ANNUAL REPORT AND FINANCIAL STATEMENTS 2009

I am pleased to provide the directors’ remuneration report for 2009 which sets out the information required by the Directors’ Remuneration Report Regulations 2002 and the Combined Code (2006) on Corporate Governance. This report is un-audited except where stated. An ordinary resolution to approve this report will be put to the annual general meeting on 24 July 2009.

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Approach to reward

The company’s remuneration arrangements are designed so that the overall level of remuneration including salary, benefits, short and long-term incentive opportunities are competitive when compared with other companies that the company may need to recruit from, provide an effective retention mechanism and have an appropriate balance between fixed and variable reward. Annual and long-term incentive remuneration arrangements are designed in a way that reflects a balance of measures including financial performance, operational performance, customer service, employee engagement and corporate responsibility. Executives are incentivised to deliver stretching results with an acceptable level of risk.

Executives are encouraged to accumulate personal holdings in United Utilities Group shares thereby ensuring that their interests are fully aligned with shareholders.

Aggregate remuneration

During the financial year, the aggregate remuneration paid to all directors was £3,230,380 (2008: £4,039,062). This includes salaries, benefits in kind (excluding pensions), annual bonuses earned and accrued in the year ended 31 March 2009 but paid after the year end and the value of long-term incentives paid in the period ended 31 March 2009.

Executive directors

The remuneration committee

The remuneration committee makes recommendations to the board on the group’s framework of executive remuneration and its aggregate cost to the group. It approves, on the board’s behalf, the general recruitment terms, remuneration, benefits, employment conditions and severance terms for senior executive management. In particular, it determines the specific recruitment terms, remuneration benefits, employment conditions, pension rights, compensation payments and severance terms for the executive board directors and senior executives who form the executive leadership team.

The committee’s members are comprised solely of independent non-executive directors. During 2008/09 the members of the committee were David Jones, Andrew Pinder and Nick Salmon. Dr John McAdam was a member until his appointment as chairman on 25 July 2008. The committee’s members have no personal financial interest in the company, other than as shareholders and the fees paid to them as non-executive directors. The committee’s terms of reference are available to shareholders on request from the company secretary and are on the group’s website: unitedutilities.com

The committee has appointed the independent consultants Hewitt New Bridge Street to advise it on executive remuneration. They also advise the group on the remuneration of a limited number of senior executive managers whose specific terms of employment do not fall within the remit of the remuneration committee. This is to ensure consistency in the application of the board’s policies on executive remuneration and the general terms of employment approved by the remuneration committee. Mercer Human Resource Consulting are the appointed advisors to the committee on pensions matters. They are also the actuaries to one of the group’s pension schemes (United Utilities Pension Scheme) and advise the group on matters relating to its operation. Eversheds LLP has been appointed to provide legal advice on the operation of the company’s share incentive and share option plans and also provide general legal advice to the company. Slaughter and May were appointed to provide advice on the share plan implications arising from the creation of the new holding company structure.

Remuneration committee meetings are also attended by the chairman of the company (Sir Richard Evans prior to 25 July 2008 and Dr John McAdam thereafter), the chief executive officer (Philip Green), the human resources director (Alison Clarke) and the reward director (Brendan Fahey) who are consulted on proposals relating to the remuneration of the senior executive directors and senior executives (other than in respect of their own remuneration). The committee can and does seek advice or information directly from other employees where the committee feels that such additional contributions will assist the committee in its decision-making. The company secretary (Tom Keevil) acts as secretary to the committee which met five times in the year ended 31 March 2009.

Policy statement on executive directors’ remuneration

The board’s policy for executive directors’ and senior executives’ remuneration for this year and subsequent years is to:

• pay a basic salary which compares with other companies of comparable size and complexity;
• use short and long-term incentives to encourage executives to out-perform key targets, thereby linking their rewards to the long-term interests of shareholders and other stakeholders;
• encourage executives to hold shares in the group; and
• reward executives fairly and responsibly for their contribution to the group’s short and long-term performance and avoid paying more than is appropriate.

