Natural resources

We rely on a variety of natural resources to deliver water and wastewater services, and we impact those natural resources through our operations, such is the circular nature of the water cycle. We also generate renewable energy from the sun and wind.

We rely on natural sources of water to supply customers. We hold abstraction licences for a number of reservoirs, rivers and boreholes that permit us to take water from the environment in a safe and sustainable way, which we then treat, store and transport across the region.

Nearly half the water we abstract originates from land we own and manage. Run-off from this land impacts the quality of the water, so managing it well helps us provide reliable and clean water, reducing risk and increasing our resilience. We help protect habitats and species designated as nationally and internationally important, many of which make their homes on this land.

We rely on watercourses to take effluent back into the environment after extensive cleaning to ensure it meets environmental consents. This protects the health of the natural environment, which enhances recreational value for our communities, protects rare species and wildlife habitats, and provides economic benefits such as underpinning the local tourism industry.

We extract bioresources from wastewater, using anaerobic digestion to break it down into biogas and biosolids. Biogas is used to generate renewable energy through combined heat and power plants, reducing our energy costs and carbon footprint. Biosolids are treated to provide a valuable source of nutrients and organic matter as high-quality fertiliser for farmers.

Impact of external drivers

Natural environment

Our long-term planning looks far into the future to ensure we are prepared for the challenges of a changing natural environment. The most significant anticipated impact comes from climate change, and in particular the long-term changes in average temperature and rainfall. Water companies must adapt to meet the challenges climate change presents, and this creates both risks and opportunities.

The main opportunity is the potential for water sharing. Our region typically receives higher average rainfall than other parts of the country, meaning the availability of raw water tends to be less constrained than in the comparatively drier south. Ofwat indicated in its initial assessment of company business plans for 2020–25 that it would provide us with £25.7 million funding for feasibility and planning work with respect to a potential north-south transfer of water as part of the development of strategic water resources options for the south and south east.

The main risks are the impact of prolonged severe dry periods, which constrain water resources, and intense periods of heavy rainfall, which increase the risk of flooding and pollution incidents.

Our response to climate change risk can be split into two areas: mitigation and adaptation.

  • Mitigation – reducing carbon emissions to minimise our contribution to climate change.

The key contributor to climate change is an increase in greenhouse gases. There is global scientific agreement that as a result of human activity the amount of greenhouse gases in the atmosphere is increasing and affecting the global climate. We have been driving down our carbon footprint (net operational emissions in 2018/19 were over 70 per cent lower than 2005/06) and have plans to reduce it further, mainly through our energy strategy.

We have assessed our operational sites for their potential to generate renewable energy through either solar panels or wind turbines. We are working on plans to substantially increase our renewable energy production across the current regulatory period to 2020, mainly from solar, and this year we generated the equivalent of over 20 per cent of our electricity consumption through renewable energy. This provides environmental benefits as well as energy cost savings.

The anaerobic digestion of bioresources reduces our carbon emissions as well as saving energy costs and producing a high-quality fertiliser. Our advanced digestion facility at Davyhulme wastewater treatment works is one of the largest of its type, making the site energy self-sufficient, with surplus energy exported to the national grid.

  • Adaptation – improving the resilience in our water and wastewater business.

The potential effect of climate change on our future water resources is considered in our 25-year Water Resources Management Plan, and we published two adaptation reports in 2011 and 2015 outlining our holistic, integrated and partnership approach to a range of short, medium and long-term challenges including climate change.

It is predicted that climate change will result in the North West experiencing higher daily temperatures all year, and a shift in our rainfall from summer to winter. More occurrences of heavy rainfall are expected, with higher rainfall in winter but more frequent and/or severe drought events predicted in summer.

We have first-hand experience of the impacts of extreme weather events on our operations and customers – during 2018 we experienced two weather extremes, with a deep freeze followed by rapid thaw in the early part of the year, and then extremely hot, dry weather coupled with significantly increased demand for water over the summer.

Coping with extreme hot, dry periods requires action in relation to both supply and demand.

