per share increased by 16 per cent to 44.7 pence. We remain on track to deliver operating expenditure outperformance and to meet Ofwat's allowance on our capital programme, after reinvesting our outperformance.

We plan to continue with high levels of investment for 2014/15. This includes bringing forward some of our scheduled 2015-20 spend to ensure a smoother investment profile. We have now invested over £2.9 billion in the first four years of the 2010–15 regulatory period, and we remain on track to deliver our planned five-year investment programme.

We intend to continue with our dividend policy of targeting growth of RPI+2 per cent per annum through to at least 2015 while delivering significant improvements for customers and the environment. In line with this policy, the board is proposing a final dividend of 24.03 pence per ordinary share making a total of 36.04 pence per share for the 2013/14 financial year. This represents an increase of 5.0 per cent compared with last year. The final dividend is expected to be paid to shareholders on 1 August 2014.

Responsible business

We continue to listen to the views of all our stakeholders and endeavour to develop, manage and operate in an environmentally sustainable, economically beneficial and socially responsible manner. In recognition of the company's continued focus on responsible business, we retained both our 'World Class' rating, as measured by the Dow Jones Sustainability Index and our 'Platinum Big Tick' ranking in Business in the Community Corporate Responsibility Index. We are proud that we are one of only seven FTSE 100 companies (and the only water company) to hold both accolades.

The communities where we operate are where our customers and employees live and work and are vital to our business. We have continued to support these North West communities both financially and in terms of employee time through volunteering. For example, our 'Beachcare' employee volunteering scheme, working in partnership with the Environment Agency and others, helps to keep our region's beaches tidy.

Through our role as a major employer, training provider and wealth creator, we help to keep the North West's economy turning. Between 2010 and 2015, our activities will generate an estimated £7 billion for the region's economy, supporting 9,000 jobs, and securing a legacy for the future.

PHOTOGRAPH: Wastewater network asset engineers Chris Broughton (front) and Mark Moss.

Our employees

A committed, capable and motivated workforce is central to delivering our vision.

The people in United Utilities are key to the delivery of the highest levels of service to our customers and we would like again to thank them for their dedication and continued hard work during the year. Notwithstanding the amount of change our business is undertaking, employee engagement sits at 79 per cent, well above the UK transitional norm and close to the norm for high performing companies in the UK.

We strive to continuously improve our safety culture and we have implemented a number of initiatives throughout the year. We launched a managers' guide for health and safety responsibilities and our transformation project, covering 13 key areas of focus across our business, is progressing well. These initiatives helped reduce the number of employee accidents in 2013/14 and this will remain a significant area of focus for us.

A committed, capable and motivated workforce is central to delivering our vision and we remain fully focused on maintaining high levels of employee development and engagement. We are always on the lookout for the best and brightest talent and we recruited a further 24 graduates and 32 apprentices in 2013/14 and we have plans to recruit a similar number in 2014/15.

Our board

As a board we are responsible to our shareholders, customers and other stakeholders for the performance and long-term success of our company. The way in which we operate, we believe, already reflects the highest standards of corporate governance. Our plc structure and governance standards ensure that our board and non-executive directors continue to provide sound and prudent governance in full compliance with the principles of the UK Corporate Governance Codes.

On behalf of the board, we say thank you and farewell to Nick Salmon, who will stand down at this year's annual general meeting after over nine years as a non-executive director. We wish Nick all the best for the future. We are pleased to welcome Mark Clare to the board following his appointment last November as a non-executive director. Mark is a member of the audit committee and the nomination committee and will replace Nick as senior independent director. Mark is Group Chief Executive at Barratt Developments PLC and his expertise will be an asset to the board.

Outlook

The Strategic report was approved at a meeting of the board on 21 May 2014 and signed on its behalf by Steve Mogford, Chief Executive Officer.

We believe that our sustained focus on operational performance, combined with continued substantial investment in our assets, is delivering benefits for customers, shareholders and the environment. We are on track to exceed our regulatory outperformance targets, with substantial financing and operating outperformance already secured. Our capital structure remains robust and we intend to continue with our dividend policy of targeting real growth through to at least 2015.

Looking ahead, our focus remains centred on driving further customer satisfaction, alongside operational and environmental improvements and we believe there is still plenty of scope to achieve this. We have now submitted our business plan for the 2015–20 period, as we aim to strike the right balance between all our stakeholders. We will continue constructive engagement with our regulators, ahead of the draft and final determinations from Ofwat later this year.


Dr John McAdam
Chairman


Steve Mogford
Chief Executive Officer