In deciding the executive directors’ total remuneration package and the individual elements of it, the remuneration committee considers both the performance of the individual and the company, as well as the range of pay in similar companies. The company aims to pay within a range of the mid-market rate over time but may pay higher salaries and total remuneration for out-performing individuals (or to attract or retain executives of the right calibre) and where the company itself out-performs. Account is also taken of a range of other factors, including the general increases in base salaries taking place within the company.

Fixed rewards include basic salary, a car allowance or company car and fuel for private mileage, life, medical and permanent health insurance and pension benefits. Variable rewards take the form of an annual bonus where executives are incentivised to receive a proportion of their bonus in shares which are matched by a corresponding performance-related award from the company (the matching share award plan, or MSAP) and a long-term incentive plan (the performance share plan, or PSP). The rewards are designed to establish a clear link between pay and performance by encouraging out-performance in both the short and long term. They are based upon business and individual performance, linking executives’ rewards directly to the interests of shareholders and other stakeholders. Annual and long-term awards are non-pensionable.

The committee aims to achieve an appropriate balance between fixed and variable rewards. It recognises that the group operates in both a regulated and non-regulated environment and therefore needs to ensure that the structure of executive remuneration reflects the practices of the markets in which its executives operate and stakeholder expectations of how the company should be run. The committee reviews its policy in the light of emerging best practice.

The group operates a defined contribution pension scheme which newly appointed directors (and senior executives) can join. Further details of pension benefits provided for executive directors are provided here.

As noted in last year’s report, the remuneration structure for 2008/09 reflected a greater emphasis on operational performance measures, an increase in maximum annual bonus opportunity and a reduction in levels of long-term incentive awards, so that the overall levels of remuneration did not increase. The committee consulted major shareholders and corporate governance advisory organisations prior to making this change. The committee reviewed the remuneration structure for 2009/10 and have decided not to make any changes for this year.

The chart below sets out the summary of the composition of reward that shows that at maximum performance the proportion of an executive’s total face value remuneration that is ‘at risk’ is 69 per cent.

Notes:

• The shading represents the value of each element of the reward package relative to base pay (base pay = 100).
• Pension refers to the defined contribution benefit provided with a group contribution of 25 per cent of basic pay.
• The maximum values apply only where maximum annual bonus is achieved and the PSP and MSAP have paid out fully.
• The values for the performance share plan and matching share award plan assume a dividend re-investment value of five per cent a year for each of the three years of the performance period and, in the case of the MSAP, that a director has invested to the maximum extent allowed with a maximum company match of 70 per cent of base salary.

Executive directors’ shareholdings

Executive directors are encouraged to build up and retain a target shareholding equal to the value of their basic salary, normally within five years of appointment. This significant level of commitment further aligns the interests of the executives with the long-term interests of shareholders. The company prefers a flexible approach to the accumulation of a shareholding, which takes account of individual circumstances, and has decided not to require executives to retain a proportion of shares that vest under its incentive plans. The level of shareholding is reviewed annually and progress towards achieving targets is discussed with each executive.

Executive directors’ emoluments and the value of long-term incentive vesting during 2008/09 are set out in table 1.

Table 1: Executive directors' emluments and long-term incentive payments (audited information)

Base salaries

The remuneration committee reviews salaries each year taking account of both company and personal performance and the level of pay in similar and, where possible, comparable companies. There will be no salary increase for executive directors in 2009 and the next review date will be 1 September 2010. The following changes were made to the annual salaries of executive directors during the year and reflect the last review date of 1 September 2008.

Table 2: Executive directors' salaries

Annual bonus

The annual bonus plan is designed to motivate and reward executives for the achievement of a range of measures that represent a balance of stakeholder interests. Performance measures established by the committee are designed to be stretching while recognising the nature and risk profile of the business. Financial performance represents one half of the total maximum opportunity. One quarter of the maximum award for each financial measure is payable for reaching a threshold target, approximately half for reaching what is broadly an on-target result and the maximum for achieving a demanding stretch target. Operational objectives reflect targets that are critical for improvements in operational performance, customer service, employee engagement and corporate social responsibility. Personal objectives reflect the individual targets and personal performance that an individual achieves during the year based upon key role specific objectives.

