ANNUAL REPORT AND FINANCIAL STATEMENTS 2009

Sections within this page:

The Combined Code
The board of directors
Summary of approach to governance
Principal committees of the board (summary)
Chairman and chief executive
Board balance and independence
Senior independent director
Conflicts of interest
The nomination committee and appointments to the board
Re-appointment of directors
Information, support and advice
Induction and training
Performance evaluation
Internal controls
Control systems
Function of controls
Annual review of risk management and internal control systems
Financial reporting and going concern
Audit committee
Significant holdings of securities
Communication with shareholders
Constructive use of the annual general meeting

The Combined Code

This corporate governance statement forms part of and should be read in conjunction with the directors' report.

United Utilities Group PLC (the company) is subject to the Combined Code on Corporate Governance (the code) which was published by the Financial Reporting Council in June 2006.

During the financial year ended 31 March 2009, the company (since its listing on the London Stock Exchange, and the previously listed entity, United Utilities PLC, see here for details), complied fully with the provisions of Section 1 of the code.

This report (which incorporates a report from the audit committee,), together with the remuneration report, gives details of how the main principles of the code have been applied during the year.

The board of directors

The names of the current directors who served during the year, and their biographical details, are set out on here (and details of those who retired are contained here). Ten board meetings are scheduled each year and it will meet more or less frequently as required. During the year nine meetings were held (2008:10). The following table shows the attendance of each of the directors at meetings of the board and the principal board committees, which are subject to code requirements during the year. The figures in brackets show the maximum number of meetings which the directors could have attended.

Summary of approach to governance

The board members are fully aware of their responsibilities, both individually and collectively, to promote the long-term success of the company. The board is responsible for devising the strategy of the group and has responsibility for the internal control systems operated across the group, allowing assessment and management of the key issues and risks impacting the business. In addition to its scheduled meetings, the board met during the year specifically to consider and develop the company’s strategy and long-term plan. The board has a formal schedule of matters reserved to it, which ensures that it takes all major strategy, policy and investment decisions affecting the group. Accordingly, the board sets the company’s overall strategic direction, reviews management performance and assesses whether the company has the necessary financial and human resources in place to meet its objectives. It also reviews the company’s business planning, approach to risk management and development of policies. Via the remuneration committee  it is responsible for the directors’ and senior managers’ remuneration.         The board is responsible for promoting the long-term success of the company and ensuring that the principal goal of the company is to create shareholder value, while having regard to other stakeholder interests. The board takes responsibility for setting the company’s values and standards. Accordingly, the long-term interests of shareholders, together with consideration of the wider interests of stakeholders represented by employees, customers, suppliers, the community and the environment are factored into the group’s management processes. Appropriate consideration is also given, within the company’s control and risk assessment processes, to social, environmental and ethical issues.

The steps taken to achieve these goals are communicated to shareholders and other interested parties through dedicated communication and investor relations departments, the company’s website and to employees via the intranet and through formal and informal briefings and newsletters. Through its vision, core values, formal policies and the ‘business principles’ statement, which sets out what the company expects from employees in the conduct of the company’s business, the board seeks to engender a culture where business ethics, integrity and fairness are values that all employees endorse and apply in their everyday conduct.

The board has established a governance framework which encourages all directors to bring to bear independent judgement on issues of strategy, performance and resources, including key appointments and standards of conduct. Directors have a right to ensure that any unresolved concerns they have about the running of the company or a proposed action are recorded in the board minutes. In addition, upon resignation, a non-executive director is asked to provide a written statement addressed to the chairman should he or she have any concerns about the running of the company, and any such statement would then be circulated to the board.

The group’s governance structure also seeks to ensure that decisions are made at an appropriate level by employees with the knowledge and skills to do so.

The directors of subsidiary operating companies (most notably United Utilities Water PLC) are legally responsible for those business entities and their associated regulatory obligations. Additionally, they are tasked with the delivery of the targets set within the budgets approved by the board and for the implementation of strategy and policy across their businesses.

