united-utilities-annual-report-2015

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UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2015Stock Code: UU.unitedutilities.comPrincipal risks and uncertaintiesRisk categoryRegulatoryenvironment andframeworkCorporategovernance andlegal complianceWater serviceWastewaterserviceSecurity, assetsand operationalresilienceMain businessobjectiveLowestSustainableCostResponsibleMannerBest Serviceto CustomersBest Serviceto CustomersBest Serviceto CustomersCurrent key risks, issues or areas ofuncertainty include:• Market reform including non-householdand upstream competition• A possible change from using the retailprices index to the consumer prices indexfor regulatory indexation• Competition law and regulatorycompliance whilst preparing for andoperating within a changing competitivemarket• Material litigation (see page 53)• New higher fine levels for environmentaloffences• Dealing with the impacts of populationgrowth, climate change and weatherconditions• Meeting infrastructure investmentrequirements and balancing supply anddemand• Expected change to the abstractionlicensing regime• The threat of cybercrime and/or terrorismaffecting our assets or operationsPotential impactsChanges to regulation and the regulatory regime (either through political orregulatory events) may increase costs of administration, reduce income andmargin and lead to greater variability of returns.Non-compliance with existing or future UK or international laws or regulations(especially given the highly regulated environment we operate in) could resultin additional workload and operating costs in justifying or defending ourposition and financial penalties (including of up to 10 per cent of relevantregulated turnover for extreme events) and compensation following litigationis also possible, together with additional capital/operating expenditure as aresult of the imposition of enforcement orders. In more remote but extremecircumstances, impacts could ultimately include licence revocation or theappointment of a special administrator.Operational performance problems or service failures can lead to increasedregulatory scrutiny, regulatory penalties and/or additional operating or capitalexpenditure. In more extreme situations the group could also be fined forbreaches of statutory obligations, be held liable to third parties and sustainreputational damage.Our resources, assets and infrastructure are exposed to various threats(malicious or accidental) and natural hazards which could impact theprovision of vital services to the public and commercial business.Human and ITresourceTax, treasuryand financialcontrolProgrammedeliveryResponsibleMannerLowestSustainableCostLowestSustainableCost• Delivering required employeeengagement, talent management,technological innovation and IT assetmanagement• Stability of financial institutions and theworld economy• The speed of economic recovery• Inflation/deflation• Financial market conditions, interestrates and funding costs• Supply chain security of supply anddelivery of solutions, quality andinnovation• New contract delivery partnershipsfor the 2015–2020 period with a newapproach to construction and designCapacity, capability and effectiveness problems associated with human andIT resource will impact the efficiency and effectiveness of business activity,the ability to make appropriate decisions and ultimately meet targets. This canalso affect the ability to recruit and retain knowledge/expertise or to recovereffectively following an incident. In remote but extreme circumstances thereis also the potential for higher levels of regulatory scrutiny, financial penalties,reputational damage and missed commercial opportunities.The failure of financial counterparties could result in additional financingcost, an adverse impact on the income statement and potential reputationaldamage. Variability in inflation (as measured by the UK Retail Prices Index) andchanges in interest rates, funding costs and other market risks could adverselyimpact the economic return on the regulatory capital value (RCV) and affectour pension schemes with a requirement for the group to make additionalcontributions. In extreme but remote cases adverse market conditions couldaffect our access to debt capital markets and subsequently available liquidityand credit ratings.Failure to deliver capital or change programmes against relevant time, costor quality measures could result in a failure to secure competitive advantageor operating performance efficiency and cost benefits. There is also the riskof increased delivery costs or a failure to meet our obligations and customeroutcomes which, depending on the nature and extent of failure, could resultin an impact at future price reviews, regulatory or statutory penalties andnegative reputational impact with customers and regulators.RevenuesHealth,safety andenvironmentalLowestSustainableCostResponsibleManner• Socio-economic deprivation in the NorthWest• Welfare reform and the impact ondomestic bad debt• Competition in the water and wastewatermarket and competitor positioning• The standards of service to ourcustomers• Risks associated with excavation,tunnelling and construction work andworking with water and wastewater• Weather conditionsPoor service to customers can result in financial penalties issued by theregulator through components of the service incentive mechanism fordomestic customers and loss of revenue associated with commercial churnfor commercial customers using five megalitres and above per annum. Theproposed opening of the market for retail services to all non-householdcustomers in England from 2017 generates both opportunities and riskassociated with market share, scale and margin erosion. There is alsomuch uncertainty surrounding the form of upstream reform which is nowanticipated to materialise post-2019.Working with and around water, sewage, construction and excavation sites,plant and equipment exposes employees, contractors and visitors to variousman-made and naturally occurring hazards which could cause harm to peopleand the environment. Depending on the circumstances the group could befined for breaches of statutory obligations, be held liable to third parties andsustain reputational damage.54