As reported in the remuneration report last year, the maximum bonus opportunity was increased for 2008/09 from 100 per cent to 130 per cent of salary with a corresponding reduction in long-term incentive awards.

Executives are encouraged to elect to take a significant part of their bonus in the form of company shares through the MSAP, thereby further aligning their interests with the long-term interests of shareholders. Participation in the plan is voluntary and for 2008, executives who were invited to and applied to join were able to elect to receive up to 50 per cent of their bonus in the form of United Utilities shares.

There is a corresponding match from the company whereby the first 20 per cent of bonus elected to be taken in the form of shares has a two-for-one match by the company and the remaining 30 per cent in an additional one-for-one match.

Future MSAP awards will be made on a basis that encourages executives to receive the increase in annual bonus opportunity in shares; the maximum matching share award will be limited to 70 per cent of salary and in order to participate fully the executive will be required to elect to receive a greater proportion of bonus earned (up to 61 per cent) in shares.

The matching shares are released after three years subject to the achievement of performance conditions. Details of the performance conditions and further information on the terms of the matching share awards are described in the section that relates to long-term incentives.

Table 3: Annual bonus plan outcome for 2008/09 (% of salary)

Pensions

All executive directors were members of the defined contribution section of the company’s pension scheme during the year. The plan is operated on a salary sacrifice arrangement whereby a salary reduction applies in return for a corresponding increase in company pension contributions. The salary reduction rate for Philip Green is equivalent to three per cent of basic salary and the rate for Charlie Cornish and Tim Weller is seven per cent. The company’s contribution rate prior to including the executive’s salary reduction rate is 25 per cent for Charlie Cornish and Tim Weller. The contribution rate for Philip Green is six per cent of basic salary to the pension scheme and an additional 19 per cent to his private pension plan. The normal pension age is 65.

During the year ended 31 March 2009, the group paid contributions totalling £401,492 (2008: £376,950) in respect of pension contributions for the current executive directors. This represents payments for Philip Green totalling £194,292 (2008: £181,480), for Charlie Cornish £93,999 (2008: £88,209) and for Tim Weller £113,201 (2008: £107,261). These figures exclude the contributions relating to the individual salary reductions.

Other benefits

Directors are paid a car allowance of £14,000 a year or are entitled to have the use of a company car, are reimbursed the cost of fuel for business and private use, and are provided with medical, life and permanent health insurance.

Long-term incentives

The group currently operates a PSP and an MSAP to provide long-term incentives.

The performance conditions for long-term incentive awards comprise two measures: total shareholder return; and key operational performance measures. The weighting of each measure in respect of each of the two plans and for each year is shown overleaf in table 6.

Total shareholder return (TSR):

represents share price growth and re-invested dividends compared with a comparator group of companies. Grants made from 2007/08 onwards are based upon a performance condition which measures the group’s comparative TSR performance against a TSR index (index) rather than a comparator group ranking. Using an index allows for a meaningful comparison of performance to be made and a smoother sliding scale of vesting of awards. The index is constructed by assessing the TSR performance of the companies in the index, with its influence on the index being weighted according to their relevance and size. When a company is acquired or taken over their performance is reflected in the calculation of the index’s performance up until the point that a public announcement is made. Any new company that joined the index would be treated in a comparable pro-rata manner.

The composition and weighting of the index for awards made during 2008/09 is shown below.

The companies and weightings shown above are the same as for 2007/08, with the exception that Kelda PLC was a constituent of the index with a weighting of 100 per cent until it announced that it had received a takeover bid on 22 November 2007.

Operational performance measures:

The TSR performance measure is complemented by a range of operational performance targets in the categories of quality and environment, finance and efficiency, customer service and people.

These operational performance measures were chosen to reflect a balance of targets, achievement of which would demonstrate sustained and improving company performance over a three-year period in areas that would, if achieved, clearly support an increase in shareholder value, as well as being within areas that were clearly within management’s accountability. The vesting scale shown for achievement of these measures is demanding. Failure to meet one of the targets in any area results in only 50 per cent vesting for that particular area.

