1. Our opinion is unmodified

We have audited the financial statements of United Utilities Group PLC (the company) for the year ended 31 March 2019, which comprise the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated and company statements of financial position, the Consolidated statement of changes in equity, the Company statement of changes in equity, the Consolidated and company statements of cash flows, and the related notes, including the accounting policies and note A7.

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 2019 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.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee.

We were first appointed as auditor by the shareholders on 22 July 2011. The period of total uninterrupted engagement is for the eight financial years ended 31 March 2019. We have fulfilled our ethical responsibilities under, and we remain independent of the group in accordance with, UK ethical requirements, including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.

2. Key audit matters: including our assessment of risks of material misstatement

Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.

Overview
Materiality: group financial statements as a whole£20.0m (2018: £19.0m)
4.7% (2018: 4.9%) of normalised group profit before tax
Coverage98% (2018: 98%) of group profit before tax
Risks of material misstatementvs 2018
Recurring risksRevenue recognition and allowance for household customer debt◄ ►
Capitalisation of costs relating to the capital programme◄ ►
Retirement benefit obligation valuation◄ ►
Water Plus joint venture investment and loans carrying value◄ ►
Recoverability of parent company's investment in United Utilities PLC◄ ►
The riskOur response

Revenue recognition and allowance for household customer debt

Revenue not recognised: £18.0 million (2018: £20.3 million)

Provision for household customer debt: £52.9 million (2018: £63.4 million)

Refer to Audit committee report, note A7 and Accounting policies

At each balance sheet date:

  • judgement is required to identify properties where there is little prospect that cash will be received for revenue that has been billed due to either the occupier not being able to be identified or a past history of non-payment of bills relating to that property and, therefore, whether the revenue should be recognised; and
  • assumptions involving a high degree of estimation uncertainty are required to assess the recoverability of trade receivables.

The effect of these matters is that, as part of our risk assessment, we determined that the recoverability of trade receivables has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. The financial statements (see accounting policies) disclose the sensitivities estimated by the group.

Our procedures included:

  • Accounting analysis – Assessing the recognition of revenue where the collection of consideration is not probable on the date of sale for compliance with relevant accounting standards;
  • Control observation – Testing the group's controls over revenue recognition and provision for household customer debt, including reconciliations between sales and cash receipts systems and the general ledger;
  • Methodology choice – Assessing the appropriateness of the customer debt provisioning policy based on historical cash collections, credits, re-bills and write-off information; and
  • Assessing transparency – Assessing the adequacy of the group's disclosures of its revenue recognition and household customer debt provisioning policies, including the judgement involved in recording revenue and estimation uncertainty of the doubtful debts provision.

Our results:

  • We found the amount of revenue recognised to be acceptable; and
  • We considered the level of provisioning against household customer debt to be acceptable.

Capitalisation of costs relating to the capital programme

£726.2 million (2018: £741.3 million)

Refer to Audit committee report, note A7, Accounting policies and note 10

 

Subjective classification:

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.               

The determination of project costs as capital or operating expenditure is inherently judgemental. Costs capitalised include an allocation of overhead costs, relating to the proportion of time spent by support function staff, which is based on assumptions involving a high degree of judgement.

The effect of these matters is that, as part of our risk assessment, we determined that the costs capitalised has a high degree of judgement, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. The financial statements (see accounting policies) disclose the sensitivities estimated by the group.

Our procedures included:

  • Accounting analysis – Assessing the group's capitalisation policy for compliance with relevant accounting standards;

  • Control observation – Testing controls over the application of the policy in the period, including review of project business case submissions, and attending a sample of capital approval meetings to observe the judgements made and evaluating the documented conclusions;
  • Tests of details– Critically assessing the costs capitalised for a sample of project cost transactions against the capitalisation policy;
  • Tests of details – Identify and assess the impact of existing projects where the capitalisation rate has changed during the year;
  • Historical comparisons – Critically assess the proportion of capitalised overhead costs using historical comparisons and expected changes based on corroborated enquiry and our sector knowledge; and
  • Assessing transparency – Assessing the adequacy of the group's disclosures of its capitalisation policy, including the judgement involved in assessing expenditure as capital and the judgement relating to the allocation of overhead costs.

Our results:

  • We found the group's classification of expenditure as capital or operating to be acceptable.
The riskOur response

Retirement benefit obligation valuation

£3,425.2 million (2018: £3,498.7 million)

Refer to Audit committee report, note A7, Accounting policies and note A5

Subjective valuation:

The valuation of the retirement benefit obligations depends on a number of estimates, including the discount rates used to calculate the current value of the future payments the group expects to pay pensioners, the rate of inflation that must be incorporated in the estimate of the future pension payments, and the life expectancy of pension scheme members.

