Risk exposure

An indication of each category’s current exposure relative to the previous year is shown by the coloured disc surrounding the risk number.

Increased

Decreased

Stable

Strategic themes

The best service to customers


At the lowest sustainable cost


In a responsible manner

 

Regulatory and legal

1

Political and regulatory risk


Developments connected with the political and regulatory environment, including changes to legislation.

Main strategic theme

 

Principal/significant impacts

  • In view of the current global impact of COVID-19 and the government’s response to it, there is the potential for the costs of administration to increase, for sources of income and funding to be impacted and for greater uncertainty of returns as well as increased uncertainty within the debt and equity markets causing blockages to the raising of finance and the refinancing of debt in the medium to long term;
  • Continuing challenges in relation to perceptions of legitimacy of the water industry leading to increased scrutiny from parliament, regulators and customers; and
  • The beginning of AMP7 from April 2020 and the delivery of our new business plan in a period of great uncertainty.

Management and mitigation

We continue to take part in government and regulatory consultations, despite the uncertain conditions associated with COVID-19, in order to influence outcomes in respect of policy and legislation. Our communications with customers continue so that their needs and expectations can be factored into our thinking.

Current key risks, issues and uncertainties

  • The global COVID-19 pandemic and its impact on the stability and certainty of regulation;
  • Challenges to the legitimacy of the water industry;
  • Ofwat’s final determination and the commencement of AMP7;
  • Greater regulatory scrutiny of competitive markets; and
  • Ongoing and new impacts of Brexit, including the effects on regulatory and legislative regimes.

2

Conduct and compliance risk


The failure to adopt or apply ethical standards, or to comply with legal and regulatory obligations and responsibilities.

Main strategic theme

 

Principal/significant impacts

Failure to comply with legal obligations could lead to financial penalties, reputational harm and loss of customer and investor confidence. Fines up to 10 per cent of group turnover could be imposed, particularly in the areas of environmental, health and safety, competition and information and data security. Ultimately sanctions could include revocation of the instrument of appointment (licence) and the imposition of a special administration regime.

Management and mitigation

Despite the influence of COVID-19 on all our activities, we continue to place high importance and focus on corporate responsibility. Our well established internal forums and our work with communities, landowners, environmental groups and other stakeholders allow us to remain engaged with and be aware of issues and concerns including ethical supply chains, modern slavery risks, the needs of vulnerable customers and diversity and equality within our own employee population. We monitor closely all legislative and regulatory developments, including, in particular, the ongoing passage of the Environment Bill and the frameworks regulating water quality, sludge and industrial emissions. The revised requirements introduced by such changes are incorporated into our operations and approach by means of policy, training and working practices. We work with our regulators but challenge them in a constructive and cost-effective manner where appropriate, and we defend litigation involving third parties and seek recoveries of outlay and losses.

Current key risks, issues and uncertainties

  • Developing competitive markets;
  • Material litigation;
  • Tighter regulation of personal data (including GDPR); and
  • Significant fines for non-compliance.

Core operations and service provision

3

Water service risk


A failure to provide a secure supply of clean, safe drinking water and the potential for a negative impact on public confidence in water supply.

Main strategic theme

 

Principal/significant impacts

  • Danger to public health caused by poor water quality;
  • The impact on communities caused by interruptions to water supply; and
  • Covid-19 restrictions affecting construction activity.

Management and mitigation

As a critical supplier we have continued to deliver on our essential water supply duties during the COVID-19 pandemic. Our centralised planning capabilities, use of Systems Thinking, risk assessment, quality assurance and testing processes enable us to maintain a resilient service. Our business plan for AMP7 contains necessary capital programmes to enhance and maintain our service to customers.

We embrace innovation and are working on projects to ensure security of supplies in the long term. The continuation of our 25-year Water Resources Management Plan enables the delivery of sustainable and secure water supplies, taking into account risk factors including climate change, scarcity of supplies and population growth.