Table 5: Operational performance measures 2008/09

i) Performance share plan

Executive directors and members of the executive leadership team participate in the performance share plan. Awards are granted at the discretion of the plan’s trustee on the recommendation of the remuneration committee. Each year, participants may be awarded a right to acquire a maximum number of shares worth up to a percentage of their annual salary at the date of the award, at no cost to them. The number of shares awarded is based upon the market price of a share at the date of grant. The plan’s rules provide for a maximum award of 100 per cent of annual salary, which may be increased above this level in circumstances which the committee consider to be exceptional, although to date grants have not exceeded 100 per cent of salary.

As disclosed in last year’s remuneration report, awards during 2008/09 were reduced from 100 per cent to 70 per cent of salary for executive directors and from 60 per cent to 50 per cent of salary for other members of the executive leadership team. The same level of awards are planned for 2009/10.

The proportion of the award that will vest and become exercisable depends upon the company’s performance against specified targets over a performance period. This period is not less than three years, beginning at the start of the financial year during which the award is made. There is no re-testing and awards lapse if the performance criteria are not met. Participants normally have three months from the date when the award vests to exercise their right to acquire shares.

There is no automatic waiving of performance conditions if there is a change of control, capital reconstruction or winding up of the company. The extent (if any) to which awards will vest and any modifications of performance conditions are at the trustee’s discretion, with the consent of the remuneration committee.

When a participant’s employment terminates during a performance period and the reason falls within the ‘good leaver’ provisions of the plan, the vesting of an award is at the trustee’s discretion. If discretion is exercised, the maximum number of shares in an award is pro-rated to service in the performance period and vesting is subject to satisfying the performance conditions (modified, if appropriate). Except in the case of the death of a participant, there is normally no early vesting of awards. Awards lapse where terminations during the performance period do not satisfy the good leaver provisions.

Table 6: Summary of performance conditions applicable to awards under the performance share plan and matching share award plan

ii) Matching share award plan

Details of the basis for MSAP awards are provided under the section relating to annual bonus. A proportion of annual bonus received in shares results in a corresponding matching award from the company. An executive must retain his shares for the three-year holding period in order to receive the matching award and in addition matching shares are only released if performance criteria are met. For awards made in 2007/08 and 2008/09 one half of each award is subject to an index performance condition on the same basis as applies to the PSP and one half relates to operational performance targets on the same basis as the PSP.

The provisions that apply in the event of a change of control, capital reconstruction or winding up of the company are the same as for the PSP.

Table 8: Executive directors' continuing scheme interests in the matching share award plan (audited information)

Matched share investment scheme for Philip Green

Full details of the matched share investment scheme for Philip Green, introduced as part of his terms of appointment, were disclosed in the remuneration report for 2006. In accordance with the rules of that scheme, Philip Green invested in 100,000 shares and a conditional matched award of 100,000 shares was made to him on 16 January 2007 which will transfer to him at the end of the five-year retention period on 12 February 2011, subject to his still being employed by the group at that date.

Table 9: Philip Green's continuing scheme interests in the matched share investment scheme (audited infomation)

Matched share investment scheme for Tim Weller

Full details of the matched share investment scheme for Tim Weller, introduced as part of his terms of appointment, were disclosed in the remuneration report for 2007. In accordance with the rules of that scheme, Tim Weller invested in 39,000 shares and a conditional matched award of 39,000 shares was made to him on 14 February 2007 which will transfer to him at the end of the five-year retention period on 30 June 2011, subject to his still being employed by the group at that date.

Table 10: Tim Weller's continuing sceme interests in the matched share investment scheme (audited informaton)

Special long-term incentive scheme for Charlie Cornish

Full details of the special long-term incentive scheme for Charlie Cornish were disclosed in the remuneration report for 2007. In accordance with the rules of that scheme, an award equal in value to his annual salary was granted to Charlie Cornish on 16 March 2007 in the form of an option over 47,027 shares. There are performance conditions which are attached to this award which mirror the operational performance measures adopted in respect of the first matching share award grant in 2007/08.