The board’s view is that it is appropriate, from a development perspective, for executive directors or senior managers to become non-executive directors of other companies, providing that any such appointment does not impact upon their obligations to the company or upon the performance of their duties. To this end, there is an embargo upon such individuals accepting more than one non-executive directorship of a FTSE 100 company or the chairmanship of such a company.

Principal committees of the board (summary)

The board has formally delegated specific responsibilities to certain committees, including the following: approvals; audit; community investment; nomination; remuneration; and treasury. All board committees are provided with sufficient resources to undertake their duties, have authority to seek independent advice, if appropriate, and are supported by the company’s secretariat. In addition to the board committees featured in the code, the board has delegated certain of its powers and functions to the following committees:

Approvals committee

This considers and approves expenditure and investment proposals within limits determined by the board. Its members are the executive directors and the company secretary.

Community investment committee

This has responsibility for developing and overseeing the corporate responsibility strategy of the company and for approving its charitable donations. Its members are certain board directors and such executive leadership team members as may be appointed by the board from time to time. Two employee representatives are also invited to attend meetings and participate in its assessment of items of business. Its current chair is Tim Weller, with Dr Catherine Bell and Gaynor Kenyon being its other members.

Executive leadership team

The team met monthly during the year, under the chairmanship of Philip Green, and provided, amongst other matters, a regular forum for discussing group-wide operational and strategic issues impacting the business. Its members during the year were the company’s executive directors, along with: Martin Bradbury, chief information officer; Alison Clarke, human resources director; Clive Elphick, managing director asset management and regulation; Tom Keevil, company secretary and general counsel; Gaynor Kenyon, communications director; Ian McAulay, managing director capital programmes; and Matthew Wright, managing director operations. Moving forward, the responsibilities of senior management are to be aligned more closely with the regulated and non-regulated business units.

Treasury committee

This considers and approves borrowing, leasing, bond and other banking facilities within limits set by the board. It is chaired by Paul Heiden and its other members are the executive directors together with the group treasurer. The treasury committee has delegated some of its powers, subject to certain limits, to the chief financial officer and the group treasurer.

Chairman and chief executive

The positions of chairman and chief executive are separate appointments and the board has agreed clearly defined responsibilities for these roles. It has also adopted a set of guiding principles to govern the working relationship between them. The chairman is primarily responsible for the working of the board, ensuring that the non-executive directors are fully engaged in their roles and that they provide an effective contribution to the operation of the board and the promotion of the success of the company. In essence, the responsibility of the chief executive officer is to manage the group’s business and to implement board strategy and policy.

Board balance and independence

The board aims to maintain a balance of executive and non-executive directors and, at the date of adoption of this statement, comprises the non-executive chairman, three executive directors and five non-executive directors.

All five of the non-executive directors are determined by the board to be independent in accordance with the code and free from any business or other relationship which could compromise their independent judgement. The chairman is not deemed to be independent under the code (following appointment to that role) although Dr John McAdam was deemed to be independent at the time of his initial appointment to the board. During the year, Dr John McAdam was appointed as non-executive chairman of Rentokil Initial PLC and as a non-executive director of Sara Lee Corporation. The board was informed in advance of the appointments and did not consider that such appointments would compromise Dr John McAdam in his role as chairman of the company.

Senior independent director

Nick Salmon was appointed as senior independent director on 27 July 2007. The senior independent director is available to shareholders if they have concerns that dialogue with management representatives has failed to resolve. The terms of reference for the senior independent director are available on the company’s website. They include the authority to call a meeting of the non-executive directors if, in his opinion, it is necessary; the convening of a meeting of the non-executive directors without the chairman present at least annually to appraise the chairman’s performance; and to be available if required to attend meetings with major shareholders to listen to their views, in order to assist the process of the company having a balanced understanding of their issues and concerns.