UNITED UTILITIES GROUP PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2015Stock Code: UU.unitedutilities.comEach risk category is made up of lotsof individual risks. The value of eachindividual risk is used to determine therelevant proportions in these illustrations.Likelihood of occurrence columnThe proportion of the risks in the category that are classifiedfor likelihood as:Red = Very likelyAmber = LikelyYellow = UnlikelyGreen = RemotePotential aggregated net impact columnAn assessment of impact should every risk in the categoryoccur but ignoring likelihood, timing and duration of thisoccurringTrend columnAn indication of that category’s current exposure relative tothe previous year (down = reducing, up = increasing,across = stable).Likelihood ofoccurrenceUnlikelyUnlikelyRemoteUnlikelyRemoteUnlikelyUnlikelyUnlikelyUnlikelyPotentialaggregatednet impact Trend Control mitigationWe engage in relevant government and regulatory consultations which may affect policy andregulation in the sectors where we operate. We also consult with customers to understand theirMediumrequirements and proactively consider all the opportunities and threats associated with anypotential change, exploiting opportunities and mitigating risks where appropriate.LowHighLowMediumLowHighMediumMediumLegislative and regulatory developments are continually monitored. Risk-based training ofemployees is undertaken and we participate in consultations to influence legislative and regulatorydevelopments. Funding for any additional compliance costs in the regulated business is soughtas part of the price determination process. The group also robustly defends litigation whereappropriate and seeks to minimise its exposure by establishing provisions and seeking recoverywherever possible.Mitigation is provided through core business processes, including forecasting, quality assuranceprocedures, risk assessments and rigorous sampling/testing regimes. Ongoing integration ofwater and wastewater networks improves service provision and measures of success have beendeveloped to monitor performance. We also undertake customer education programmes, seekingto minimise related operational issues.Physical and technological security measures combined with strong governance and inspectionregimes aim to protect infrastructure, assets and operational capability. Ongoing integration of waterand wastewater networks improves operational resilience and we maintain robust incident response,business continuity and disaster recovery procedures. We also maintain insurance cover for loss andliability and the licence of the regulated business also contains a ‘shipwreck’ clause that, if applicable,may offer a degree of recourse to Ofwat/customers in the event of a catastrophic incident.Developing our people with the right skills and knowledge, combined with delivering effectivetechnology are important enablers to support the business to meet its objectives. Employees arekept informed regarding business strategy and progress through various communication channels.Training and personal development programmes exist for all employees in addition to talentmanagement programmes and apprentice and graduate schemes. We focus on change programmesand innovative ways of working to deliver better, faster and more cost-effective operations.Refinancing is long-term with staggered maturity dates to minimise the effect of short-termdownturns. Counterparty credit, exposure and settlement limits exist to reduce any potentialfuture impacts. These are based on a number of factors, including the credit rating and the sizeof the asset base of the individual counterparty. The group also employs hedging strategies tostabilise market fluctuation for inflation, interest rates and commodities (notably energy prices).Sensitivity analysis is carried out as part of the business planning process, influencing the variousfinancial limits employed. Continuous monitoring of the markets takes place including movementsin credit default swap prices and movements in equity levels.We have a developed and clear view of our investment priorities which are built into our programmes,projects and integrated business and asset plans. We have created better alignment and integrationbetween our capital delivery partners and engineering service provider including alignment with ouroperating model. Our programme and project management capabilities are well established withstrong governance and embedded processes to support delivery, manage risks and achieve businessbenefits. We utilise a time, cost and quality index (TCQi) as a key performance indicator and enhanceour performance through a dedicated programme change office to deliver change in a structured andconsistent way. Supply chain management is utilised to deliver end-to-end contract managementwhich includes contract strategy and tendering, category management, security of supply, price andprice volatility and financial and operational service level performance.For domestic retail there is a transformation plan in place covering a wide range of initiatives andactivities to improve customer service, with a number of controls in place to monitor achievementagainst the plan. Similarly, we look to retain existing and acquire new commercial customersby striving to meet their needs more effectively. We monitor competitor activity and target areduction in operating costs.SHAREHOLDER INFORMATION FINANCIAL STATEMENTS GOVERNANCE STRATEGIC REPORTRemoteLowWe have developed a strong health, safety and environmental culture supported by stronggovernance and management systems which include policies and procedures which are certified toOHSAS 18001 and ISO 14001.55
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FINANCIALSTATEMENTSThe full audited
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