Table 11: Charlie Cornish's continuing scheme interests in his special long-term incentive scheme (audited information)

United Utilities Group PLC

Following the acquisition of shares in United Utilities PLC by United Utilities Group PLC, all company share awards, that were previously awards over shares in United Utilities PLC (‘UU’) became awards over shares in United Utilities Group PLC (‘UUG’). The cash alternatives that were available to shareholders in addition to the exchange of UU shares for UUG shares did not apply to company share awards and any cash redemption or dividend payment in respect of UUG B Shares was not included for the purposes of any notional dividend re-investment that applies to existing awards. Executives who were the beneficial owners of UU shares connected with awards under any matched investment scheme were entitled to receive UUG B shares but were required to retain UUG B shares until the last possible redemption date in April 2009. In order to retain any matching company awards the executives are required to retain the revised holding in UUG shares to the end of the original performance or retention period. Full details were provided to shareholders in the prospectus prior to the approval of the scheme of arrangement at the extraordinary general meeting on 1 July 2008.

Contracts of service and compensation for termination

The group’s policy is that the executive directors normally have one-year notice periods. The group may offer a longer notice period if it considers that necessary to recruit a new director. If it offers an initial notice period of more than one year, it will reduce that to a rolling one-year notice period after the initial period has expired. At 31 March 2009, all current executive directors had one-year notice periods. Service contracts are with, and all remuneration and benefits are provided by, United Utilities PLC.

Contracts terminate automatically upon the director reaching age 65 unless the group agrees that a director may continue to work after attaining that age. No special arrangements apply if there is a change of control.

Service contracts do not provide explicitly for termination payments (other than for holidays due but not taken), liquidated damages or payments in lieu of notice. If a contract is to be terminated, the remuneration committee will, in each circumstance, determine the compensation that will be paid, normally by reference to fixed elements of remuneration and the notice period. There is no automatic entitlement to payments under the annual bonus or performance share plan. Any annual bonus payment is at the discretion of the group. Performance share plan vesting is at the discretion of the trustees based upon a recommendation from the remuneration committee and an award will not normally vest unless the termination is for a ‘good leaver’ reason such as retirement or because of ill health, or there are other special circumstances. Payments are then pro-rated and subject to the performance conditions on which awards were granted (or modified, if appropriate) being satisfied.

The committee will apply such mitigation to any contractual obligations as it considers is fair and reasonable. It will take into account the best practice provisions of the Combined Code and will take legal advice on the company’s liability to pay compensation. The company’s policy is to take a robust line on reducing compensation, and it may phase payments to reflect a departing employee’s obligation to mitigate loss.

Details of directors’ contracts as at 31 March 2009 are set out in table 12.

Table 12: Executive directors' service contracts as at 31 March 2009

Non-executive directorships

The group recognises that its executive directors may be invited to become non-executive directors of companies outside the group and exposure to such non-executive duties can broaden experience and knowledge, which will be to the benefit of the group. Subject to board approval (which will not be given if the proposed appointment is with a competing company, would otherwise lead to a material conflict of interest or could have a detrimental effect on a director’s performance), executive directors are allowed to accept one non-executive directorship and to retain the fee. Philip Green is a non-executive director of Lloyds Banking Group plc and received £100,000 in fees in the year to 31 December 2008. Tim Weller is a non-executive director of the Carbon Trust and received £21,000 in fees for the year to 31 March 2009.

Performance graph

The performance graph compares the group’s annual TSR performance (reflecting B shares issued to shareholders and the share consolidation) for the past five years against the FTSE 100 index. This index was chosen as it is the most appropriate broad equity market index. This comparison also supplements the information on the group’s TSR performance relative to the comparator groups in the MSAP and PSP. The TSR indices used in the chart have been calculated in accordance with the Directors’ Remuneration Report Regulations 2002 relative to a base date of 31 March 2004.