Conflicts of interest

Since 1 October 2008, directors have been under a statutory duty to avoid any situation in which they have, or can have, a direct or indirect interest which conflicts or possibly may conflict with the interests of the company. The duty is not infringed where a conflict situation has been authorised in advance by the unconflicted directors or the shareholders of the company or where the situation cannot reasonably be regarded as likely to give rise to a conflict of interest. For a public company, the unconflicted directors can only authorise conflict situations if permitted to do so by the company’s articles of association.

The company’s articles of association contain provisions which permit the unconflicted directors to authorise conflict situations and procedures have been put in place for the disclosure of any conflicts by the directors to the board and for the consideration and, if appropriate, authorisation of such conflicts. The procedures permit any authorisation to be subject to any terms and/or conditions that the unconflicted directors think fit.

Prior to 1 October 2008, each board member (together with the directors of the principal operating subsidiary) completed a comprehensive questionnaire to establish if any director had a conflict of interest under the Companies Act 2006. The results were then assessed by the chairman and the board, which concluded that no director had a conflict that required authorisation. Moving forward, directors are required to notify the chairman and/or company secretary if they believe that a conflict might arise. If so, it would be referred to the board. Conflicts of interest in general will be reviewed annually by the board. Any potential issue of conflict relating to prospective directors is addressed by the nomination committee, with a recommendation to the board.

The nomination committee and appointments to the board

The nomination committee meets at least once each year and otherwise as required. Its primary role is to make recommendations to the board on the composition, balance and membership of the board and refreshment of the board’s principal committees. The nomination committee’s terms of reference are available to shareholders on request and are also available on the company’s website.

The nomination committee evaluates the balance of skills, knowledge and experience on the board and, in the light of such evaluation, prepares descriptions of the roles and capabilities required for a particular appointment and makes recommendations to the board from time to time on its composition. It may use executive search consultants to assist it when considering board member succession.

The committee is chaired by the chairman of the company (except when succession issues surrounding that position are being considered). Its other members are the non-executive directors and the chief executive. As such, the substantial majority of the members are non-executive directors determined by the board to be independent in accordance with the code.

During the financial year ended 31 March 2009, amongst other matters, the nomination committee reviewed the succession planning arrangements for the senior executive management population.

The letters of appointment of the non-executive directors (which comply with the code) are made available for inspection at the company’s registered office during business hours and before the annual general meeting and are published on the company’s website. They make it clear that no compensation is payable for loss of office and expressly set out the time commitment expected from non-executive directors. Non-executive directors are required to disclose to the company any significant commitments that might impede the performance of their duties to the company prior to appointment and to consult the chairman before accepting any positions that might impact upon their availability to perform their duties or give rise to a potential conflict of interest.

Details of the executive directors’ service contracts and the basis of their appointments are set out in the directors’ remuneration report.

Re-appointment of directors

The board appoints all new directors, after assessing the recommendation of the nomination committee and following an appropriate recruitment process. Following initial appointment, a new director is required to retire and seek appointment at the next annual general meeting. The company’s articles of association require all directors to retire and seek re-appointment at least every three years, and include additional provisions which require one third of the directors to retire at each annual general meeting, (including those who are proposed for re-appointment at an annual general meeting and those who are not). Biographical details of directors being submitted for appointment or re-appointment are set out in the notes accompanying the relevant notice of meeting.

Non-executive directors are appointed for specified terms, subject to re-appointment under the company’s articles of association and to Companies Acts provisions relating to the removal of directors. The board explains to shareholders, in the notes accompanying a resolution to elect a non-executive director, why it believes that a non-executive director should be appointed. The chairman will confirm to shareholders when proposing reappointment that, following formal performance evaluation, the individual’s performance continues to be effective and that they demonstrate commitment to the role. Any term beyond six years for a non-executive director will be subject to particularly rigorous review, and will take into account the need for progressive refreshing of the board. Any non-executive director serving for longer than nine years will be subject to annual reappointment.

Information, support and advice

The chairman is responsible for ensuring that directors receive comprehensive information on a regular basis to enable them to perform their duties properly, supported by the company secretary. As part of the preparation process for board meetings, the chairman has implemented a programme of informal briefings with the non-executive directors and chief executive, the evening before the scheduled board meetings.