Current key risks, issues and uncertainties

  • Failure of supply and distribution system;
  • Scarcity of supplies;
  • Drought;
  • Population growth;
  • Adverse weather events;
  • Stricter regulation of abstraction activities;
  • Uncertainty of global supply chain in the light of Brexit; and
  • COVID-19 and its effect on the supply chain and our construction activities.

4

Wastewater service risk


A failure to remove and treat wastewater.

Main strategic theme

 

Principal/significant impacts

Pollution incidents, interruptions to drainage services and sewer flooding could lead to damage to the natural environment, disruption to businesses and domestic customers and could result in significant fines and reputational harm. The evolving markets of bioresources and sludge treatment introduce uncertainty. COVID-19 restrictions have affected construction activity.

Management and mitigation

Our innovative and efficient business processes, including Systems Thinking, centralised planning and control, quality assurance, risk management, sampling and monitoring of discharge consents enable a proactive and predictive approach to controlling and minimising incidents. Our business plan for AMP7 contains necessary capital programmes to maintain and enhance our service to customers.

Current key risks, issues and uncertainties

  • Failure of networks;
  • Failure to treat wastewater;
  • Adverse weather events and their effect on the capacity of the sewer network;
  • Pollution events;
  • Odour nuisance;
  • Population growth and its impact on existing infrastructure;
  • Significant environmental fines;
  • COVID-19 and its effect on the supply chain and our construction activities;
  • Changes to the regulatory regime; and
  • Effects of Brexit on the chemicals supply chain.

5

Retail and commercial risk


Failing to provide good and fair service to domestic customers and third-party retailers or a failure of or issue in relation to non-United Utilities Water operations or businesses (including Water Plus).

Main strategic theme

 

Principal/significant impacts

Particularly in the context of the economic downturn caused by the measures taken to control the COVID-19 pandemic, there is a risk of financial losses and an impact on profitability. This is associated with poor cash flow, an increase in bad debt, potential regulatory penalties and reputational harm, including as a result of decreased customer satisfaction.

Management and mitigation

Our customer-focused initiatives aim to drive excellent service and enhance the experience of all our customers. We have an award-winning Priority Services scheme for vulnerable customers and those needing help to pay, which has driven up our success in recovering charges in a personalised and sympathetic way. Bad debt risk is managed through the adoption of best practice collection techniques, segmentation of customers based on their credit risk profile and the use of data sharing where appropriate to better understand customers’ circumstances to determine the most effective and collaborative collection and support activities. The wholesale business maintains processes, systems, data and organisational capacity and capability to deal fairly with market participants and the central market operator in the business retail market in order to generate and collect revenue. Similarly strong governance applies to non-United Utilities Water operations and businesses.

Current key risks, issues and uncertainties

  • Competition in the bioresources, water and wastewater markets;
  • Socio-economic deprivation in the North West;
  • Effects of COVID-19 on customers’ ability to pay;
  • Economic downturn and the effect on domestic bad debt;
  • C-MeX and D-MeX;
  • Non-household retail competition and the ability to treat other participants equally;
  • Wholesale revenue collection;
  • The challenges associated with being involved in a joint venture water retail business (Water Plus) operating in a competitive environment; and
  • Business retail customer payments, debt and bad debt during the period and aftermath of COVID-19.

Functional service and support

6

Financial risk


Potential inability to finance the business appropriately.

Main strategic theme

 

Principal/significant impacts

  • The COVID-19 pandemic has introduced significant uncertainty into global financial markets, exacerbating the potential for worse credit ratings, associated funding costs or reduced access to debt capital markets leading to lower liquidity and adversely impacting the economic return on the regulatory capital value (RCV); and
  • Tax inefficiencies, under or over payment of tax, deflation, interest rates and energy prices and a potential worsening of the pension scheme funding position could all lead to a significant increase in costs to the group.

Management and mitigation

Significant liquidity and refinancing which is long term with staggered maturity dates to minimise the effect of short-term downturns. Counterparty credit exposure and settlement limits exist to reduce any potential future impacts. These are based on a number of factors, including the credit rating and the size of the asset base of the individual counterparty. The group employs hedging strategies to manage the impact of market fluctuations for inflation, interest rates and energy prices. Sensitivity analysis is carried out as part of the business planning process, influencing the various financial limits employed. Continuous monitoring of the markets takes place, including movements in credit default swap prices and movements in equity levels.