Supply is managed by ensuring we continue to have resilient water resources and infrastructure capable of moving water efficiently around the region. We have an integrated supply zone covering the majority of our region operated using our Systems Thinking approach. This helps us to manage water supply and demand and, where there is any potential shortfall, we bring more supplies online to meet demand. Generally this system is proficient, but there are areas that require further improvements to deal with future challenges. Our West East Link Main pipeline runs between Manchester and Liverpool, allowing transfer of water across our region, and the extreme dry weather in 2018 gave us cause to increase the capacity of this pipeline, as well as bringing additional groundwater sources online, both of which increased our resilience.

Demand is managed by encouraging and supporting customers to use water efficiently. We have increased our efforts in this area and ran a number of high profile campaigns in summer 2018 when demand was much higher than normal. We encourage customers to save water through education initiatives to raise awareness, sharing water saving tips on our website and through social media, and providing free water-saving devices. We work with external partners to expand our messaging further afield, and have increased the number of water meters installed, with 44 per cent of households in our region now fitted with meters.

Coping with periods of intense heavy rainfall requires action to cope with excess surface water drainage while minimising the risk of sewer flooding, pollution and spills.

Traditional interventions, such as storage tanks and enlarging sewers, are costly and subject to constraints for space, particularly in urban areas with little permeable ground. Innovation is needed to find new solutions, which is why we have increased our focus on the use of sustainable drainage solutions in recent years, working with partners to transform hard-grey areas into living planted places.

Our operations produce sludges, excavated materials and general office waste, which we are committed to managing in a sustainable way. Less than five per cent of our waste goes to landfill, we use recycled products where practical, and are working to reduce the use of plastics. We look for ways to reduce our use of raw materials to minimise our environmental impact and increase efficiency.

Stakeholders

Our catchment land is open to the public with an estimated nine million visits a year, providing access to the beauty and recreational benefits that the natural environment offers, and boosting the local tourism industry.

Much of our catchment land is managed by tenant farmers, or in partnership with other organisations such as the RSPB and Wildlife Trusts. We are increasingly looking at integrated catchment solutions, taking a holistic view of issues and solutions within catchments, working with others to improve the lakes, rivers and coastal waters in our region, and often utilising the natural environment as part of the solution. We have a long history of doing this through our award-winning sustainable catchment management programme (SCaMP), which has shown we can manage our catchment land to protect and enhance water quality and to provide other benefits such as an improving biodiversity.

We are one of many organisations with a role to play in boosting the quality of bathing water along the North West coast. With strict bathing water standards, we continue to work with partners to improve the quality of rivers and coastal waters, and we give the public real-time information on bathing water quality.

Technology and innovation

Innovation is one of our core values, and we embrace new treatment technologies and efficient approaches that use less resources. The development of connected technologies and Systems Thinking enables greater control and flexibility to operate our networks and assets to reduce our environmental impact.

Regulatory environment

Our regulatory framework shapes the way we manage natural resources and our interaction with the environment, and we work with our environmental regulators to agree long-term plans. The Environment Agency (EA) assesses water companies' performance across a basket of measures including regulatory compliance, pollution incidents and improvement plans.

Political environment

Many of our environmental regulations are based on EU legislation; therefore, there may be changes after the UK leaves the EU. The UK government published its 25-year Environment Plan for England and Wales in 2017, setting out its environmental ambitions. This plan, subject to any changes following exit from the EU, influences our activities and long-term investment plans.

The influence of devolved metro mayors in our region is starting to impact development and spatial planning, including the natural environment. Maintaining a close working relationship helps us work together to improve the natural environment in the region.

Global politics also has an impact on what we do. See UN sustainable development goals for how we are contributing to the UN's Sustainable Development Goal to 'Ensure access to water and sanitation for all'.

Management and measurement

We have an ISO-accredited environment management system that covers the whole business, and is externally certified through six-monthly surveillance visits.

We have a comprehensive set of environmental strategies covering our approach to carbon management, waste and resources, biodiversity and water use.

We manage our own woodland in a sustainable way to protect water quality, conservation, access, recreation and timber, and have been Forest Stewardship Council® (FSC®) certified since 2003.

A number of our operational KPIs are directly linked to the protection and enhancement of the natural environment, such as leakage, EA performance assessment, and some of our wholesale outcome delivery incentives, such as measures of our contribution to improving rivers and bathing waters, and pollution incidents.