Board papers are generally distributed five days in advance of scheduled board meetings to enable directors to obtain a thorough understanding of the matters to be discussed, and seek clarification, if required. All directors have access to the advice and services of the company secretary and his team, who are responsible to the board for ensuring that board procedures are complied with. The appointment and removal of the company secretary are matters reserved to the board.

The board has adopted a protocol under which directors have access, through the company secretary, to independent professional advice at the company’s expense where they judge it necessary to discharge their responsibilities as directors. The company also maintains an appropriate level of directors’ and officers’ insurance.

In 2008, the company established arrangements for the provision of indemnities for the benefit of its current directors and officers and those of its subsidiaries. These arrangements, which constitute qualifying third party indemnity provision and qualifying pension scheme indemnity provision, have been established in compliance with the relevant provisions of the Companies Act 2006. They include provision for the company to fund the costs incurred by directors in defending certain claims against them in relation to their duties as directors of the company or its subsidiaries.

Induction and training

New directors receive appropriate induction on joining the board, typically including meeting with members of the senior management team and visits to operational sites. During the year, Dr John McAdam’s induction continued. Directors are provided with details of seminars and training courses relevant to their role and are encouraged to attend those that meet their development needs. Additionally, training is provided to the whole board on topics such as the Companies Act 2006. Major shareholders are also invited to meet with new non-executive directors and shareholders will have the opportunity to meet directors at the annual general meeting in July.

Performance evaluation

During the year, the board conducted an evaluation of its own performance and that of its committees and individual directors. The process involved the completion by each director of a confidential questionnaire in a form consistent with previous years and which was modelled on the ‘Chairman’s Guide to the Board Performance Review’ published by the Chairman’s Forum. Each director was required to score the board’s performance (and that of the principal committees) on 40 topics, including: contribution to strategy; risk management; financial and operational reporting; matters reserved for the board; communication; company and board advisers; relations with the group’s regulators and investors; and board procedures.

The company secretary analysed the completed questionnaires and summarised the findings in a report for the chairman, which highlighted and prioritised the key areas of feedback and provided a comparison with the previous year’s evaluation. The chairman subsequently conducted one-to-one discussions with each of the board members based upon the summary report about the board’s performance and their own as directors, after which he reported back to the whole board on the evaluation process. The responses to the questionnaires demonstrated a high degree of consistency and the evaluation process affirmed the board’s confidence in the group’s system of corporate governance. Nevertheless there is always room for improvement and, arising from the 2008/09 exercise, the board has asked that the structure of the strategic review process be enhanced. The members of the audit, nomination and remuneration committees, together with the managers and advisers who attend those committees, completed separate confidential questionnaires upon the effectiveness of the principal committees. Similarly, the chairs of those committees undertake evaluation based upon the feedback that is received.

As part of good governance, the chairman holds meetings with the non-executive directors without the executive directors present. In turn, led by the senior independent director, the non-executive directors meet without the chairman present at least annually to appraise the chairman’s performance. The chief executive officer conducts annual appraisals with executive directors and the other members of his senior management team and has one-to-one discussions about their performance with them, as does the chairman with the chief executive officer.

Internal controls

The board has overall responsibility for the company’s system of risk management and internal controls and for reviewing its effectiveness. The schedule of written matters reserved to the board ensures that the directors are responsible for the control of, amongst other matters, all significant strategic, financial and organisational risks.

An overview of some of the principal risks surrounding the company is contained in the business review section. To manage these and other commercial and operational risks the company has an established risk management programme that assists management in identifying, assessing and mitigating business, financial, operational and compliance risks on a continual basis. The board views management of risk as integral to good business practice. The programme is designed to support management’s decision-making, improve the reliability of business performance, and assist in the preparation of the company’s consolidated accounts. It is supported by the dedicated team of internal risk specialists and internal auditors who report to the director of audit and risk, who in turn reports directly to the audit committee and the chief executive officer.