There is a considerable amount of estimation uncertainty involved in setting the above assumptions and a small change in the assumptions and estimates may have a significant impact on the retirement benefit obligations.

The effect of these matters is that, as part of our risk assessment, we determined that the gross defined benefit pension obligations has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (see note A5) disclose the sensitivity estimated by the group.

Our procedures included:

  • Our actuarial expertise – We used our own actuarial specialists to challenge key assumptions and estimates used in the calculation of the retirement benefit obligations. We also compared the IAS 19 valuation with the triennial funding valuations of the UK schemes, notwithstanding that they were prepared on a different basis and as at different dates;
  • Methodology assessment – We used our own actuarial specialists to assess the appropriateness and consistency of the methodology applied by management in setting the key assumptions;
  • Benchmarking assumptions – We performed a comparison of key assumptions against our own benchmark ranges derived from externally available data and against those used by other companies reporting on the same period
  • Assessing external actuary's credentials – We assessed the competence and independence of the external actuary engaged by the group; and
  • Assessing transparency – We considered the adequacy of the group's disclosure in respect of retirement benefits, in particular, the gross defined benefit obligation and the assumptions used, which are set out in note A5 to the financial statements.

Our results:

  • We found the resulting estimate of the retirement benefit obligations to be acceptable.

Water Plus joint venture investment and loans carrying value

£36.7 million investment in joint venture and £142.1 million loans to joint venture (2018: £37.3 million and £135.8 million respectively)

Refer to Audit committee report, note A7, Accounting policies, note 12

Forecast-based valuation:

The group's investment in the equity of and loans to Water Plus is significant. The estimated recoverable amount is subjective due to the inherent uncertainty involved in forecasting future cash flows.

Our procedures included:

  • Assessing methodology – We assessed whether the principles and integrity of the cash flow model are in accordance with relevant accounting standards;
  • Our valuation expertise – We challenged the assumptions used by the group in the calculation of the discount rates, including comparisons with external data sources and by involving our own valuation specialist to assist us in assessing the discount rate assumptions applied.
  • Sensitivity analysis – We performed our own sensitivity analysis, including a reasonably possible reduction in forecast cash flows and an alternative discount rate assumption, to assess level of sensitivity to these changes; and
  • Assessing transparency – We assessed whether the group's disclosures about the sensitivity of the outcome of the impairment assessment to a reasonably possible change in the discount rate and cash flows reflected the risks inherent in the valuation.

Our results:

  • We found the resulting estimate of the recoverable amount of the investment in the equity and loans to Water Plus to be acceptable.

Recoverability of parent company's investment in United Utilities PLC

Investment in United Utilities PLC £6,326.8 million (2018: £6,326.8 million).

Refer to note A7 and note 13

 

Low risk, high value:

The carrying amount of the parent company's investments in United Utilities PLC represents 99 per cent (2018: 99 per cent) of the company's total assets. The recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to the materiality in the context of the parent company financial statements, this is considered to be the area that had the greatest effect on our overall parent company audit.

Our procedures included:
  • Tests of detail: Compared the carrying amount of the investment with the draft balance sheet of United Utilities PLC to identify whether the net assets, being an approximation of the minimum recoverable amount, was in excess of the carrying amount and if not, comparing it with the expected value of the business based on a suitable premium to the regulatory capital value.

Our results:

  • We found the group's assessment of the recoverability of the investment in United Utilities PLC to be acceptable.

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

Materiality for the group financial statements as a whole was set at £20.0 million (2018: £19.0 million), determined with reference to a benchmark of group profit before tax, normalised to exclude net fair value gains or losses on debt and derivative instruments as disclosed in note 5, of £9.5 million, of which it represents 4.7 per cent (2018: 4.9 per cent).

Materiality for the parent company financial statements as a whole was set at £19.5 million (2018: £18.5 million), determined with reference to a benchmark of company total assets, of which it represents 0.30 per cent (2018: 0.29 per cent).

We agreed to 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.

Of the group's 34 (2018: 34) reporting components, we subjected seven (2018: six) to full scope audits for group purposes.

The components within the scope of our work accounted for the percentages illustrated opposite.

For the residual components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these.

The group team approved the component materialities, which ranged from £2.5 million to £19.5 million (2018: £2.5 million to £18.5 million), having regard to the mix of size and risk profile of the group across the components. The work on one of the seven reporting components (2018: one of six) was performed by component auditors and the rest, including the audit of the parent company, was performed by the group team. The group team instructed the component auditor as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The group team performed procedures on the items excluded from normalised group profit before tax.