Current key risks, issues and uncertainties

  • Failure to achieve AMP7 financing outperformance;
  • COVID-19;
  • Low inflation;
  • Financial market conditions;
  • Interest rates and funding costs due to economic uncertainty associated with Covid-19 and Brexit; and
  • Paying an appropriate amount of tax.

7

Supply chain and programme delivery risk


Potential ineffective delivery of capital, operational and change programmes/processes.

Main strategic theme

 

Principal/significant impacts

The potential failure to meet our obligations and customer outcomes, including DPC, resulting in an impact at future price reviews, negative reputational impact with customers and regulators. COVID-19 restrictions have challenged financial resilience in supply chains and created an impact on cash flow.

Management and mitigation

Supply chain management is utilised to deliver an end-to-end contract management service, including contract strategy, tendering and category management, which provides a risk-based approach and relationship management programme for suppliers. We prioritise our investment programmes, projects and integrated business and asset plans. We have created better alignment and integration between our capital delivery partners and engineering service providers including alignment with our operating model.

Our programmes and project management capabilities are well established with strong governance and embedded processes to support delivery, manage risks and achieve business benefits. We utilise a time, cost and quality index (TCQi) as a key performance indicator and enhance our performance through a dedicated programme change office to deliver change in a structured and consistent way.

Current key risks, issues and uncertainties

  • New partnership structures and arrangements in AMP7;
  • DPC, including early exit;
  • Technical quality and innovation;
  • Brexit and increased uncertainty of availability of materials sourced from Europe; and
  • Effects of COVID-19.

8

Resources risk


Failing to provide appropriate resources (human, technological or physical) required to support business activity.

Main strategic theme

 

Principal/significant impacts

  • The potential inability to recruit, retain or deploy knowledge and/or expertise;
  • The potential inability to respond and recover due to non-resilient business activity; and
  • COVID-19 could lead to significant staff absences, both through illness and covering of other essential roles.

Management and mitigation

Developing our people with the right skills and knowledge, combined with delivering effective technology to support the business meeting its objectives. Employees are kept informed regarding business strategy and progress through various communication channels. Training and personal development programmes exist for all employees in addition to talent management programmes and apprentice and graduate schemes. We focus on change programmes and innovative ways of working to deliver better, faster and more cost-effective operations. Resources are closely monitored because of COVID-19, with homeworking and safe site working practices being adopted. People with multiple skill sets are able to add resilience across the business.

Current key risks, issues and uncertainties

  • Risks to health and safety of the workforce caused by COVID-19;
  • Delivering required employee engagement;
  • Personal development, talent management and succession planning; and
  • Optimising technology and innovation.

Hazard-based

9

Security risk


Potential for malicious activity (physical or technological) against people, assets or operations.

Main strategic theme

 

Principal/significant impacts

  • The potential for a loss of data/information and the consequent effect on service provision; and
  • The potential for catastrophic damage to our property, infrastructure and non-infrastructure and the consequent effect on service provision.

Management and mitigation

Physical and technological security measures and awareness training combined with strong governance and inspection regimes aim to protect infrastructure, assets and operational capability. Externally, we work closely with our industry peers, the Centre for the Protection of National Infrastructure (CPNI), the National Cyber Security Centre (NCSC), the Drinking Water Inspectorate and Defra to shape the sector approach to security, particularly cyber security, and to understand how we can best deliver the appropriate levels of protection to our business and in compliance with the Network and Information Systems Directive (NIS). Ongoing system and network integration improves operational resilience and we maintain robust incident response, business continuity and disaster recovery procedures. We maintain insurance cover for loss and liability, and the instrument of appointment (licence) of the regulated business also contains a ‘shipwreck’ clause that, if applicable, may offer a degree of recourse to Ofwat/customers in the event of a catastrophic incident.

Current key risks, issues and uncertainties

  • Cybercrime, particularly during the COVID-19 pandemic;
  • Terrorism;
  • Fraud; and
  • Ownership of Critical National Infrastructure and National Infrastructure.