The board delegates to executive management the responsibility for designing, operating and monitoring both the system and the maintenance of effective internal control in each of the group’s businesses. The system of internal control is based upon an ongoing process of identifying, evaluating and managing key risks and includes the risk management processes referred to above. The system of internal control was in place throughout the year and up to the date of approval of the Annual Report and Financial Statements. The effectiveness of this system has been reviewed regularly throughout the year, and up to the date of the approval of the Annual Report and Financial Statements, by the executive leadership team. The system of internal control was periodically reviewed by the audit committee and the board and it accords with the guidance in the Turnbull Report and the Internal Control Revised Guidance for Directors published by the Financial Reporting Council in October 2005. The system is also refined, as necessary, in response to changes in the company’s business and the associated risks. Joint venture arrangements with other companies and participations via shareholdings in other businesses are outside the group’s own formal control procedures. However, the group’s exposure to them is assessed by line management (in most cases through representation on the boards of those operations).

Control systems

The main components of the group’s internal control framework are summarised below. Their foundation is in the considerable value that the group places, throughout its activities, on seeking to ensure that employees are of the highest quality and integrity. Formal control is exercised through a management structure which includes clear lines of responsibility and documented delegations of authority from the board. The systems of internal control include a series of group policies, operating and procedural manuals and processes, which all relevant employees are expected to comply with. Processes underpinning the financial reporting systems are managed and monitored by line and functional management through regular reporting. Separately, the effectiveness of these internal controls is reviewed by an internal audit function. It reports its results to the executive leadership team and directly to the audit committee. The work of the internal auditors is focused on the areas of perceived greatest risk to the company as determined by internal risk assessments, senior management and the audit committee.

Function of controls

The system of internal control (the control system) is designed to manage rather than eliminate the risk of failure to achieve business objectives. It can only provide reasonable and not absolute assurance against material errors, losses, fraud or breaches of laws and regulations. The key features of the control system include:

• a control environment with clearly defined organisation structures, operating within a framework of policies and procedures, covering every aspect of the business;
• comprehensive business planning, risk assessment and financial reporting procedures, including the annual preparation of detailed operational budgets for the following year and projections for subsequent years;
• established procedures, set out in an internal control manual, for planning, approving and monitoring major capital expenditure, major projects and the development of new business which includes short and long-term budgets, risk evaluation, detailed appraisal and review procedures, defined authority levels and post-investment performance reviews;
• a monthly board review of financial and non-financial performance to assess progress towards objectives;
• monthly meetings, prior to each board meeting, of the senior management team, where the executive directors, and other senior executives responsible for running the group’s businesses, amongst other matters, review performance and explore strategic and operational issues which are of group-wide importance;
• centralised treasury operations operating within defined limits and subject to regular reporting requirements and internal audit reviews;
• an internal audit function which provides independent scrutiny of internal control systems and risk management procedures;
• regular monitoring of risks and control systems throughout the year by the operating businesses, supported by the use of risks and issues databases;
• a monthly rolling review of group-wide risks and mitigating actions and controls by the senior management team. Arising from such reviews, plans are developed to enhance internal control and risk management further;
• a self-certification process whereby the operating businesses are required to confirm annually that the system of internal control is operating effectively;
• an annual risk assessment exercise involving self-assessment by management of all major business risks in terms of impact, likelihood and control strength;
• health and safety performance reviews carried out by in-house health and safety professionals in addition to the normal health and safety risk assessment and management processes carried out within each of the operating businesses; and
• data consolidated into the group’s financial statements is reconciled to the underlying financial systems. A review of the consolidated data is undertaken by management to ensure that the true position and results of the group are reflected, through compliance with approved accounting policies and the appropriate accounting for non-routine transactions.