We measure and report on our wider environmental performance. Those most relevant to our stakeholders can be found in the Stakeholder metrics table, and information is available on our website at: unitedutilities.com

The principal risks and uncertainties that relate to this key resource are 'Health, safety and environmental risk', 'Water service risk' and 'Wastewater service risk'.

Link to our strategic themes

The best service to customers

Customers have told us they value the natural environment and want us to protect and enhance the region's natural resources as part of our activities, and this was one of the outcomes that we committed to deliver as part of our business plan for the 2015–20 regulatory period. Many of our outcome delivery incentives are directly linked to the environmental impacts of our water and wastewater services and to protecting and enhancing the environment. We help customers do their bit for the environment and save money on their bills through our water-saving initiatives and 'what not to flush' campaigns to prevent sewer blockages.

At the lowest sustainable cost

Our embedded innovation culture helps us find new ways of working that simultaneously reduce costs and protect natural resources. Our approach to catchment management aims to address issues at source rather than through increasingly expensive treatment methods. This approach, as well as our renewable energy generation, makes us less reliant on power and chemicals, which reduces treatment costs as well as carbon emissions and use of natural resources. The work we do to prepare our network to sustainably cope with extreme weather and the challenges of climate change can save repair and recovery costs as well as ensuring a more resilient service for customers.

In a responsible manner

Managing our dependency, use and impact on natural resources is a key expectation of many of our stakeholders. Our monitoring and management of leakage from our water network is a crucial part of responsible water management. We comply with abstraction licences and environmental discharge consents set by independent regulators to safeguard the responsible management of the environmental impact of the water and wastewater services we provide. In addition, our efforts to reduce our carbon footprint and use of plastics makes an important contribution to protecting and enhancing the natural environment and mitigating climate change.

Business insight:

Responding to extreme weather conditions

Assets

Our network assets and treatment works are essential to delivering water and wastewater services to customers and protecting public health, and our energy assets enable us to generate energy, which helps reduce costs and minimise our environmental impact.

We are investing around £3.9 billion across the 2015–20 period, and we expect to continue with a substantial investment programme for the foreseeable future to meet increasingly stringent environmental standards and to maintain and improve our assets and services.

Impact of external drivers

Natural environment

We must build increased resilience into all our assets to cope with the anticipated impacts of a changing climate in the long term, including improvements to flood defences. Our assets must be prepared to continue to comply with increasingly challenging environmental constraints in areas such as water abstraction and wastewater treatment levels.

Economic environment

When making strategic investment decisions we must consider the impact on customers' bills and ensure we maintain affordability. A phased, long-term approach to address all of the concerns and interests of our many stakeholders, including environmental regulators, ensures that the necessary work can be delivered without the costs placing too much pressure on customer bills. For example, we have agreed to spread some of the environmental spend required by current legislation over the next 15 years.

Regulatory environment

Many of our assets are very long-term in nature, such as our impounding reservoirs that can last hundreds of years. Through our economic regulation framework we earn a return, received through revenue, based on a measure of the value of our capital asset base, Regulatory Capital Value (RCV). This mechanism allows us to share the cost of building these long-term assets between the generations that will benefit from them.

Our RCV is over £11 billion, but the gross replacement cost of our fixed assets (including all our reservoirs, treatment works and pipes), i.e. the estimated amount it would cost for another company to build similar assets and networks, is around £90 billion.

Stakeholders

Many of our reservoirs are areas of natural beauty and we permit the public to enjoy access to this land, bringing recreational and health benefits. Other assets, such as our wastewater treatment plants, are close to residential areas and we work hard to minimise odours and other impacts.

New infrastructure projects, such as our West Cumbria pipeline, can impact local communities and we go to great lengths to consult in the planning stage.

Political environment

UK government priorities, including those of the National Infrastructure Commission, will impact the planning of large infrastructure projects. We anticipate an increase in the North West's population of around one million by 2045 (more than the population of a large city such as Liverpool). We are planning to ensure our services and infrastructure are able to meet the needs of this growing population, including new connections and higher demand on our water and wastewater networks.