10

Health, safety and environmental risk


Potential harm to people (employees, contractors or the public) and the environment.

Main strategic theme

 

Principal/significant impacts

  • The effects of COVID-19 on employees, contractors and customers;
  • The potential for serious injury or loss of life in remote, extreme circumstances;
  • The potential for catastrophic damage to private, public or commercial property/infrastructure including the consequent effect on water and wastewater service provision; and
  • The potential for serious impact on wildlife, fish or natural habitats resulting in significant fines and reputational damage.

Management and mitigation

We have developed a strong health and safety culture where ‘nothing we do at United Utilities is worth getting hurt for’ is supported by strong governance and management systems certified to OHSAS 18001. We actively seek to improve health, safety and wellbeing across the group through targeted improvements and benchmarking against our peers. Also certified to ISO 14001, we seek to protect and improve the environment through the responsible delivery of our services. This includes helping to support rare species and habitats through targeted engagement and activity and commitment to reducing our carbon footprint by designing out waste from our operations, generating our own energy and looking at ways to reduce our use of raw materials. We recognise the impact the environment can have on our service provision with extreme weather and climate change being integrated into our risk, planning and decision-making processes.

Current key risks, issues and uncertainties

  • COVID-19;
  • Impounding reservoirs containing significant volumes of water;
  • Other critical asset failure;
  • Multiple hazards including process safety, use or accidental release of chemicals, excavation, tunnelling and construction work; and
  • Fluvial and coastal flooding associated with climate change.

The group’s top ten event-based risks

As described previously, the board regularly considers the group’s most significant risks in our business risk profile and which underpin the principal risks set out above. The following are summaries of the ten highest business risk exposures in an operational context (likelihood and impact) from across the group.

1

Failure of significant water supply systems with the current lowest resilience due to asset deterioration, leading to water quality issues and/or supply interruptions to a large proportion of the United Utilities customer base. Potential impacts include penalties, additional cost, customer compensation and reputational damage. Mitigation includes capital projects for asset replacement as well as extensive programmes of asset monitoring, surveys and maintenance.

Risk stable

2

Partial failure of the wastewater network owing to hydraulic capacity, operational capacity or equipment failure relative to changing and extreme weather conditions. Impacts include sewer flooding and consequent penalties, additional cost, customer compensation and reputational damage. Mitigation includes the combination of the Drainage and Wastewater Management Plans (DWMPs) and embedment of the Wastewater Network Operating Model. These include preventative maintenance, inspection regimes, asset condition surveys, sewer rehabilitation projects, customer campaigns and sewer cleaning programmes.

Risk stable

3

Data and technology assets could be significantly compromised due to malicious or accidental activity, leading to a major impact to key business processes and operations. Potential consequences include penalties, additional costs, customer compensation and reputational damage, as well as impacts to business services, regulatory compliance, financial and operational performance. Mitigation includes multiple layers of control with an approach that covers people, process and technology. This includes a secure perimeter with segmented internal network zones and a core data network supported by infrastructure and system access controls, with constant monitoring and 24/7 incident and forensic response capability.

Risk stable

4

Failure to adequately treat wastewater due to operational capacity and capability of wastewater treatment works, leading to environmental permit breaches, with potential impacts including penalties, additional cost, customer compensation and reputational damage. Mitigation includes an improved effective operations and maintenance programme and operating procedures including proactive maintenance, operative training and compliance audits.

Risk stable

5

The unintended introduction of sewage and other pollutants into the environment due the capacity and/or capability of wastewater treatment or network assets, leading to extensive environmental impact and pollution with potential ODI penalties, prosecution fines, additional opex, capex and reputational damage. Mitigation includes our proactive strategy of identifying defects and collapses through the use of extensive field CCTV surveys, staff training and incident analysis. In addition we are developing a Pollution Incident Reduction Plan and are improving our capabilities further through the development of Integrated Drainage Area Studies and Wastewater Network Management.