Annual review of risk management and internal control systems

In addition to the regular reports received by the audit committee and the board on internal controls, key risks and periodic reviews, the board conducts an annual review of the effectiveness of the risk management and internal control systems in operation during the year and up to the date of the approval of the Annual Report and Financial Statements. Through operational reports from management, the board reviews controls designed to mitigate risks and would receive, via these reports, information in the event of any significant control failings occurring. The board, through the audit committee, also assesses the review that is conducted by internal audit. Management of all the business divisions of the group are required to complete and sign-off control self-assessment questionnaires that confirm that the key internal controls are in place and are operating effectively. Where weaknesses have been identified, plans and timetables for putting them right are also reported. Internal audit monitors and selectively checks the results of this exercise, ensuring that the representations made are consistent with the results of the internal audit function’s work during the year. The results of this exercise are summarised for the audit committee and the board.

In the event that any significant losses were incurred during any year as a result of the failure of internal controls, an analysis would be reported to the audit committee and the board. A plan would also be implemented to take the necessary action to remedy any significant weaknesses. In the year ended 31 March 2009, there were no such losses and the board was satisfied with:

• the changes since the last annual assessment in the nature and extent of significant risks identified by management;
• the company’s ability to respond to changes in its business and the external environment to the extent that such changes are events that management can materially influence;
• the scope and quality of management’s ongoing monitoring of risks and of the system of internal control, and where applicable, the work of its internal audit function and other providers of assurance;
• the extent and frequency of communication of the results of the monitoring to the board (or board committee(s)) which enables it to build up a cumulative assessment of the state of controls in the company and the effectiveness with which risk is being managed; and
• the company’s external reporting processes.

Financial reporting and going concern

When releasing the annual and half-yearly financial reports and interim management statements the directors aim to present a balanced and understandable assessment of the group’s position and prospects. These statements are posted on the company’s website at the same time as they are released to the London Stock Exchange. To encourage effective communication, individuals with an email address can register free of charge to receive an email alert upon the posting of each new release.

The directors have a reasonable expectation that the company has adequate resources available to it to continue in operational existence for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the financial statements. This approach, taking into account the relatively stable and regulated nature of the business, is based, amongst other matters, upon a review of the group’s budget for 2009/10, the group’s proposed five-year business plan and investment programme (in line with the plans submitted for the 2009 water price review), together with a review of the cash and committed borrowing facilities available to the group (discussed in further detail in the liquidity section) and the debt financing and interest rate management section. This review shows that the group, at 31 March 2009, had a headroom of £935 million based on cash and short-term deposits, medium-term committed bank facilities and net of short-term debt, which is sufficient to cover the group’s projected financing needs through to mid 2011.

The board also took into account potential contingent liabilities and other risk factors as interpreted by the guidance given in ‘Going Concern and Financial Reporting: Guidance for Directors of Listed Companies registered in the United Kingdom’, published in November 1994 and the guidance published in November 2008 ‘An update for Directors of Listed Companies: Going Concern and Liquidity Risk’ as published by the Financial Reporting Council.

Audit committee

Members

The audit committee’s members are Paul Heiden (chairman), Dr Catherine Bell, Norman Broadhurst (until 25 July 2008), David Jones and Dr John McAdam (until he took up the position as chairman of the board on 25 July 2008). The board is satisfied that Paul Heiden has recent and relevant financial experience and that all members have extensive commercial experience and are independent within the meaning of the code. Appointments to the committee are made by the board, on the recommendation of the nomination committee in consultation with the audit committee chairman. Appointments are initially for a period of up to three years, extendable by no more than two additional three-year periods, so long as committee members continue to be deemed to be independent. The terms of reference of the audit committee are available to shareholders on request and are also available on the company’s website.

Attendees at meetings

The chairman, chief executive officer and chief financial officer of the group and other senior management attend committee meetings by invitation of the committee. Representatives of the group’s external auditors and the director of audit and risk (whose responsibilities include internal audit, risk and security) also attend meetings by invitation. During the year ended 31 March 2009, the external and internal auditors attended all audit committee meetings, had direct access to the committee during the meetings and time was also set aside for them to have private discussions with the committee, in the absence of management.

Audit committee compliance with the code

The audit committee’s terms of reference comply with the code and were revised during the year to reflect the guidance published by the Financial Reporting Council in October 2008.