See How we create value for stakeholders for how we are contributing to the UN's Sustainable Development Goal to 'Build resilient infrastructure, promote sustainable industrialisation and foster innovation'

Technology and innovation

It is important we have the right systems and procedures in place to monitor and control our assets efficiently and effectively. We embrace the opportunity that new technology and innovation presents. This is at the heart of our Systems Thinking approach.

The new Nereda process has transformed the wastewater treatment process, our use of robots in managing the water network has improved efficiency and customer service, and we are using drones to inspect assets with restricted access, which improves health and safety as well as reducing time and costs.

We use technology for renewable energy self-generation, for example our Davyhulme sludge recycling centre employs a groundbreaking configuration of thermal hydrolysis to maximise energy generation from sludge; and we built Europe's largest floating solar array on our reservoir in Godley, Greater Manchester.

Technological advances can give rise to new risks as well as opportunities. Cyber crime has been on the increase in recent years and, as the holder of customer information, is a threat we take very seriously.

Management and measurement

Our asset management policy, available to all employees on our intranet, details how we will operate, maintain and invest in our assets with the aim of delivering our customer promises and associated outcomes, as agreed at the price review for the current regulatory period.

We monitor the condition and performance of our assets and assess the risk to service provision. Our proactive and reactive maintenance programmes, and focus on asset health performance measures, ensure we are managing our assets in the most efficient way. Our wholesale outcome delivery incentives, which feature as one of our operational KPIs, include measures of asset health such as the resilience of our impounding reservoirs and maintaining our wastewater treatment works.

The principal risks and uncertainties that relate to this key resource are 'Security risk', 'Water service risk', 'Wastewater service risk', 'Compliance risk', and 'Supply chain and programme delivery'.

Link to our strategic themes

The best service to customers

Maintaining and enhancing our assets is essential in order for us to provide the best service to customers. Since privatisation in 1989, we have invested billions in our assets and this has provided substantial benefits to customers, including reduced supply interruptions, reduced sewer flooding incidents, and improved water quality.

At the lowest sustainable cost

We manage our assets in a holistic way that seeks to minimise whole life costs, helping us deliver efficient total expenditure (totex) without compromising on quality of service or long-term resilience. This approach helps us to save future operating costs, reduce future customer bills, and continue to operate in a sustainable manner.

In a responsible manner

We are committed to managing and operating our assets in a way that continues to create long-term value for all our stakeholders. Effective capital investment helps us to meet increasingly stringent environmental standards, which helps to enhance the region's environment, improving bathing waters and protecting indigenous wildlife and habitats.

People

We support thousands of jobs in the North West, including a growing graduate programme and we have been named one of the top 100 apprenticeship employers, helping to secure a legacy for the future in our region. We believe that the most effective decision-making comes from access to a diverse range of people with a broad set of viewpoints.

Fundamental to the performance we deliver is a skilled, engaged and motivated team of employees, suppliers and contractors. We provide comprehensive training and development opportunities for our employees. Competitive wages, benefits and long-term incentives have been shown to enhance quality of work, increase employee retention, and reduce absenteeism, as well as providing societal benefits. Employee retention also helps ensure efficient and effective training and higher levels of performance.

Impact of external drivers

Stakeholders

We are committed to protecting the health, safety and wellbeing of our people. This is fundamental to their welfare and to the reputation and performance of the company, and remains an area of focus as we strive for continuous improvement. We have implemented a number of initiatives over recent years to improve health and safety conditions for our employees, and have been awarded the workplace wellbeing charter.

We promote diversity and equal opportunity to drive a comprehensive and balanced skill set, and we recruit and promote employees on the basis of merit. Over the last few years, we have been striving to improve diversity across all types of role and all levels within our business. We established a Gender Equality Network in 2015 to provide role models, mentoring and opportunities. We target diverse shortlists and attraction campaigns for our apprentice and graduate schemes.

Women are represented at all levels of our company. Over a third of our combined board and executive team is female. See chart.

1) Group board as at 31 March 2019.

2) Executive team excludes CEO, CFO and COO, who are included in group board figures.