The group team visited none (2018: none) of the component locations to assess the audit risk and strategy. Telephone conference meetings were held with the component auditor. At these meetings, the findings reported to the group team were discussed in more detail and any further work required by the group team was then performed by the component auditor.

Normalised group profit before tax

£426.7m (2018: £384.8m)

Group revenue
 

Group total assets

Group normalised profit
before tax

Group profit before tax

Full scope for group audit purposes 2019

Full scope for group audit purposes 2018

Residual components

Specified risk-focused audit procedures 2019

Specified risk-focused audit procedures 2018

4. We have nothing to report on going concern

The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the company or the group or to cease their operations and, as they have concluded, that the company's and the group's financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements ('the going concern period').

Our responsibility is to conclude on the appropriateness of the directors' conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor's report is not a guarantee that the group and the company will continue in operation.

In our evaluation of the directors' conclusions, we considered the inherent risks to the group's and the company's business model and analysed how those risks might affect the group's and the company's financial resources or ability to continue operations over the going concern period. The risks that we considered most likely to adversely affect the group's and the company's available financial resources over this period were:

  • a significant increase required in total expenditure;
  • funding to be obtained in line with forecast; and
  • the impact of macro-economic factors on household customers' ability to pay.

As these were risks that could potentially cast significant doubt on the group's and the company's ability to continue as a going concern, we considered sensitivities over the level of available financial resources indicated by the group's financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively and evaluated the achievability of the actions the directors consider they would take to improve the position should the risks materialise. We also considered less predictable but realistic second-order impacts, such as the impact of Brexit and the erosion of customer or supplier confidence, which could result in a rapid reduction of available financial resources.

Based on this work, we are required to report to you if:

  • we have anything material to add or draw attention to in relation to the directors' statement in the Accounting policies of the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the group and company's use of that basis for a period of at least 12 months from the date of approval of the financial statements; or
  • the related statement under the Listing Rules set out in the Corporate governance report is materially consistent with our audit knowledge.

We have nothing to report in these respects and we did not identify going concern as a key audit matter.

5. We have nothing to report on the other information in the Annual Report

The directors are responsible for the other information presented in the Annual Report, together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work, we have not identified material misstatements in the other information.

Strategic report and Directors' report

Based solely on our work on the other information:

  • we have not identified material misstatements in the strategic report and the directors' report;
  • in our opinion, the information given in those reports for the financial year is consistent with the financial statements; and
  • in our opinion, those reports have been prepared in accordance with the Companies Act 2006.

Directors' remuneration report

In our opinion, the part of the Directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

Disclosures of principal risks and longer-term viability

Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:

  • the directors' confirmation within the Long-term viability statement in the Corporate governance report that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency and liquidity;
  • the Principal risks and uncertainties disclosures describing these risks and explaining how they are being managed and mitigated; and
  • the directors' explanation in the Long-term viability statement of how they have assessed the prospects of the group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Under the Listing Rules, we are required to review the Long-term viability statement. We have nothing to report in this respect.

Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the group's and company's longer-term viability.

Corporate governance disclosures

We are required to report to you if:

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

We are required to report to you if the Corporate governance statement does not properly disclose a departure from the 11 provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.

We have nothing to report in these respects.

6. We have nothing to report on the other matters on which we are required to report by exception

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.

We have nothing to report in these respects.

7. Respective responsibilities

Directors' responsibilities

As explained more fully in their statement set out in the Statement of directors' responsibilities, the directors are responsible for: the preparation of the financial statements, including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the group and parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor's report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC's website at www.frc.org.uk/auditorsresponsibilities

Irregularities – ability to detect

We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussion with the directors and other management (as required by auditing standards), and from inspection of the group's regulatory and legal correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the group to component audit teams of relevant laws and regulations identified at group level.

The potential effect of these laws and regulations on the financial statements varies considerably.

Firstly, the group is subject to laws and regulations that directly affect the financial statements; including financial reporting legislation (including related companies legislation); distributable profits legislation and taxation legislation; and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.

Secondly, the group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an effect: Ofwat, Environmental Agency, Drinking Water Inspectorate, health and safety, anti-bribery, employment law, regulatory capital and liquidity and certain aspects of company legislation recognising the financial and regulated nature of the group's activities and legal form. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and inspection of regulatory and legal correspondence, if any. Through these procedures, we became aware of actual or suspected non-compliance and considered the effect as part of our procedures on the related financial statement items. The actual or suspected non-compliance was not sufficiently significant to our audit to result in our response being identified as a key audit matter.

Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.

8. The purpose of our audit work and to whom we owe our responsibilities

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members, as a body, for our audit work, for this report, or for the opinions we have formed.

William Meredith (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
St Peter's Square, Manchester, M2 3AE
22 May 2019