Risk stable

6

Competition in the bioresources market following the reforms set out in the Water Act 2014, Water2020 and PR19 process, leading to a loss of business and reduced operational efficiency. Mitigation includes delivering operational efficiency, continued engagement with Ofwat and a strategic review of the bioresources business.

Risk stable

7

Failure to achieve AMP7 financing outperformance because of falling CPIH inflation impacting the effective real rate on embedded fixed rate nominal debt, resulting in a lower level of financing outperformance than expected. Mitigation includes board approval of our interest rates and inflation management strategies, ongoing monitoring of markets and regulatory developments against financial outperformance projections.

Risk stable

8

Delay to the Haweswater Aqueduct Resilience Programme, triggered by exit from the Direct Procurement for Customers process. Causes could include the market’s failure to present a better value proposition than in-house delivery, lack of market appetite/capability to deliver the scheme, or unacceptable business impacts caused by financing. Impacts include increased risks of failure due to project delays, additional/unrecoverable cost and the requirement for significant finance to be raised for in-house procurement. Mitigation includes adoption of HM Treasury’s Green Book process, regular liaison with Ofwat, market engagement and financial modelling. We are progressing direct United Utilities activity including ecological surveys and ground investigations, which are both key activities to progressing the planning applications, and developing the commercial aspects of the DPC.

Risk increasing

9

Partial failure of the water distribution system caused by network characteristics, asset condition, operational strategies, extreme weather or third party damage leading to the loss of treated water and failure of the leakage target. Impacts include incurring ODI penalties, extra opex to recover the leakage target and reputational damage. Mitigation includes leakage detection engineers, sounding valves and fittings within the network, monitoring and managing pressure and flow, and analysing and interrogating system data to assess and allocate leak detection and repairs to the right area.

Risk decreasing

10

Failure to treat sludge due to a combination of treatment capacity and quality of sludge produced at wastewater treatment works, leading to higher operating costs, loss of revenue from renewable energy and the potential for sludge to be inadequately disposed of. Mitigation is by a bioresource production planning process which incorporates regular testing and analysis, a digester and tank cleaning programme and a focused maintenance programme.

Risk stable

New and emerging risks and issues

We continue to review and monitor external and internal risk factors to understand and assess new and emerging risks, as well as the evolution of existing risks. This enables us to plan our strategy and operations to minimise threats of this nature. Notable new and emerging risks and some possible impacts are set out below.

  • No suitable trade deal with the EU: Additional cost of products sourced directly or indirectly from the EU. The most critical product category is chemicals for the treatment of water and sludge production.
  • COVID-19: In the short term, there is a risk of reduced recovery of household debtors, non-household charges to retailers and the additional impact flowing from the risk of reduced recovery of business customer receivables within Water Plus. In addition, reduction in resource because of illness or self-isolation and the impacts of social distancing have potential impacts on service delivery, capital project delivery, ODIs and C-MeX. In the longer term, economic impacts resulting from COVID-19 could include sustained levels of high unemployment and corporate failures affecting debt collection and lower inflation affecting revenues, financing costs and RCV.
  • Customer Measure of Experience (C-MeX): A new regulatory customer service measure is being introduced for the new AMP which introduces a much broader set of customer factors and measures than the previous service element, opening up a new group of customers and experiences which could affect our performance ratings.
  • Plastics: Implications associated with the current attention on single use plastics and microplastic pollution in water, wastewater effluent discharge and sludge disposal (see biosolids recycling).
  • Biosolids recycling to agriculture: The practice of disposing of biosolids to agriculture could be banned (partially or in full) in the UK based on similar actions within Europe.
  • Water scarcity and water trading: Water scarcity is an emerging issue within the UK, which has knock on implications to UU in relation to the proposed strategic transfer of water from the North West to the South East of England and the associated service, commercial and reputational impacts.

Material litigation

The group robustly defends litigation where appropriate and seeks to minimise its exposure by establishing provisions and seeking recovery wherever possible. Litigation of a material nature is regularly reported to the group board. Beyond that reported in previous years on the Argentina multiparty ‘class action’ and the Manchester Ship Canal Company matters (to which there have been no material developments), there is nothing specific to report on material litigation.