3) As at 31 March 2019, there were 11 male and 3 female employees appointed as statutory directors of subsidiary group companies but who do not fulfil the Companies Act 2006 definition of 'senior managers'.

4) Employees of each sex as at 31 March 2019.

Further information on diversity can be found in the Nomination committee report

Applicants with disabilities are given equal consideration in our application process, and disabled colleagues have equipment and working practices modified for them as far as possible where it is safe and practical to do so.

Economic environment

The availability of skilled engineers depends on economic and social conditions. Our award-winning apprentice scheme and graduate programme help ensure we can continue to attract and train a high calibre of engineers, in a profession which has seen declining numbers in the UK in recent years. Our employees are paid a competitive base salary plus benefits and the opportunity to join the employee healthcare scheme and our share incentive plan.

We work with suppliers and contractors whose business principles, conduct and standards align with our own. Our key suppliers have committed to our sustainable supply chain charter. We support the appointment of a small business commissioner to investigate companies who do not treat suppliers fairly, are a signatory to the Prompt Payment Code, and will fully comply with rules on reporting payments to suppliers.

Technology and innovation

We have an embedded culture of innovation, and it is one of our core values. We encourage ideas from our people as well as from outside our business, both ad hoc and formally through programmes such as our annual CEO challenge.

Management and measurement

We measure employee engagement through an annual survey, and regularly achieve engagement levels higher than the UK norm. We monitor and measure employee performance through annual reviews, and employees at all levels of the company participate in the bonus scheme, so they benefit from company success. The bonus performance measures are the same for all employees as those for the executive directors, and can be found in the Corporate governance report.

We maintain a comprehensive A–Z suite of policies, which are available to all employees on our intranet. Our policies on maternity, paternity, adoption, personal and special leave go beyond the minimum required by law. For disabled applicants, and existing employees, we are committed to fulfilling our obligations in accordance with the relevant legislation.

We convened a cross-company working group to draft our human rights policy statement and assess risks and potential impacts on our stakeholders. These are mapped to, and managed within, our corporate risk register. Our human rights policy can be found on our website, and this has links to other related policies including our modern slavery policy and slavery and human trafficking statement, and sustainable supply chain charter.

The principal risks and uncertainties that relate to this key resource are 'Health, safety and environmental risk' and 'Resource risk'.

Link to our strategic themes

The best service to customers

Our employees and our supply chain act as the face of our business, and therefore are a crucial part of delivering the best service to customers across our entire business. Customer focus is one of our core values that we encourage our people to live by, and we recognise great customer service from individuals, such as through participation in the WOW! Awards.

At the lowest sustainable cost

Comprehensive training and development opportunities for our employees help to improve our internal skills base and therefore quality of work at an efficient cost, as well as creating a more engaged workforce. Management has a range of incentives that focus on performance over a number of years, rather than just the current year, to encourage the delivery of benefits over the longer term.

In a responsible manner

We work with schools, including encouraging the next generation of women into science, technology, engineering and mathematics careers, and with our supply chain partners to give young people not in education, employment or training the chance to gain hands-on experience and basic skills training in the workplace. We are a signatory to the Prompt Payment Code for our suppliers.

Business insight:

Creating a healthy workplace

Financing

As a result of the long-term nature of our assets and the need to spread the cost between the generations of customers that benefit from them, it is necessary to raise financing in order to fund this investment.

We adopt a prudent approach to managing financial risks, with clear and transparent hedging policies, and our debt portfolio has a very long average life. We maintain a robust and sustainable capital structure, balancing both equity and debt financing, which helps us maintain a strong and stable investment grade credit rating. This enables efficient access to the debt capital markets across the economic cycle, long-term financial resilience, and reduces our exposure to fluctuating market conditions and regulatory changes.

Impact of external drivers

Economic environment

Changes in economic conditions and financial markets can influence our ability to create value through financing. We mitigate some of the impact through our financial hedging strategies, including our approach to hedging inflation and interest rates.

Interest rates have been comparatively low in recent years, and through our interest rate hedging policy we have progressively locked in these lower rates on our debt portfolio, benefiting our future cost of debt.