During the year ended 31 March 2009, the formal calendar of matters considered by the committee embraced, amongst other matters, the code requirements to:

• monitor the integrity of the financial statements of the company, and any formal announcements relating to the company’s financial performance, including reviewing significant financial reporting judgements and any disclosures contained in them;
• review the company’s internal financial controls and its internal control and risk management systems and to make recommendations to the board;
• monitor and review the effectiveness of the company’s internal audit function;
• make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, reappointment and removal of the external auditors and to approve the remuneration and terms of engagement of the external auditors;
• review and monitor the external auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements; and
• review the company’s policy on the engagement of the external auditors to supply non-audit services. In doing so, account is taken of relevant ethical guidance regarding the provision of non-audit services by the external auditors and pre-approval practices. In this context, the committee will report to the board any matters in respect of which it considers that action or improvement is needed and makes recommendations as to the steps to be taken.

Audit committee activities

An overview of the work undertaken by the audit committee during the year ended 31 March 2009 is described within the following sections of this report.

The audit committee met four times during the financial year ended 31 March 2009. It has a formal policy, endorsed by the board, to keep under review the independence and objectivity of the external auditors. The audit committee determined that it was satisfied that the independence of the external auditors had been maintained, having taken into account the external auditors’ written representations and the committee’s own enquiries. These were facilitated by a private meeting with the external auditors without executive management being present. The independence policy sets out certain disclosure requirements by the external auditors to the audit committee, including restrictions on mutual hiring of personnel, rules for rotation of audit partners and procedures for the approval of non-audit services provided by the external auditors. The audit committee has monitored the application of the policy both during the year ended 31 March 2009 and up to the date of this report.

The audit committee reviewed the external auditors’ audit scope, plans and materiality levels and the resources proposed to execute the plans. Having done so, the committee approved the terms of engagement and the audit fees. The committee also reviewed the findings of the external auditors and their management letters on internal financial controls.

The audit committee also assessed the qualifications, expertise and resources and independence of the external auditors and the effectiveness of the audit process. Through an embedded regular audit effectiveness review, the audit committee has continued to keep the performance of the company’s auditors and audit effectiveness under review. Mindful of the costs associated with the company’s compliance requirements, the audit committee continues to seek the most cost-effective approach to compliance and external audit generally.

The policy relating to the provision of non-audit services by the external auditors specifies the types of work from which the external auditors are excluded; for which the external auditors can be engaged without referral to the audit committee; and for which a case-by-case decision is required. The ratio of non-audit fees to audit fees was monitored by the committee throughout the year ended 31 March 2009. The audit committee is satisfied that this policy in respect of the provision of non-audit services was applied during the year ended 31 March 2009 and up to the date of this report.

Fees

As summarised above, the committee has established policies and procedures to pre-approve the engagement of the auditor to provide any audit or non-audit services and keep the nature and extent of non-audit services under review. All audit and audit related services proposed to be provided by Deloitte LLP are pre-approved by the audit committee and reviewed annually. The provision of audit related services is generally highly correlated with the role of independent auditors. Such services include assurance on non-statutory information, assurance work carried out in connection with reporting to a statutory regulator, analysis and interpretation of accounting principles, support for debt issues and similar transactions and other services that have a bearing on the group’s financial statements on which the external auditors provide their opinion.

Non-audit services are allowed under the procurement of an audit and non-audit services policy, where they do not affect the independence of the external auditors, but do require the pre-approval of the audit committee prior to the engagement. Specific approval may be delegated to a designated member of the audit committee, with such approvals to be reported at the next audit committee meeting. In granting such approval, the designated member of the audit committee is required to consider the cumulative proportion of fees paid for such work compared with the statutory audit fees. In the financial year ended 31 March 2009, all such services were approved by the audit committee.

The company also maintains a list of prohibited services that cannot be provided by the group’s auditors; as they are considered by statute or in the group’s opinion to be incompatible with the role of the independent auditors.