Non-executive directors (including the chairman)

A committee of the board decides the remuneration of all of the non-executive directors other than the chairman. Its members are the chairman (Sir Richard Evans until 25 July 2008 and Dr John McAdam thereafter) and the executive directors: Philip Green, Charlie Cornish and Tim Weller. The committee met once during the year to review the fees paid to non-executive directors, which were increased with effect from 1 September 2008 (see below). The remuneration committee (details of which are set out earlier in this report) determines the remuneration of the chairman.

The group’s policy is to pay annual fees that reflect the responsibilities placed upon the non-executive directors. Fees are reviewed each year when account is taken of the level of fees paid in companies of similar size and complexity. There are separate annual fees for the chairman and the other non-executive directors. Additional fees are paid to the chairmen of the audit and remuneration committees and to the senior independent non-executive director. Non-executive directors do not participate in any annual bonus or incentive plans, pension schemes, healthcare arrangements, the group’s long-term incentive plans or employee share schemes. The group repays the reasonable expenses that non-executive directors incur in carrying out their duties as directors.

Non-executive directors’ fees were increased on 1 September 2008. The base annual fee is £54,000 a year (2008: £52,000). The chairman of the audit committee receives an additional annual fee which was increased on 1 September 2008 from £10,000 to £12,500. The chairman of the remuneration committee and, with effect from 1 September 2008, the senior independent non-executive director, receive an additional annual fee of £10,000.

The chairman’s fee was £250,000 which was payable following his appointment at the AGM on 25 July 2008. The next review of non-executive directors’ fees will be in September 2009.

Non-executive directors’ remuneration for the year ended 31 March 2009 is set out in table 14.

Terms of appointment

Non-executive directors’ appointments are for an initial period of three years. They are subject to re-appointment at the first AGM after their initial appointment and at an AGM at least every three years thereafter (if they are to be reappointed). After nine years in office, a non-executive director is required to seek reappointment each year at the AGM. They have letters of appointment, as opposed to contracts of service. In the event of early termination, for whatever reason, they are not entitled to receive compensation for loss of office.

The non-executive directors’ letters of appointment can be inspected at the group’s registered office and on the group’s website, unitedutilities.com The letters set out the expected time commitment and non-executives agree to devote sufficient time to meet what is expected of them. Table 13 summarises the terms of appointment for each non-executive director.

Table 13: Non-executive directors' terms of appointment

Table 14: Non-executive directors' fees (audited information)

Share interests

Details of beneficial interests in the company’s ordinary shares as at 31 March 2009 held by the directors and their connected persons are set out below in table 15. Except as described below and, in the case of the options granted as part of the incentive schemes of the company, as set out above, none of the directors had any interest in any share capital of any other group company or in any debenture of any group company.

Table 15: Details of interests in shares held by directors

Employee share schemes

The board believes that share ownership is an effective way of strengthening employees’ involvement in the development of the business and bringing together their interests and those of shareholders. It offers employees the opportunity to build up a shareholding in the group.

The main all-employee scheme is the HM Revenue & Customs approved share incentive plan, ‘ShareBuy’. This is a flexible way for employees to acquire shares in the group by buying ‘partnership’ shares up to the lower of £1,500 or 10 per cent of taxable pay each year. The funds are deducted from pre-tax pay and passed to an independent trustee who makes a monthly purchase of shares at full market price. Employees can re-invest the dividends on partnership shares to buy more shares under the plan. The group gives one free share for every five partnership shares bought, which need to be held in trust for a five-year term in order to retain the maximum tax advantages.

A limited number of senior managers participate in a deferred share award scheme to facilitate the award of annual performance awards in the form of UUG shares. Shares awarded are released after a waiting period of three years from the date the award is determined, provided that the individual remains employed within the group with no additional performance conditions. Shares are forfeited in the event that an individual voluntarily leaves the group during the waiting period. Newly issued or treasury shares may not be used to satisfy awards under this plan. According to the rules of the plan executive directors are not eligible to participate in this scheme.

Approved by the board of directors on 27 May 2009 and signed on its behalf by:

David Jones

Remuneration committee chairman