Our revenue and regulatory capital value (RCV) are linked to RPI inflation during the current regulatory period. Our inflation hedging policy aims to maintain around half our net debt in index-linked form (where it is economic to do so), as this provides a partial economic offset for our inflation exposure. Periods of lower inflation mean lower growth in revenue and the RCV, but also lower finance costs, and the reverse is true in periods of higher inflation.

Market sentiment can impact our financing. While much of this can be outside of our direct control, we can help inform and influence investor opinion through regular engagement.

Regulatory environment

Our ability to raise efficient financing at a cost cheaper than many of our peers provides the potential to outperform the industry-allowed cost of debt, and we have a long track record of aligning our financial risk management policies with the regulatory model.

We maintain an appropriate level of gearing, measured as net debt to regulatory capital value (RCV), within a target range of 55–65 per cent, which is broadly in line with regulatory assumptions for the 'notional company'.

Our inflation hedging policy aligns with the current RPI-linked regulatory framework, and we have evolved our policy and began introducing CPI-linked debt in line with Ofwat's transition towards CPIH inflation for the 2020–25 period. We issued the first ever CPI-linked notes by a UK utility in 2017 and have continued to increase our CPI exposure where there are good relative value opportunities, but we expect our index-linked debt to remain mostly in RPI-linked form until CPI or CPIH debt and swaps become available in sufficient size at an economic cost.

Our interest rate hedging policy is to fix nominal debt out to 10 years on a reducing balance basis, reducing our exposure to market fluctuations while managing uncertainty in Ofwat's approach to setting the cost of debt at future price reviews. For 2015–20 we also substantively fixed all our nominal debt to the end of the period once the cost of debt was known, but we will not do this for 2020–25 as a result of Ofwat's introduction of indexation on new debt.

Stakeholders

As a FTSE 100 listed company, we have open and transparent reporting around all of our equity and debt financing arrangements, which helps to build trust with long-term investors as well as our regulator.

We have proactive engagement programmes with equity and debt investors, through which we update them on developments in our business and seek their views, which we consider in our strategic planning.

Technology and innovation

New innovative ways of raising finance often emerge, for example accessing pockets of untapped investor demand via our Euro Medium Term Note (EMTN) programme, CPI-linked financing, and green bonds have become more prevalent in recent years. We monitor and assess these developments and continue to maintain access to a broad and diverse range of sources of finance in a number of markets, across which we seek the best relative value when issuing new debt.

Management and measurement

We have clearly articulated financial risk management policies, covering credit, liquidity, interest rate, inflation and currency risk.

We maintain relationships with a diverse range of banks, and we periodically refresh our EMTN programme to enable efficient debt issuance under pre-agreed contractual terms. The board delegates authority to the CFO, allowing us to respond quickly to attractive financing opportunities.

We aim to avoid a concentration of refinancing in any one year, and fund long-term where possible. We monitor liquidity forecasts, with a policy of having available resources to cover the next 15–24 months of projected cash flows to ensure forward funding needs are met.

As part of our planning process, we review key credit ratios against required thresholds for our target credit ratings. Performance against these ratios is regularly monitored, and we maintain relationships with the credit rating agencies to understand methodology changes.

The principal risk that relates to this key resource is 'Financial risk'.

Link to our strategic themes

The best service to customers

Customers benefit from receiving service improvements earlier as a result of our ability to pre-fund investment in long-term assets, and keeping finance costs down helps us to ensure bills remain affordable. The financial resilience we build through our financial risk management helps to ensure we can continue to provide great service long into the future.

At the lowest sustainable cost

Locking in long-term debt and swaps at good relative value helps keep our finance costs low, and we monitor liquidity and headroom regularly to maintain adequate funding. Our approach and financial risk management reduce our risk exposure and help ensure the sustainability of our ability to efficiently finance our business.

In a responsible manner

Our environmental, social and governance performance and robust capital structure give equity and debt investors confidence in the long-term sustainability of our business, which reduces their investment risk. We do not use offshore financing vehicles, and our open and transparent reporting is trusted by Ofwat who rated us 'self-assurance' three years in a row.

Business insight:

Introducing artificial intelligence to our network

Business insight:

Alerting communities to what not to flush

Business insight:

Accelerating the drive for new ideas