The fees paid or payable to the auditors in the year ended 31 March 2009 and the preceding year were as follows:

Included in the above statutory audit fee is £50,000 in relation to the company for the period ended 31 March 2009.

For the year ended 31 March 2009, the substantial majority of non-audit related fees relate to the services provided by Deloitte LLP in their advisory capacity in relation to their provision of due diligence services to United Utilities PLC to support the creation and listing of a new holding company to facilitate the necessary distributable reserves to allow the proposed return of capital to shareholders.

Having undertaken a review of the nature and the amount of non-audit related work, the audit committee has satisfied itself that the services undertaken during the financial year ended 31 March 2009 did not prejudice the auditors’ independence.

Other activities

The audit committee met prior to the board meetings at which the annual and half-yearly financial reports were approved. The committee reviewed significant accounting policies, financial reporting issues and judgements and, in conducting this review, considered reports from management, the external auditors, and internal audit.

At three of its meetings, the committee reviewed and considered reports from the director of audit and risk. Those reports included the status of the company’s risk management systems, findings from the internal audit function concerning internal controls and reports on the status of the correction of any weaknesses in internal controls identified by the internal or external auditors.

The audit committee also reviewed and approved the remit, organisation, plans and resources of the company’s internal audit function and carried out a review of the effectiveness of that function.

Disclosure policy

The committee’s objective is to ensure that arrangements are in place for the proportionate and independent investigation of matters raised in confidence and for appropriate follow-up action. Accordingly, the audit committee reviews, at least annually, the arrangements by which employees may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. Historically, a confidential voicemail box was provided for employees to report any concerns anonymously. The disclosure arrangements are, however, in the process of being enhanced with the appointment of an independent service provider, whom employees can contact at any time.

Significant holdings of securities

Information can be found in the directors’ report.

Communication with shareholders

The company produces an electronic report for shareholders and other interested parties, which provides information on our key social and environmental impacts and performance during the year. Together with the annual and the half yearly financial reports, and interim management statements, these form the principal means of communications with shareholders. A substantial amount of company information is available via its website: unitedutilities.com

Additionally, there is a programme of regular investor meetings and presentations which take place throughout the year, both in the UK and overseas. During the year, the board met or offered to meet with 114 different funds, representing 54 per cent of the company’s issued share capital. Such briefings, together with regular announcements of significant events affecting the group and frequent updates on current trading, are part of a dedicated investor relations programme undertaken to keep the company’s equity and debt investors informed of developments affecting the group. The board regards this programme as an important contribution to seek continually to improve investors’ awareness of the business and for the board to maintain an understanding of investors’ priorities. Board members also receive regular updates in their board papers about investor relations and reports from sector analysts. Additionally, the board commissions an annual survey of shareholders by Makinson Cowell. Non-executive directors also have the opportunity to attend meetings with major shareholders at either party’s request.

Constructive use of the annual general meeting

The notice calling the annual general meeting and related papers are sent to shareholders at least 20 working days before the meeting. All directors normally attend annual general meetings, where presentations are made on the progress and performance of the business prior to the formal business of the meeting.

Additionally, the board encourages shareholders to participate in meetings through question and answer sessions with individual directors or, where appropriate, the chairman of the relevant committee. To that end, the chairmen of the audit, nomination and remuneration committees will always endeavour to be available to answer questions relevant to the work of those committees.

Voting on all resolutions takes place by means of a poll which ensures that all shareholders’ votes are taken into account, whether lodged in person at the meeting, or by proxy. The poll vote is scrutinised by the company’s share registrars and the results are released to the London Stock Exchange and posted on the company’s website on the next business day. Separate resolutions are proposed on each substantially separate issue. For each resolution, proxy appointment forms provide shareholders with the option to direct their proxy to vote either for or against the resolution or to withhold their vote. The proxy form and any announcement of the results of a vote will make it clear that a ‘vote withheld’ is not a vote in law and will not be counted in the calculation of the proportion of votes for and against the resolution.

The corporate governance statement and report of the audit committee were approved by the board on 27 May 2009.